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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
FOR
ANNUAL AND TRANSITION REPORTS
PURSUANT TO
SECTIONS 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
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(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ____________ TO ____________
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COMMISSION FILE NUMBER: 001-13037
SERVICE EXPERTS, INC.
(Exact Name of Registrant as Specified in Its Charter)
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DELAWARE 62-1639458
(State or Other Jurisdiction (I.R.S. Employer
of Incorporation or Identification No.)
Organization)
111 WESTWOOD PLACE, SUITE 420 37027
BRENTWOOD, TENNESSEE (ZIP CODE)
(ADDRESS OF PRINCIPAL
EXECUTIVE OFFICES)
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Registrant's Telephone Number, Including Area Code: (615) 371-9990
Securities registered pursuant to Section 12(b) of the Act:
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COMMON STOCK, $.01 PAR VALUE PER SHARE NEW YORK STOCK EXCHANGE
(Title of Each Class) (Name of Each Exchange on Which Registered)
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Securities registered pursuant to Section 12(g) of the Act:
NONE
(Title of Class)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
The aggregate market value of the shares of Common Stock (based upon the
closing sale price of these shares as reported on the New York Stock Exchange on
March 12, 1998) of the registrant held by non-affiliates on March 12, 1998, was
approximately $382,194,329.
As of March 12, 1998, 15,827,993 shares of the registrant's Common Stock
were outstanding.
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DOCUMENTS INCORPORATED BY REFERENCE
Documents incorporated by reference and the part of Form 10-K into which
the document is incorporated:
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Portions of the Company's Proxy Statement relating to its
Annual Meeting of Stockholders to be held on May 1,
1998...................................................... Part III
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PART I
ITEM 1. BUSINESS
GENERAL
Service Experts, Inc. (the "Company") is one of the leading providers of
residential heating, ventilating and air conditioning ("HVAC") services and
replacement equipment in the United States, and management believes that the
Company will continue to be a leading consolidator of the fragmented HVAC
service and replacement industry. The Company currently operates 63 HVAC service
and replacement businesses ("Service Centers") in 28 states and owns Contractor
Success Group, Inc., a company that provides HVAC businesses proprietary
products, as well as marketing, management, educational and advisory services
("CSG"). The Service Centers install, service and maintain central air
conditioners, furnaces and heat pumps, primarily in existing homes. Management
estimates that approximately 80% of the Company's pro forma net revenue in 1997,
giving effect to all completed and pending acquisitions, was related to
replacing, maintaining and servicing HVAC equipment at existing residences, and
to the sale of ancillary products such as indoor air quality ("IAQ") devices and
services.(1) The Company focuses on the service and replacement segment of the
HVAC industry rather than the new construction segment because management
believes that the service and replacement segment offers higher margins and
exposes the Company to less credit risk. The service and replacement segment
offers more attractive pricing because of customers' demands for immediate,
convenient and reliable service.
Management intends to develop a national presence through acquisitions and
a national reputation for superior, high quality service which will enable the
Company to appeal to a large number of customers. The Company has implemented an
aggressive acquisition strategy, acquiring 71 HVAC businesses (the "1997
Acquired Companies") during 1997 with aggregate annualized residential HVAC
service and replacement revenue for the year ended December 31, 1997 of
approximately $162.0 million. Subsequent to December 31, 1997, the Company has
acquired ten HVAC businesses with aggregate annualized HVAC service and
replacement revenue of approximately $22.8 million (the "1998 Acquired
Companies"). The Company currently has agreements in principle to acquire during
the first six months of 1998 four additional HVAC businesses (the "Pending
Acquisitions") with aggregate revenue in 1997 of approximately $7.8 million. The
Company's 1997 pro forma net revenue, giving effect to the acquisition of the
1997 Acquired Companies, the 1998 Acquired Companies and the companies included
in the Pending Acquisitions, was approximately $321.3 million.
HVAC SERVICE AND REPLACEMENT INDUSTRY
The HVAC industry consists of the installation, replacement, maintenance,
service and repair of HVAC systems at existing residences and commercial
businesses and the installation of HVAC systems at newly constructed homes and
businesses. The Company primarily provides installation and replacement services
to existing homes and small to medium-sized businesses.
According to Air Conditioning, Heating and Refrigeration News, there are
approximately 43 million central air conditioners, 54 million furnaces and nine
million heat pumps in operation in homes in the United States. Management
estimates, based on industry information, that the market for the service and
replace-
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(1) All references herein to the Company's 1997 pro forma results assume the
completion as of January 1, 1997 of the acquisitions being discussed.
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ment of HVAC systems in existing homes is approximately $24 billion annually.
The installation and replacement segment of the industry has increased in size
as a result of the aging of the installed base of residential systems, the
introduction of new, energy efficient systems and the upgrading of existing
homes to central air conditioning. According to the Air Conditioning and
Refrigeration Institute, over 61 million central air conditioners have been
installed in the United States since 1975. Many of the units installed from the
mid-1970s to the mid-1980s are reaching the end of their useful lives, thus
providing a growing replacement market. In addition, in recent years, increased
governmental regulation restricting the use of ozone depleting refrigerants in
HVAC systems has contributed to the growing replacement market. See
"Regulation."
According to Air Conditioning, Heating, and Refrigeration News, over 30,000
HVAC contractors are currently operating in the United States. Management
believes that HVAC businesses are typically closely held, single-center
operations that serve a limited geographic area and are heavily dependent upon
referrals to generate business. Management believes that, in many cases, these
businesses are operated by former service technicians who lack the business and
marketing expertise to expand their businesses, increase their profitability and
compete effectively with larger operators. Management believes that larger
companies are able to operate more efficiently, offer customers a broader array
of products and services and provide a higher level of customer service than
smaller operators. Management believes that these competitive advantages are the
result of greater managerial and financial resources as well as economies of
scale in purchasing and marketing expenses. Management believes that these
factors will continue to promote a trend toward consolidation in the industry
and present an opportunity for well-capitalized operators to acquire additional
businesses on favorable terms.
ACQUISITIONS
The Company's goal is to become the leading provider of residential HVAC
services and replacement equipment in the United States through the acquisition
of HVAC businesses in new markets, the integration of HVAC businesses in
existing markets and the continued revenue and profit growth of its Service
Centers.
Strategy
The Company has implemented an aggressive acquisition program utilizing a
"hub and spoke" strategy for expansion into new geographic areas and further
penetration into existing markets. The U.S. residential HVAC service industry is
currently highly fragmented. Management believes that many HVAC businesses,
which lack the capital necessary to expand operations and the ability to exit
their business profitably, will desire to affiliate with the Company because the
Company will provide (i) business and marketing systems that enable a company to
operate more profitably, (ii) the opportunity to increase the operator's focus
on customer service rather than administration, (iii) the potential for national
name recognition and (iv) the opportunity for the owner to gain liquidity while,
in some cases, continuing to manage the operations of the business. By expanding
geographically, management hopes that the Company will be able to offset to some
extent seasonal and economic trends that affect different regions of the country
periodically.
Expanding Geographic Presence through Hub Acquisitions. The Company plans
to continue to make "hub" acquisitions of existing HVAC businesses in new
markets that are not being served by the Company. Management targets for
acquisition HVAC businesses that operate successfully in the Company's targeted
markets. Typically, these businesses have annual net revenue ranging from $1.0
million to $10.0 million. In evaluating such acquisitions, the Company considers
candidates that are in attractive markets, financially stable, experienced in
the industry and characterized by strong management.
Expanding Market Penetration of Hubs through the Acquisition of Other HVAC
Businesses. The Company expects to increase market share through "spoke"
acquisitions of other HVAC businesses that have large customer bases and that
present opportunities to reduce overhead or dispose of fixed assets to improve
profitability. When acquired, the operations of such businesses will be
integrated into the operations of existing hubs, enabling the Company to reduce
overhead costs, sell redundant assets and consolidate operations within existing
areas served by the Company.
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Recent and Pending Acquisitions
During 1997, the Company acquired 71 HVAC businesses. The consideration
paid by the Company for the 1997 Acquired Companies was approximately $102.2
million, consisting of approximately 2.5 million shares of Common Stock, $43.1
million in cash and warrants to purchase 200,000 shares of Common Stock. Five of
the transactions (collectively, the "1997 Pooled Companies"), were accounted for
using the pooling of interests method of accounting, and the remainder were
accounted for using the purchase method. The 1997 Pooled Companies together with
Custom Air Conditioning, Inc. and Freschi Air Systems, Inc., two companies
acquired in 1996 and accounted for using the pooling of interests method, are
sometimes referred to collectively as the "Pooled Companies." One-time expenses
associated with the 1997 Pooled Companies were $263,000. Of the consideration
paid for the 1997 Acquired Companies, $73.9 million was allocated to intangible
assets which are to be amortized over a 40-year period. On a pro forma basis,
these companies, excluding the Pooled Companies, contributed revenue in 1997 of
approximately $121.6 million and contributed operating income of approximately
$8.6 million.
The Company currently has agreements in principle to acquire four HVAC
businesses. The Pending Acquisitions are expected to close during the first six
months of 1998. The consideration to be paid by the Company for these businesses
is approximately $6.1 million, consisting of approximately 224,000 shares of
Common Stock and approximately $200,000 cash. All of these transactions are
expected to be accounted for using the purchase method. Approximately $4.9
million of the consideration to be paid is expected to be allocated to
intangible assets which are to be amortized over a 40-year period. On a pro
forma basis, these companies generated revenue in 1997 of approximately $7.8
million. The acquisitions are subject to customary conditions, and there can be
no assurance that the Company will be able to consummate all of the acquisitions
or to successfully integrate the businesses of the acquired companies.
The Company's acquisitions during 1997 expanded the geographic coverage of
the Company by providing entry to the Connecticut, Idaho, Illinois, Iowa,
Kentucky, Maryland, Massachusetts, Nebraska, North Carolina, Ohio, Utah and West
Virginia markets and increasing the Company's market presence in Arkansas,
California, Florida, Georgia, Indiana, Louisiana, New York, Oklahoma, Tennessee
and Texas. The Company now operates 63 Service Centers in 28 states.
OPERATING STRATEGY
Management believes that successful implementation of the Company's
operating strategy will enable it to establish a national reputation for
superior, high quality service. By developing a national reputation, management
believes the Company will appeal to a large number of customers who are familiar
with and rely upon a large, national company. The Company's operating strategy
incorporates the successful methods developed by CSG and capitalizes on the
operating efficiencies resulting from the integration of the operations of its
Service Centers. The key elements of the Company's operating strategy are as
follows:
Providing Superior, High Quality Service in a Professional Manner. The
Service Centers seek to provide high quality service at a competitive price and
in a friendly, professional manner. In order to provide such service, service
technicians, maintenance technicians and installers employed by the Company
complete comprehensive training programs designed to teach employees the
Company's operating procedures. These procedures are described in CSG's training
manuals which provide detailed instructions in areas such as residential
replacement sales, residential installation, preventive maintenance agreements,
service and routine maintenance. The Company has standardized policies and
operating procedures intended to result in a uniform level of professional, high
quality service, including installation and maintenance procedures, random
drug-testing of employees, the technician's appearance and the use of "Carpet
Saver" shoe coverings when inside a customer's home. Substantially all of the
Service Centers utilize a flat rate billing system that advises the customer of
the cost of service before work begins and charges the quoted price regardless
of the actual time necessary to repair the system. The Service Centers are
generally open for business from 8:00 a.m. to 8:00 p.m. on weekdays, and most
are open on Saturday from 8:00 a.m. to 4:00 p.m. Management believes that by
providing evening and Saturday service, in addition to 24 hour emergency
service, the Service Centers are able to better accommodate customers than most
of their competitors.
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Increasing Revenue at Service Centers. The Company actively promotes its
maintenance agreements to both new and existing customers. See "Service
Centers -- Maintenance and Service Agreements." The sale of maintenance
agreements not only generates recurring revenue through the payment of fees, but
also helps the Company develop a committed, loyal customer base and provides the
opportunity for cross-marketing of the Company's other services and products.
The Company offers a wide assortment of financing packages designed to enable
customers to purchase equipment and services from the Company in the most
convenient and cost-effective manner possible. Certain Service Centers also
offer their customers a Professional Courtesy credit card solely for use in
purchasing equipment and services from the Company. This financing, including
the Professional Courtesy credit card, is offered through a number of third
party lenders. Pursuant to its arrangements with such financing companies, the
Company receives an origination fee based on the amount financed, but does not
bear any credit risk from such financing.
The Service Centers utilize a variety of local print advertising and
targeted marketing promotions designed by CSG, including maintenance technician
referrals, service technician referrals, yellow page advertising and direct mail
campaigns followed up by telemarketing. During the off-peak spring and fall
months, the Service Centers aggressively market products and services which
generate revenue during such months and help to offset increased demand
historically experienced in the summer and winter months. In 1997, advertising
and marketing expenditures (net of marketing expenditures by manufacturers) were
3.4% as a percentage of the Company's net revenue.
As technology has improved, HVAC businesses have begun to utilize equipment
that monitors the levels of certain harmful substances in the air of a
customer's home. The Company's Service Centers offer a number of services and
products that are not available from most HVAC contractors. The Company offers
and actively promotes a variety of IAQ services designed to detect and correct
unhealthy air quality. Among these services are duct cleaning, fresh air
ventilation and heat recovery systems, ultraviolet light processes and the sale
and installation of ozonators. According to industry sources, the market for IAQ
products and services in the United States was estimated to be $1.8 billion in
1994 and is expected to double by the year 2000 as public awareness of indoor
air pollution, which the U.S. Environmental Protection Agency now ranks as one
of the top five environmental health threats, continues to grow.
Achieving Operating Efficiencies. Manufacturers of HVAC equipment have
historically offered more favorable prices and rebates to high volume
purchasers. Since the Company's initial public offering (the "IPO"), the Company
has achieved increased operating efficiencies by consolidating certain functions
at the corporate level, including the purchase of insurance, the provision of
legal support and the utilization of corporate trainers in the areas of
marketing and IAQ. The Company intends to review the desirability of
consolidating other functions at the corporate level, including the purchasing
and leasing of service vehicles and national marketing. A portion of any
operating efficiencies will be offset by increased general and administrative
expenses at the Company's corporate headquarters.
Since the IPO, the Company has implemented a uniform system of budgets,
forecasts, reports and financial controls, including an electronic mail system,
for its Service Centers. In addition, each of the Service Centers generates and
provides to the Company a daily management report of revenue and expense
information and certain billing and collection data.
Attracting and Retaining Quality Employees. Management believes the
Service Centers attract and retain quality employees by providing (i) an
environment that emphasizes professionalism and customer satisfaction, (ii)
extensive training that allows employees to advance to higher-earning positions
and (iii) stability of income because the Service Centers do not experience the
cyclical lay-offs typically found in the HVAC industry. The Company has
established a bonus program for each Service Center pursuant to which managers
may earn bonuses based on the performance of the Service Center and the Company
relative to established goals set by the Service Center's general manager and
the Company. The Service Centers generally are operated by managers who are
trained in the CSG operating methods and procedures and who management believes
are better educated than a typical HVAC service business operator.
Potential employees of most Service Centers must pass extensive interviews
and background checks, where permitted, as well as technical tests prior to
being hired. Service technicians, maintenance technicians
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and installers employed by the Company are required to complete training
programs designed to teach employees the Company's operating procedures. These
training programs are conducted both at the Service Centers and at CSG sponsored
seminars. Since the IPO, the Company has implemented training programs relating
to marketing and IAQ products that are conducted at Service Centers by the
Company's corporate trainers. Management believes that these policies have
resulted in a low rate of employee turnover. See "Contractor Success Group."
CONTRACTOR SUCCESS GROUP
CSG, a wholly-owned subsidiary of the Company, was formed in 1991 to offer
HVAC companies proprietary products and marketing, management, educational and
advisory services not available from industry trade associations. Currently,
there are approximately 265 members of CSG serving distinct market areas in the
United States and Canada defined primarily by zip codes. CSG offers its members
a competitive edge over other contractors in the market by providing useful
management and technical skills, training programs and proprietary products. In
exchange, CSG members pay an initial fee upon joining CSG and a quarterly fee
thereafter. In 1997, CSG collected fees totaling approximately $2.5 million. CSG
members are granted exclusive rights to the territory in which they operate.
Although the Company has acquired 54 CSG members since its formation, other HVAC
companies have joined CSG. The Company intends to continue to build and expand
the membership of CSG.
CSG licenses to its members copyrighted training manuals that cover in
specific detail the aspects of owning and operating an HVAC service and
replacement company, including residential replacement sales, residential
maintenance, service contracts, residential installation, business planning and
service dispatch. In addition, CSG members receive materials containing, and
attend conferences discussing, methods and procedures for the operation of an
efficient, profitable company, including (i) daily report forms designed to
provide accurate and timely sales and cost information essential to determining
the performance of an HVAC business, (ii) "Scorecard," a monthly report
distributed to CSG members comparing top producers among members, (iii)
contracts and forms, including non-competition agreements for employees, sales
and service contracts, (iv) marketing promotions that are tested and proven with
specific instructions on how to tailor advertising for the member's market and
(v) quarterly projects introducing to CSG members new products and services
designed to increase productivity.
Seminars and Services
Potential CSG subscribers are invited to attend an informational seminar
where they are introduced to the CSG concept and are invited to join the
organization. Upon paying the initial fee, CSG subscribers attend "Boot Camp"
which is an intensive four-day workshop conducted by CSG three times each year.
At Boot Camp, HVAC contractors are educated on all aspects of operating an HVAC
service and replacement business. Attendees receive presentations and materials
that explain in specific detail the methods and procedures successfully utilized
by CSG members. Topics covered include administration, sales, service,
advertising, direct marketing, maintenance, service contracts, acquisitions and
accounting. CSG members may also attend "Success Convention," which is a
quarterly two-day convention of CSG members designed to allow the members to
compare ideas and projects and at which quarterly projects are presented, and
"Sales Extravaganza," which is an annual convention designed to encourage and
motivate a member's salespeople, selling technicians and telemarketers.
Future University
In connection with the acquisition of its Service Centers, the Company has
acquired approximately 39% of the issued and outstanding common stock of Future
University, Inc. ("Future University(R)"). The remaining shares of Future
University's Common Stock are held by a number of CSG members and their
shareholders. Future University is a corporation formed in 1991 that offers to
CSG members, for an additional enrollment fee, technical and operational
educational programs designed to improve the profitability of the CSG member's
business. The technical programs offer installers and technicians a combination
of classroom and on-the job-training during one and two week sessions.
Technicians receive skills training that will enable
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them to effectively analyze customer problems and offer efficient solutions. In
the maintenance training classes, for example, technicians are trained to
maximize the operating efficiency of HVAC systems, assure safe operation of
systems and reduce the chances of future breakdowns. In the sales training
classes, technicians are trained to deal with customer expectations, use and
promote various products and services, develop leads, explain financing programs
and improve on various customer relations skills. In sending technicians to the
Future University program, CSG members are able to develop a high level of
commitment in their employees. The technical programs are held in Little Rock,
Arkansas under an exclusive licensing arrangement with Hardwick Air Masters,
Inc., one of the Company's Service Centers. Pursuant to the current licensing
arrangement, Hardwick Air Masters, Inc. receives 70% of the revenue from the
technical programs and Future University receives 30% of such revenue. The
operational programs offer general managers and salespeople a variety of classes
covering residential sales training, replacement sales, marketing and
promotions, telemarketing and general operations. These programs are held in
Houston, Texas.
SERVICE CENTERS
General
Management estimates that during 1997 the Service Centers' service and
maintenance technicians responded to over 600,000 maintenance, repair and
service calls. The services offered by each Service Center include (i) the sale
of replacement central air conditioners, furnaces and heat pumps, (ii) the
maintenance and repair of HVAC units, (iii) diagnostic analysis of the condition
of existing units and (iv) the sale of ancillary products such as IAQ devices
and monitors. Most of the Service Centers employ an in-house sales force that
sells replacement units, installation technicians who install replacement
equipment in existing homes, service technicians who service and maintain the
equipment, and an administrative staff to perform dispatching, purchasing and
other administrative functions. In addition, some of the Service Centers offer
plumbing services. Management believes that in 1997 the installation and
servicing of plumbing systems represented less than 1% of the Company's pro
forma net revenue. The Company anticipates that these Service Centers will
continue to offer, and that Service Centers acquired in the future may offer,
plumbing services, but currently does not intend to expand this business.
Most of the Service Centers' technicians are trained to promote the
Company's preventive maintenance agreements and to cross-market IAQ equipment
and other ancillary services and products offered by the Company. Service
technicians are trained to perform service and maintenance in a professional
manner, to identify problems with existing HVAC systems and to offer customers
the most practical, cost-effective solution to their problem, whether that
involves repairing the existing system or suggesting a replacement system or
part. Often this involves providing customers with information on products to
upgrade their system and improve efficiency as well as informing them about the
advantages and disadvantages of a particular product or service. Maintenance
technicians perform routine maintenance examinations of HVAC systems in an
effort to keep the systems in working order and to identify potential problems
before they become too costly to correct.
Management believes that most HVAC contractors charge the cost of the
materials and the hourly rate for the actual time it takes to install or repair
the system. In contrast, the Company utilizes a flat rate pricing system that
advises the customer of the cost of service for the particular job before work
begins and charges the quoted price regardless of the time necessary to repair
the system. While this may result in parts, labor and other costs incurred in
repairing a customer's system exceeding the quoted price from time to time, the
Company is able to alter its pricing on a per job basis. The Company's
experience is that customers generally prefer this pricing method because it
eliminates surprise or hidden costs. This pricing method also creates an
incentive for the Company to hire quality technicians and to provide them with
the training necessary to service customer needs efficiently.
Sale of Replacement Units
The replacement market for residential HVAC equipment is dependent upon the
base of installed units, the mechanical life and usage of the equipment and
technological advances in the efficiency of newer units.
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Management believes the replacement market for HVAC units offers the potential
for high growth and profitability in the future given the potential number of
HVAC systems that will need replacement in the coming years and the Company's
ability to effectively service that need. The market for replacement units is
highly fragmented, with no single manufacturer dominating the market. In order
to service the replacement market, the Company maintains relationships with
several national, regional and local manufacturers of replacement units in order
to offer a wide variety of products to its customers. The Company has recently
implemented a preferred vendor program (the "Preferred Vendor Program") pursuant
to which the Company has established strategic relationships with selected
vendors. The Company encourages its Service Centers to use these preferred
vendors which offer discounts and rebates to the Service Centers.
At the time of sale, a customer is offered a wide assortment of financing
packages by the Service Center. A Service Center's installers and technicians,
in addition to the salespeople, are trained to educate customers as to the
financing options available, assist the customer in completing the credit
application forms and determine whether the customer's financing is approved.
The Company also offers its customers a Professional Courtesy credit card solely
for use in purchasing equipment and services from the Company. Such financing,
including the Professional Courtesy credit card, is offered through a number of
third party lenders. Pursuant to its arrangements with such financing companies,
the Company receives an origination fee based on the amount financed, but does
not bear any credit risk from such financing.
Maintenance and Service Agreements
The Company currently has approximately 115,000 maintenance agreements with
customers. These agreements are for a term of one to three years and generally
provide for two diagnostic and precision maintenance visits during the year at
an average cost to the customer of approximately $135 per year. The sale of
maintenance agreements not only generates recurring revenue through the payment
of fees, but also helps the Company develop a committed, loyal customer base and
provides the opportunity for cross-marketing of the Company's other services and
products. Management believes that customers with maintenance agreements are
among the Company's most satisfied customers because of the many benefits
offered by these agreements, including (i) energy savings resulting from a more
efficient HVAC system, (ii) fewer and less costly emergency repairs, (iii)
longer useful life for the HVAC system, (iv) discounted rates for service and
(v) guaranteed same-day service in the event of an emergency repair. Maintenance
agreements also allow the Company to more fully utilize its technicians during
the historically slower spring and fall months by scheduling maintenance
appointments during such time. Because systems under maintenance agreements are
less likely to require emergency repairs, the Service Centers are able to
provide more prompt service to emergency and new service calls.
The Company's service agreements are generally for a term of one year and
provide for the repair of any problem with the customer's system at no
additional cost to the customer. Pursuant to the terms of the service
agreements, if the cost of repair exceeds the value of the customer's HVAC
system, the Company is not required to repair the system and the customer
receives a discount if he purchases a replacement unit from the Company. In some
states, warranties provided for in the Company's service agreements may be
deemed insurance contracts by applicable state insurance regulatory agencies
thereby subjecting the Company and the service agreements to the insurance laws
and regulations of any such state. In such states, the Company insures its
service agreements through licensed insurers. Management believes that the
Company has made adequate provision for potential claims under these agreements.
See "Regulation."
Commercial Service and Replacement
Some of the Service Centers offer HVAC services to small and medium-sized
businesses. In 1997, non-residential revenue generated from the provision of
services and sale of products, including those related to commercial, electrical
and plumbing services and products, represented approximately 20% of the
Company's pro forma net revenue. The Service Centers target restaurants, small
office buildings, warehouses and theaters as potential prospects for their
commercial services. The Company's commercial sales representatives receive
extensive training designed to enable the representatives to promote the
Company's services and products effectively. The services offered to commercial
customers are generally the same as services offered to
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residential customers, including the analysis, maintenance and repair of
existing HVAC systems, the sale of replacement systems and the sale of ancillary
products, including IAQ devices and services. While management does not plan to
develop further its commercial HVAC business beyond existing operations given
the potential for growth in the residential service and replacement market, the
Company intends to continue to provide, and may acquire Service Centers that
provide, commercial HVAC services.
SERVICES AND OPERATIONS
The Company provides management, financial and accounting services for all
of the Service Centers' operations, as well as insurance and certain marketing
and legal support. Management provides certain financial control support,
including budgets, forecasts and reports, while allowing each general manager of
a Service Center to manage its day-to-day operations. Since the IPO, the Company
has added various corporate management and staff personnel to provide support
services for its Service Centers and to facilitate its acquisition of additional
HVAC businesses.
The Company provides the following services:
Purchasing
Each Service Center generally purchases the HVAC units, parts and
supplies it uses from distributors. The Company's Preferred Vendor Program
allows the Service Centers to purchase these items at a lower cost through
discounts and rebates available from the vendors participating in the
program. The principal manufacturers participating in the Company's
Preferred Vendor Program include The Trane Company, Lennox Industries, Inc.
and Amana. The Service Centers generally maintain less than a 30-day supply
of inventory.
Management Information Systems
The Service Centers currently utilize various compatible management
and financial information systems. The Company intends to convert the
majority of the Service Centers' current systems to an integrated system
within the next 12 to 18 months. The implementation of an integrated system
will allow the Company to maintain greater control over the operations of
its Service Centers. The Company tracks important data related to the
Service Centers' operations and financial performance and monitors all
advertising expenditures. In addition, the Service Centers generate and
provide to the Company a daily management report of revenue information and
certain billing and collection data.
Employee Screening and Training
Prior to employment, potential employees of the Company are tested to
determine their technical expertise. In addition, as permitted by local
law, employees of the Company are required to pass a drug test prior to
employment and are thereafter subject to random drug testing. Failure to
take or pass a drug test may result in immediate termination of employment.
Once hired, employees of the Company generally complete various training
programs covering technical skills and communication and sales techniques.
In addition, employees periodically attend educational seminars and
conventions conducted by CSG. See "Contractor Success Group." The Company
has established training programs relating to marketing and IAQ products
that are conducted at the Company's Service Centers by two corporate
trainers.
Advertising and Marketing
The Company's advertising and marketing programs are designed to
attract new customers and to stimulate increased demand from existing
customers. Each Service Center, utilizing materials produced by CSG,
develops customized marketing programs tailored to meet the needs of its
local customer base. Emphasizing superior, high quality service, the
Service Centers market directly to prospective and existing customers
through various means, including local print advertising, yellow page
advertising and direct mail campaigns followed up by telemarketing. In
1997, advertising and marketing expenditures
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<PAGE> 10
(net of marketing expenditures by manufacturers) were 3.4% as a percentage
of the Company's net revenue. The Company intends, over time, to develop
the Service Experts name as a key element of its marketing strategy. As a
part of this strategy, management intends gradually to integrate the
Company's name and logo in advertising while continuing to utilize
established local brand names.
REGULATION
HVAC systems are subject to various environmental statutes and regulations,
including, but not limited to, laws and regulations implementing the Clean Air
Act, as amended (the "Clean Air Act"), relating to minimum energy efficiency
standards of HVAC systems and the production, servicing and disposal of certain
ozone depleting refrigerants used in such systems. In connection with the entry
into new markets, the Company may become subject to compliance with additional
regulations. Although, there can be no assurance that the regulatory environment
in which the Company operates will not change significantly in the future,
compliance with existing regulatory requirements has not had a material effect
on the Company.
Various local, state and federal laws and regulations, including, but not
limited to, laws and regulations implementing the Clean Air Act, impose
licensing standards on technicians who service heating and air conditioning
units. While the installers and technicians employed by the Service Centers are
duly certified by applicable local, state and federal agencies and have been
able to meet or exceed such standards to date, there can be no assurance that
they will be able to meet stricter future standards. In addition, installers
must comply with local building codes when installing HVAC units in residences
and commercial buildings.
In some states, warranties provided for in the Company's service agreements
may be deemed insurance contracts by applicable state insurance regulatory
agencies, thereby subjecting the Company and the service agreements to the
insurance laws and regulations of any such state.
TRADEMARKS
"Service Experts" is registered as a federal trademark with the United
States Patent and Trademark Office. The Company currently licenses the Service
Experts name and logo to two companies that are members of CSG. The Company owns
and licenses numerous proprietary products used by the Service Centers and other
CSG members. See "Contractor Success Group." In addition, the Company owns
approximately 39% of the issued and outstanding common stock of "Future
University," which is registered as a federal trademark with the United States
Patent and Trademark Office. See "Contractor Success Group -- Future
University." The Company regards its trademarks as having significant value and
being an important factor in the development and marketing of its operations.
The Company's policy is to pursue registration of its trademarks whenever
possible and to oppose vigorously any infringement of its trademarks.
COMPETITION
The HVAC service and replacement industry is highly competitive in each of
the markets in which the Company operates. The Company's Service Centers compete
with utility companies and other full-service HVAC businesses primarily on the
basis of quality, reliability, customer service and price. Some of these
companies have access to capital, personnel, marketing and technological
resources that are equal to or greater than those of the Company. Because of the
fragmented nature of the industry and relative low barriers to entry, additional
competitors, including companies that offer other home improvement services in
addition to HVAC services, may emerge that have greater access than the Company
to capital, personnel and technological resources. Certain of these companies
are pursuing a consolidation strategy in the industry and compete with the
Company for potential acquisitions as well as for customers.
EMPLOYEES
Management estimates that the Company currently has approximately 3,200
employees, all but approximately 40 of who are employed at Service Centers. None
of the Company's employees is represented by a collective bargaining agreement.
10
<PAGE> 11
INSURANCE
The Company maintains general liability, workers compensation and property
insurance. The costs of insurance coverage varies, and the availability of
certain coverage has fluctuated in recent years. As of February 1, 1997, the
Company consolidated the purchase of insurance for its operations under a single
policy, excluding major medical insurance. This coverage resulted in savings
from the amounts previously paid by the Company's subsidiaries. While management
believes, based upon its claims experience, that the Company's present insurance
coverage is adequate for its current operations, there can be no assurance that
the coverage is sufficient for all future claims or will continue to be
available in adequate amounts or at reasonable rates.
ITEM 2. PROPERTIES
The Company currently occupies the building and underlying real estate on
which all but four of its Service Centers are located pursuant to leases with
terms generally ranging from five to ten years on terms the Company believes to
be commercially reasonable. Total rental expense for the Company's leased
centers, including certain leased vehicles and equipment, in 1997 was
approximately $2.9 million. The Company purchased the building and underlying
real estate on which four of its Service Centers are located. The Company
generally plans to continue to lease rather than purchase space for the Service
Centers to maximize the Company's available capital.
The Company's corporate headquarters are located in approximately 6,580
square feet of space in Brentwood, Tennessee. The remaining term of the lease on
this office space is approximately four years, and the Company pays annual rent
of $115,200. Subsequent to year-end, the Company entered into a new lease
agreement for its corporate headquarters. This operating lease is for
approximately 20,800 square feet of space and for a term of five years
commencing on May 1, 1998, pending completion of the construction of the new
building. The minimum annual lease commitments are $361,000 for the first year
and increase annually during the term of the lease to $425,000 in the fifth
year. As a result of this agreement, the Company will cancel its current lease
obligation but will not incur any fees or penalties associated with such
cancellation.
ITEM 3. LEGAL PROCEEDINGS
The Company does not have pending any litigation that, separately or in the
aggregate, if adversely determined, would have a material adverse effect on the
Company. The Company and its Service Centers may, from time to time, be parties
to litigation or administrative proceedings which arise in the normal course of
their businesses.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of the stockholders during the fourth
quarter ended December 31, 1997.
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<PAGE> 12
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The following table sets forth the reported high and low sales prices of
the Common Stock for the quarters indicated as reported on the Nasdaq National
Market and the New York Stock Exchange. The Company completed its IPO on August
16, 1996 at a price per share of $13.00. The Common Stock was traded on the
Nasdaq National Market under the symbol "SERX" from the Company's IPO on August
16, 1996 until June 6, 1997. The Common Stock is currently traded on the New
York Stock Exchange under the symbol "SVE."
<TABLE>
<CAPTION>
HIGH LOW
------ ------
<S> <C> <C>
1996
Third Quarter (beginning August 16, 1996) $20.25 $13.75
Fourth Quarter.............................................. 28.50 19.00
1997
First Quarter............................................... $28.25 $21.25
Second Quarter.............................................. 30.25 21.25
Third Quarter............................................... 30.38 24.38
Fourth Quarter.............................................. 30.38 24.63
1998
First Quarter (through March 12, 1998)...................... $29.31 $25.50
</TABLE>
On March 12, 1998, the last reported sale price of the Common Stock was
$26.13 per share. As of March 12, 1998, there were approximately 323 holders of
record of the Company's Common Stock.
Since the IPO, the Company has not declared or paid dividends on its Common
Stock. The Company expects that future earnings will be retained to finance the
growth and development of the Company's business and, accordingly, does not
intend to declare or pay any dividends on the Common Stock for the foreseeable
future. The declaration, payment and amount of future dividends, if any, will be
subject to the discretion of the Company's Board of Directors and will depend
upon the future earnings, results of operations, financial condition and capital
requirements of the Company, among other factors. Under Delaware law, the
Company is prohibited from paying any dividends unless it has capital surplus or
net profits available for this purpose. In addition, the Company's credit
facilities impose restrictions on the ability of the Company to pay dividends.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources."
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The following table presents selected consolidated financial data of the
Company. The Company was incorporated on March 27, 1996. On August 21, 1996 and
simultaneously with the closing of the Company's IPO, the Company acquired 12
HVAC companies and CSG (collectively, the "Predecessor Companies") in exchange
for shares of Common Stock and cash (the "Combination"). The acquisitions of the
Predecessor Companies have been accounted for using the historical cost basis of
the Predecessor Companies in accordance with Securities and Exchange Commission
("Commission") Staff Accounting Bulletin No. 48 ("SAB 48"). In accordance with
the provisions of the Commission's Staff Accounting Bulletin No. 97 ("SAB 97"),
the historical financial statements of the Company for periods prior to August
21, 1996 are the combined financial statements of AC Service & Installation Co.,
Inc. and Donelson Air Conditioning Company, Inc. (collectively, the "Acquiring
Company"). In addition, the historical financial statements of the Company for
all periods presented include the financial statements of the Pooled Companies,
which were acquired effective December 1996, May 1997 and September 1997 in
business combinations accounted for as poolings of interests, and the operations
of all other acquired companies are included from their respective effective
dates of acquisition. The Pooled Companies are Custom Air Conditioning, Inc.,
Freschi Air Systems, Inc., C. Iapaluccio Company, Inc., Parrott Mechanical,
Inc., TML, Inc. and MT Partnership, Hawk Heating
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& Air Conditioning, Inc. and McAlister Heat & Air, Inc. The following should be
read with the historical consolidated financial statements and notes thereto
appearing elsewhere herein.
The selected consolidated financial data for the fiscal years ended
December 31, 1993, 1994, 1995, 1996 and 1997 have been derived from the
financial statements of either the Company or the Acquiring Company and the
Pooled Companies.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------------------
1993 1994 1995 1996 1997
------- ------- ------- ------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net revenue..................................... $35,151 $47,545 $49,748 $74,913 $238,692
Cost of goods sold.............................. 26,934 36,369 38,227 52,628 154,598
------- ------- ------- ------- --------
Gross margin.................................... 8,217 11,176 11,521 22,285 84,094
Selling, general and administrative expenses.... 7,716 9,240 11,185 17,384 60,219
------- ------- ------- ------- --------
Income from operations.......................... 501 1,936 336 4,901 23,875
Other income (expense).......................... (59) (199) (359) (26) 580
------- ------- ------- ------- --------
Income (loss) before federal and state income
taxes......................................... 442 1,737 (23) 4,875 24,455
Provision for income tax expense................ 46 251 146 1,136 9,189
------- ------- ------- ------- --------
Net income (loss)............................... $ 396 $ 1,486 $ (169) $ 3,739 $ 15,266
======= ======= ======= ======= ========
Net income (loss) per share:
Basic......................................... $ .19 $ .70 $ (.08) $ .74 $ 1.07
======= ======= ======= ======= ========
Diluted....................................... $ .19 $ .70 $ (.08) $ .74 $ 1.06
======= ======= ======= ======= ========
Weighted average shares outstanding:
Basic......................................... 2,132 2,132 2,132 5,022 14,305
======= ======= ======= ======= ========
Diluted....................................... 2,132 2,132 2,132 5,051 14,453
======= ======= ======= ======= ========
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------------------------
1993 1994 1995 1996 1997
------- ------- ------- ------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital................................. $ 2,025 $ 1,460 $ 395 $12,878 $ 27,945
Total assets.................................... 10,778 13,522 16,833 80,170 194,810
Total debt...................................... 3,715 3,603 7,614 6,083 15,937
Stockholders' equity............................ 3,177 3,886 3,321 55,319 142,402
</TABLE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion should be read in conjunction with the information
contained in the Company's consolidated financial statements, including the
notes thereto.
OVERVIEW
Simultaneous with the IPO in August 1996, the Company acquired the
Predecessor Companies in the Combination. Prior to the Combination, the Company
had no operations. The consideration paid by the Company for the Predecessor
Companies was approximately $77.5 million, consisting of approximately 4.5
million shares of Common Stock and approximately $18.7 million in cash. No
intangible assets were recorded as a result of the Combination because of the
accounting treatment in accordance with SAB 48.
As of December 31, 1997, the Company had acquired 88 HVAC businesses and
one consulting business (the "Acquired Companies") since the IPO, of which 51
are Service Centers. The consideration paid by the Company for the Acquired
Companies was approximately $147.5 million, consisting of approximately 5.0
million shares of Common Stock, warrants to purchase 200,000 shares of Common
Stock and approximately $46.7 million in cash. Seven of the transactions were
accounted for using the pooling of interests method of
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<PAGE> 14
accounting, and the remainder were accounted for using the purchase method.
Approximately $107.0 million of the consideration paid by the Company was
allocated to intangible assets which are to be amortized over a 40-year period.
FINANCIAL STATEMENT PRESENTATION
Since the IPO, the financial presentation of the Company has changed. The
Combination was accounted for using the historical cost basis of the Predecessor
Companies in accordance with SAB 48. On July 31, 1996, SAB 97 was adopted to
replace SAB 48 for certain combination transactions. In accordance with the
provisions of SAB 97, the presentation of financial information for the Company
reflects the Acquiring Company as the acquiror of the other Predecessor
Companies. Prior financial statements of the combined Predecessor Companies are
not included in the Company's historical financial presentation. The operation
of the Predecessor Companies and other Acquired Companies (except for the Pooled
Companies) have been included in the Company's financial statements from their
respective effective dates of acquisition.
The Acquired Companies historically have been managed as independent
private companies and, as such, their results of operations reflect different
tax structures which have influenced, among other things, their historical
levels of owner's compensation. Owners and certain key employees of the Acquired
Companies have agreed to certain reductions in their compensation in connection
with the acquisitions.
COMPONENTS OF INCOME
Net revenue of the Acquired Companies has been derived primarily from the
installation, service and maintenance of central air conditioners, furnaces and
heat pumps in existing homes. Net revenue and associated income from operations
are subject to seasonal fluctuations resulting from increased demand for the
Company's services during warmer weather in the summer months and during colder
weather in winter months, particularly in the beginning of each season. Cost of
goods sold primarily consists of purchased materials such as replacement air
conditioning units and heat pumps and the labor associated with both
installations and repair orders. The main components of selling, general and
administrative expenses include administrative salaries, insurance expense and
promotion and advertising expenses.
PREFERRED VENDOR PROGRAM
The Company's Preferred Vendor Program was designed with flexibility to
ensure competitive prices and services at the local level and at the same time
reduce certain administrative and operational costs in the system. The Preferred
Vendor Program will also help to offset corporate costs. At each Service Center,
the Company's managers have the freedom to determine the best source(s) of
products for their customers' needs. The Company has developed a strategic
relationship with several vendors and requests that the Service Centers support
them when possible and practical. The benefits available to the Service Center
by utilizing this select list of vendors are significant and although the
programs are voluntary, they are widely used in almost every Service Center.
Included in the Preferred Vendor Program are recognized national brands in
manufacturing including The Trane Company, Lennox Industries, Inc. and Amana,
and distribution channels including Watsco, Inc., Pameco Corp. and Hughes
Supply, Inc.
RESULTS OF OPERATIONS
Because of the significant effect of the Combination, the acquisitions of
the Acquired Companies and the anticipated effect of pending acquisitions on the
Company's results of operations, the Company's historical results of operations
and period-to-period comparisons will not be indicative of future results and
may not be meaningful. The Company plans to continue acquiring Service Centers
in the future. The integration of acquired Service Centers and the addition of
management personnel to support existing and future acquisitions may positively
or negatively affect the Company's results of operations during the period
immediately following acquisition.
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<PAGE> 15
The following table sets forth certain selected financial data as a
percentage of net revenue for the periods indicated:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------
1995 1996 1997
----- ----- -----
<S> <C> <C> <C>
Net revenue................................................. 100.0% 100.0% 100.0%
Cost of goods sold.......................................... 76.8 70.3 64.8
----- ----- -----
Gross margin................................................ 23.2 29.7 35.2
Selling, general and administrative expenses................ 22.5 23.2 25.2
----- ----- -----
Income from operations...................................... 0.7% 6.5% 10.0%
===== ===== =====
</TABLE>
Year Ended December 31, 1997 Compared to Year Ended December 31, 1996
Net Revenue. Net revenue increased $163.8 million, or 218.6%, from $74.9
million for the year ended December 31, 1996 to $238.7 million for the year
ended December 31, 1997. This increase is primarily attributable to the
inclusion of the Predecessor Companies and the 13 companies acquired in December
1996 for a full year and the acquisition of 66 HVAC businesses during 1997.
Cost of Goods Sold. Cost of goods sold increased $102.0 million, or
193.8%, from $52.6 million for the year ended December 31, 1996 to $154.6
million for the year ended December 31, 1997. As a percentage of net revenue,
cost of goods sold decreased from 70.3% for the year ended December 31, 1996 to
64.8% for the year ended December 31, 1997. The decrease as a percentage of net
revenue was primarily attributable to an emphasis on more profitable products,
the inclusion of the Predecessor Companies and the December 1996 acquisitions
for the full year, the inclusion of 66 companies acquired in 1997 and a $1.8
million decrease in the cost of equipment and supplies as a result of the
Preferred Vendor Program.
Gross Margin. Gross margin increased $61.8 million, or 277.4%, from $22.3
million for the year ended December 31, 1996 to $84.1 million for the year ended
December 31, 1997. As a percentage of net revenue, gross margin increased from
29.7% for the year ended December 31, 1996 to 35.2% for the year ended December
31, 1997. The increase in gross margin as a percentage of net revenue is
primarily attributable to the inclusion of 66 companies acquired in 1997 that
operated at higher margins than the 1997 Pooled Companies and the reduction in
costs from the Preferred Vendor Program.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased $42.8 million, or 246.4%, from $17.4 million
for the year ended December 31, 1996 to $60.2 million for the year ended
December 31, 1997. This increase is attributable to the inclusion of 66
companies acquired in 1997, a $1.8 million increase in amortization expense and
an increase in management personnel during the year. As a percentage of net
revenue, selling, general and administrative expenses increased from 23.2% for
the year ended December 31, 1996 to 25.2% for the year ended December 31, 1997.
Income from Operations. Income from operations increased $19.0 million
from $4.9 million for the year ended December 31, 1996 to $23.9 million for the
year ended December 31, 1997. Income from operations as a percentage of net
revenue increased from 6.5% in 1996 to 10.0% in 1997 as a result of the factors
mentioned above.
Year Ended December 31, 1996 Compared to Year Ended December 31, 1995
Net Revenue. Net revenue increased $25.2 million, or 50.6%, from $49.7
million for the year ended December 31, 1995 to $74.9 million for the year ended
December 31, 1996. This increase is primarily attributable to the acquisition of
the Predecessor Companies in August 1996 and the December 1996 acquisitions.
Cost of Goods Sold. Cost of goods sold increased $14.4 million, or 37.7%,
from $38.2 million for the year ended December 31, 1995 to $52.6 million for the
year ended December 31, 1996. As a percentage of net revenue, cost of goods sold
decreased from 76.8% for the year ended December 31, 1995 to 70.3% for the year
ended December 31, 1996. The decrease as a percentage of net revenue was
primarily attributable to an
15
<PAGE> 16
emphasis on more profitable products, improved employee training, an improvement
in the operations of a 1997 Pooled Company and the inclusion of the Predecessor
Companies following the Combination.
Gross Margin. Gross margin increased $10.8 million, or 93.4%, from $11.5
million for the year ended December 31, 1995 to $22.3 million for the year ended
December 31, 1996. As a percentage of net revenue, gross margin increased from
23.2% for the year ended December 31, 1995 to 29.7% for the year ended December
31, 1996.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased $6.2 million, or 55.4%, from $11.2 million for
the year ended December 31, 1995 to $17.4 million for the year ended December
31, 1996. This increase is attributable to the inclusion of the acquisition of
the Predecessor Companies in August 1996 and the December 1996 acquisitions and
an increase in management personnel since the IPO. As a percentage of net
revenue, selling, general and administrative expenses increased from 22.5% for
the year ended December 31, 1995 to 23.2% for the year ended December 31, 1996.
Income from Operations. Income from operations increased $4.6 million from
$0.3 million for the year ended December 31, 1995 to $4.9 million for the year
ended December 31, 1996. Income from operations as a percentage of net revenue
increased from 0.7% in 1995 to 6.5% in 1996.
LIQUIDITY AND CAPITAL RESOURCES
The Company's principal capital needs arise from the acquisition of new
HVAC businesses and the costs associated with such expansion. Cash used in
investing activities was primarily attributable to the acquisition of HVAC
businesses.
The Company's ability to acquire new HVAC businesses will depend on a
number of factors, including the ability of management of the Company to
identify favorable target businesses and to negotiate favorable acquisition
terms, the availability of adequate financing and other factors, many of which
are beyond the control of the Company. In addition, there can be no assurance
that the Company will be successful in identifying and acquiring Service
Centers, that the Company can integrate such new Service Centers into the
Company's operations or that the Company's new Service Centers will generate
sales revenue or profit margins consistent with those of the Company's existing
Service Centers.
On August 21, 1996, the Company completed the IPO at $13.00 per share. The
proceeds to the Company, net of expenses and underwriting discounts and
commissions, were approximately $28.1 million. Of the net proceeds, $18.7
million was used to pay the cash portion of the consideration for the
Predecessor Companies, including $1.2 million which was used to repay certain
indebtedness arising from the Combination. The Company used the remaining
proceeds for working capital and capital expenditures, including the acquisition
of additional HVAC replacement and service businesses.
On March 18, 1997, the Company completed a secondary offering of 1,850,000
shares of its Common Stock at $22.00 per share. The proceeds to the Company, net
of expenses and underwriters' discounts and commissions, were approximately
$38.0 million. The Company used the proceeds for planned capital expenditures,
acquisitions and general corporate purposes.
The Company has a $50.0 million unsecured revolving credit facility with a
banking syndication available through September 3, 1999 (the "Credit Facility").
Borrowings under the Credit Facility bear interest at either (i) the higher of
the agent's base lending rate or the federal funds rate plus one-half of one
percent per annum or (ii) a variable rate equal to the 30, 60 or 90-day LIBOR,
as such rates change from time to time, plus a variable margin of from 75 to 150
basis points depending on the Company's funded debt to EBIA ratio determined on
a quarterly basis, at the election of the Company. All of the Company's
subsidiaries have guaranteed the repayment of indebtedness under the Credit
Facility. The Credit Facility contains covenants with respect to the maintenance
of certain financial ratios and specified net worth and limiting the incurrence
of additional indebtedness, the sale of substantial assets, consolidations or
mergers by the Company and the payments of dividends.
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<PAGE> 17
The Company currently has on file with the Commission a shelf Registration
Statement on Form S-4 (Registration No. 333-12319) (the "Shelf Registration
Statement") covering securities with a collective aggregate offering price of
$50.0 million for use in the acquisition of HVAC businesses. Under the Shelf
Registration Statement, the Company may issue shares of Common Stock, warrants
to purchase Common Stock and debt securities in connection with acquisitions.
Management believes that the Company's existing cash balances, cash
generated from operations, and additional borrowings will be sufficient to fund
the Company's operating needs, planned capital expenditures and debt service
requirements for the next 12 months. Management continually evaluates potential
strategic acquisitions as part of the Company's growth strategy. To date, such
acquisitions have been predominantly funded by issuing shares of Common Stock,
although future acquisitions could be effected using greater amounts of cash.
Although the Company believes that its financial resources will enable it to
consider potential acquisitions, should the Company's actual results of
operations fall short of, or its rate of expansion significantly exceed, its
plans, or should its costs or capital expenditures exceed expectations, the
Company may need to seek additional financing in the future. In negotiating such
financing, there can be no assurance that the Company will be able to raise
additional capital on terms satisfactory to the Company. Failure to obtain
additional financing on reasonable terms could have a negative effect on the
Company's plans to acquire additional HVAC businesses.
Newly Issued Accounting Standards
In June 1997, the Financial Accounting Standards Board ("FASB") issued
Statement No. 130, "Reporting Comprehensive Income" ("Statement 130"). Statement
130 establishes standards for reporting and displaying comprehensive income and
its components in a full set of general purpose financial statements. Statement
130 is effective for interim and annual periods in 1998. Comprehensive income
encompasses all changes in stockholders' equity (except those arising from
transactions with owners) and includes net income, net unrealized capital gains
or losses on available for sale securities and foreign currency translation
adjustments. Management of the Company does not expect the adoption of Statement
130 to have a material impact on the Company's financial statements.
In June 1997, the FASB issued Statement No. 131, "Disclosures about
Segments of an Enterprise and Related Information" ("Statement 131"). Statement
131 establishes standards for the way public business enterprises are to report
information about operating segments in annual financial statements and requires
these enterprises to report selected information about operating segments in
interim financial reports issued to shareholders. It also establishes standards
for related disclosures about products and services, geographic areas, and major
customers. Statement 131 is effective for fiscal years beginning after December
15, 1997. Management of the Company is currently reviewing the impact of
Statement 131. The Company will adopt Statement 131 on December 31, 1998 and
will report interim information effective in the first quarter of 1999.
Impact of Year 2000
The Year 2000 issue is the result of computer programs written using two
digits rather than four digits 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.
Based on a recent assessment, the Company determined that it will be
required to modify or replace portions of its software so that its computer
systems will function properly with respect to dates in the year 2000 and
thereafter. 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 timely, the Year 2000 issue
could have a material effect on the operations of the Company.
The Company has initiated formal communications with all of its significant
suppliers to determine the extent to which the Company's interface systems are
vulnerable to those third parties' failure to remediate
17
<PAGE> 18
their own Year 2000 Issues. The Company's total Year 2000 project cost and
estimates to complete include the estimated costs and time associated with the
impact of third party Year 2000 issues based on currently available information.
However, there can be no guarantee that the systems of other companies on which
the Company's systems rely will be timely converted and would not have an
adverse effect on the Company's systems. The Company has determined it has no
exposure to contingencies related to the Year 2000 issue for the products it has
sold.
The Company will utilize both internal and external resources to reprogram,
or replace, and test the software for Year 2000 modifications. The Company
anticipates completing the Year 2000 project no later than March 31, 1999, which
is prior to any anticipated impact on its operating systems. The total cost of
the Year 2000 project is estimated at $600,000 and is being funded through
operating cash flows. Of the total project cost, approximately $400,000 is
attributable to the purchase of new software which will be capitalized. The
remaining $200,000, which will be expensed as incurred, is not expected to have
a material effect on the results of operations. To date, the Company has
incurred approximately $100,000 related to the assessment of, and preliminary
efforts on, its Year 2000 project and the development of a modification plan,
purchase of new systems and systems modifications.
The costs of the project and the date on which the Company believes it will
complete the Year 2000 modifications are based on management's best estimates,
which were derived utilizing numerous assumptions of future events, including
the continued availability of certain resources, third party modification plans
and other factors. However, there can be no guarantee that these estimates will
be achieved and actual results could differ materially from those anticipated.
Specific factors that might cause such material differences include, but are not
limited to, the availability and cost of personnel trained in this area, the
ability to locate and correct all relevant computer codes and similar
uncertainties.
18
<PAGE> 19
RISK FACTORS
This report contains forward-looking statements regarding the business and
industry of the Company, including those regarding the successful integration of
the businesses of its subsidiaries, the effective implementation of the
Company's strategy, the availability of additional HVAC businesses for
acquisition, the adequacy of the Company's capital resources and other
statements regarding trends relating to the HVAC industry and various revenue
and expense items. Many factors, including the Company's limited operating
history on a combined basis, its aggressive acquisition strategy and the
uncertainty that acquisitions can be completed and integrated as planned, the
fact that many of the Company's operating and information systems are in the
development or implementation phase, competition, labor availability, regulatory
developments and other uncertainties, could cause actual results to differ
materially from those discussed in the forward-looking statements made in this
report.
LIMITED COMBINED OPERATING HISTORY
The Company was incorporated in March 1996 and, simultaneously with the
closing of the Company's IPO on August 21, 1996, consummated the acquisition of
the Predecessor Companies in exchange for shares of Common Stock and cash. Since
the IPO, the Company has acquired numerous additional Service Centers. Because
of the limited operating history of the Company as a combined entity, there can
be no assurance that the Company will be able to integrate successfully the
businesses of its subsidiaries or to operate profitably. There can be no
assurance that the Company's management will be able to manage effectively the
combined entity and implement effectively the Company's operating and
acquisition strategies. Failure to integrate successfully the Company's
subsidiaries and to implement successfully the Company's operating and
acquisition strategies could have a material adverse effect on the Company's net
revenue and earnings.
RISKS ASSOCIATED WITH ACQUISITION STRATEGY AND FINANCING
The success of the Company's acquisition strategy will depend on a number
of factors, including (i) the Company's ability to locate and successfully
negotiate the acquisition of HVAC businesses and to successfully integrate the
operations of acquired Service Centers into the Company's operations and (ii)
the availability of adequate financing to develop or acquire additional HVAC
businesses. In addition, the Company competes with other HVAC and residential
service companies for desirable acquisition candidates. Some of these companies
may have access to capital, personnel and other resources equal to or greater
than those of the Company. The Company expects that its capital needs over the
next several years, primarily for acquisitions, will exceed capital generated
from operations. The Company plans to incur indebtedness and to issue, from time
to time, additional debt or equity securities. In the event that the Common
Stock does not maintain a sufficient market value, or potential acquisition
candidates are unwilling to accept Common Stock as part of the consideration for
the sale of their businesses, the Company may be required to utilize more of its
cash resources, if available, in order to maintain its acquisition program.
There can be no assurance that the Company's acquisition strategy will be
successful, that modifications to the Company's strategy will not be required,
that the Company will be able to manage effectively and enhance the
profitability of additional Service Centers or that the Company will be able to
obtain adequate financing on reasonable terms to develop or acquire additional
HVAC service businesses.
RISKS ASSOCIATED WITH DEVELOPMENT, IMPLEMENTATION, AND INTEGRATION OF OPERATING
SYSTEMS AND POLICIES
As a rapidly growing provider of HVAC services, the Company is faced with
the development, implementation and integration of Company-wide policies and
systems related to its operations. Each of the subsidiaries of the Company and
companies to be acquired may need, to some extent, to modify or adopt certain
systems and policies they have utilized historically in order to implement the
Company's systems and policies, which management is continuing to formulate. The
Company is implementing a uniform computer system and electronic mail system at
each of the Service Centers. The Company plans to implement and integrate
certain other information and operating systems and procedures for the Service
Centers including, but not limited to, uniform purchasing programs and certain
centralized marketing programs. The Company
19
<PAGE> 20
may experience delays, complications and expenses in implementing, integrating
and operating such systems, any of which could have a material adverse effect on
the Company's operations, net revenue and earnings.
COMPETITION
The HVAC service and replacement industry is highly competitive. The
Company's Service Centers compete with other full-service HVAC businesses
primarily on the basis of quality, reliability, customer service and price.
Several companies have been organized to pursue the acquisition of businesses
that offer HVAC services. Some of these competitors have access to capital,
personnel, marketing and technological resources that are equal to or greater
than those of the Company. In certain markets, the Company competes with utility
companies which have access to capital, personnel, marketing and technological
resources that are equal to or greater than those of the Company. Because of the
fragmented nature of the industry and relatively low barriers to entry,
additional competitors, including companies that offer other home improvement
services in addition to HVAC services, may emerge with greater access than the
Company to capital, personnel and technological resources. There can be no
assurance that the Company will be able to compete successfully or that such
competition will not make it more difficult to acquire HVAC businesses on terms
beneficial to the Company.
DEPENDENCE ON KEY PERSONNEL
The success of the Company is dependent upon the continued services of the
Company's senior management, particularly upon its Chairman, President and Chief
Executive Officer, Alan R. Sielbeck. The loss of the services of Mr. Sielbeck or
any of the Company's senior management would have a material adverse effect upon
the Company's business and prospects.
LABOR AVAILABILITY
The timely provision of high-quality service by the Service Centers
requires an adequate supply of skilled labor. In addition, the operating costs
of each Service Center may be adversely affected by high turnover in skilled
positions. Accordingly, the Company's ability to increase productivity and net
earnings is limited to a degree by its ability to employ the skilled laborers
necessary to meet the Company's service requirements. There can be no assurance
that the Company will be able to maintain an adequate skilled labor force
necessary to operate efficiently its Service Centers or that the Company's labor
expenses will not increase as a result of a shortage in the supply of skilled
workers.
SEASONAL NATURE OF THE INDUSTRY
The HVAC service industry generally experiences increased demand during the
summer and winter months. The Company may, in certain periods, be affected by
these seasonal trends. Extended periods of unseasonably mild or wet weather can
have an adverse affect on the business of the Company. There can be no assurance
that the HVAC service and replacement industry will not experience future
declines or that such declines will not have a material adverse effect on the
Company.
CONTROL BY MANAGEMENT AND PRINCIPAL STOCKHOLDERS
As of March 12, 1998, directors, officers and 5% stockholders of the
Company beneficially owned approximately 7.7% of the outstanding Common Stock.
Accordingly, these persons have substantial influence over the affairs of the
Company, including the ability to influence the election of directors and other
matters requiring stockholder approval.
REGULATION
HVAC systems are subject to various environmental statutes and regulations,
including, but not limited to, laws and regulations implementing the Clean Air
Act, relating to minimum energy efficiency standards of HVAC systems and the
production, servicing and disposal of certain ozone depleting refrigerants used
in such systems. In connection with the entry into new markets, the Company may
become subject to compliance
20
<PAGE> 21
with additional regulations, and there can be no assurance that the regulatory
environment in which the Company operates will not change significantly in the
future.
Various local, state and federal laws and regulations, including those
implementing the Clean Air Act, impose licensing standards on technicians who
service heating and air conditioning units. While the installers and technicians
employed by the Service Centers are duly certified by applicable local, state
and federal agencies and have been able to meet or exceed such standards to
date, there can be no assurance that they will be able to meet future standards.
In some states, warranties provided for in the Company's service agreements
may be deemed insurance contracts by applicable state insurance regulatory
agencies thereby subjecting the Company and the service agreements to the
insurance laws and regulations of such state.
CERTAIN ANTI-TAKEOVER PROVISIONS
Certain provisions of the Company's Restated Certificate of Incorporation
("Restated Certificate") and Bylaws and Delaware law may make a change in the
control of the Company more difficult to effect, even if a change in control
were in the stockholders' interest. Section 203 of the Delaware General
Corporation Law would prevent an "interested stockholder" (defined in Section
203, generally, as a person owning 15% or more of the Company's outstanding
voting stock) from engaging in a "business combination" (as defined in Section
203) with the Company for three years following the date such person became an
interested stockholder unless certain conditions, including approval by the
Company's Board of Directors, are met. The Company's Restated Certificate and
Bylaws include certain super-majority voting requirements. The Restated
Certificate also allows the Board to determine the terms of preferred stock
which may be issued by the Company without approval of the holders of the Common
Stock. The ability of the Company to issue preferred stock in this manner could
enable the Board to prevent changes in management and control of the Company.
The Board of the Company is divided into three classes of directors, with
directors being elected for staggered three-year terms. Such staggered terms may
affect the ability of the holders of the Common Stock to change control of the
Company. In addition, certain provisions of the employment agreements between
the Company and the executive officers of the Company may make a change of
control more difficult. Pursuant to these employment agreements, upon a change
in control of the Company, each executive officer is to be paid as severance pay
such officer's base salary for the remaining term of the employment agreement.
VOLATILITY OF MARKET PRICE
From time to time, there may be significant volatility in the market price
of the Common Stock. Quarterly operating results of the Company, changes in
earnings estimated by analysts, changes in general conditions in the economy or
the financial markets or other developments affecting the Company could cause
the market price of the Common Stock to fluctuate substantially. In addition, in
recent years the stock market has experienced extreme price and volume
fluctuations. This volatility has had a significant effect on the market prices
of securities issued by many companies for reasons unrelated to their operating
performance.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
No disclosure required.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See Appendix A.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
21
<PAGE> 22
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
EXECUTIVE OFFICERS AND KEY EMPLOYEES
Information with respect to the executive officers of the Company is
incorporated by reference to the information contained under the caption
"Executive Compensation -- Executive Officers of the Company" included in the
Company's Proxy Statement relating to its Annual Meeting of Stockholders to be
held on May 1, 1998.
DIRECTORS
Information with respect to the Company's directors is incorporated by
reference to the information contained under the caption "Election of Directors"
included in the Company's Proxy Statement relating to its Annual Meeting of
Stockholders to be held on May 1, 1998.
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT
Information with respect to compliance with Section 16(a) of the Securities
Exchange Act of 1934 is incorporated by reference to the information contained
under the heading "Compliance with Reporting Requirements of the Exchange Act"
included in the Company's Proxy Statement relating to its Annual Meeting of
Stockholders to be held on May 1, 1998.
ITEM 11. EXECUTIVE COMPENSATION
This information is incorporated by reference to the information contained
under the heading "Executive Compensation" included in the Company's Proxy
Statement relating to its Annual Meeting of Stockholders to be held on May 1,
1998, except that the Comparative Performance Graph and the Compensation
Committee Report on Executive Compensation included in the Proxy Statement are
expressly not incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
This information is incorporated by reference to the information contained
under the caption "Voting Securities and Principal Holders Thereof" included in
the Company's Proxy Statement relating to its Annual Meeting of Stockholders to
be held on May 1, 1998.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
This information is incorporated by reference to the information contained
under the caption "Certain Relationships and Related Transactions" included in
the Company's Proxy Statement relating to its Annual Meeting of Stockholders to
be held on May 1, 1998.
22
<PAGE> 23
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) Index to Consolidated Financial Statements, Financial Statement
Schedules and Exhibits:
(1) CONSOLIDATED FINANCIAL STATEMENTS: See Item 8 herein.
The Consolidated Financial Statements of the Company required to be
included in Part II, Item 8, are indexed on Page A-1 and submitted as a
separate section of this report.
(2) CONSOLIDATED FINANCIAL STATEMENT SCHEDULES:
All schedules are omitted, because they are not applicable or not
required, or because the required information is included in the
consolidated financial statements or notes thereto.
(3) EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBITS
- ------- -----------------------
<C> <C> <S>
3.1 -- Restated Certificate of Incorporation of the Registrant(a)
3.2 -- Bylaws of the Registrant(a)
4 -- Form of Common Stock Certificate(b)
10.1 -- Registrant's 1996 Incentive Stock Plan(a)
10.2 -- Registrant's 1996 Non-Employee Director Stock Option Plan(a)
10.3 -- Registrant's 1996 Employee Stock Purchase Plan(a)
10.4 -- Registrant's 1997 Nonqualified Stock Option Plan(c)
10.5 -- Registrant's 1997 Nonqualified Stock Purchase Plan(c)
10.6 -- Employment Agreement, dated June 16, 1996, between the
Registrant and Alan R. Sielbeck(a)
10.7 -- Employment Agreement, dated June 16, 1996, between the
Registrant and James D. Abrams(a)
10.8 -- Employment Agreement, dated June 16, 1996, between the
Registrant and Anthony M. Schofield(a)
10.9 -- Employment Agreement, dated August 1, 1997, between the
Registrant and Alfred W. Taylor III
10.10 -- Employment Agreement, dated October 1, 1997, between the
Registrant and Ronald L. Smith
10.11 -- Form of Equitable Securities Corporation Stock Purchase
Warrant(a)
10.12 -- Amended and Restated Credit Agreement, dated September 18,
1997, between the Registrant and SunTrust Bank, Nashville,
N.A., as agent for the lenders
10.13 -- First Amendment to Amended and Restated Credit Agreement,
dated December 16, 1997, between the Registrant and SunTrust
Bank, Nashville, N.A., as agent for the lenders
10.14 -- Form of Combination Agreement by and among each of the
Predecessor Companies, each of its respective stockholders
and the Registrant(a)
10.15 -- Form of Agreement and Plan of Merger among certain of the
Registrant's subsidiaries, a wholly-owned subsidiary of the
Registrant and the Registrant(c)
10.16 -- Form of Combination Agreement between certain of the
Registrant's subsidiaries and the Registrant(c)
10.17 -- Form of Stock Purchase Agreement between the former
stockholders of certain of the Registrant's subsidiaries and
the Registrant
</TABLE>
23
<PAGE> 24
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBITS
- ------- -----------------------
<C> <C> <S>
21 -- List of subsidiaries of the Registrant
23 -- Consent of Ernst & Young LLP
27 -- Financial Data Schedule (for SEC use only)
</TABLE>
- ---------------
(a) Incorporated by reference to the exhibits filed with the Registrant's
Registration Statement on Form S-l, Registration No. 333-07037.
(b) Incorporated by reference to the exhibits filed with the Registrant's
Registration Statement on Form 8-A, File No. 000-21173.
(c) Incorporated by reference to the exhibits filed with the Registrant's
Registration Statement on Form S-4, File No. 333-12319.
(d) Incorporated by reference to the exhibits filed with the Registrant's
Registration Statement on Form S-1, Registration No. 333-21971.
24
<PAGE> 25
EXECUTIVE COMPENSATION PLANS AND ARRANGEMENTS
The following is a list of all executive compensation plans and
arrangements filed as exhibits to this Annual Report on Form 10-K:
1. Registrant's 1996 Incentive Stock Plan (filed as Exhibit 10.1)
2. Registrant's 1996 Non-Employee Director Stock Option Plan (filed as
Exhibit 10.2)
3. Registrant's 1996 Employee Stock Purchase Plan (filed as Exhibit
10.3)
4. Registrant's 1997 Nonqualified Stock Option Plan (filed as Exhibit
10.4)
5. Registrant's 1997 Nonqualified Stock Purchase Plan (filed as
Exhibit 10.5)
6. Employment Agreement, dated June 26, 1996, between the Company and
Alan R. Sielbeck (filed as Exhibit 10.6)
7. Employment Agreement, dated June 26, 1996, between the Company and
James D. Abrams (filed as Exhibit 10.7)
8. Employment Agreement, dated June 26, 1996, between the Company and
Anthony M. Schofield (filed as Exhibit 10.8)
9. Employment Agreement, dated August 1, 1997, between the Registrant
and Alfred W. Taylor III (filed as Exhibit 10.9)
10. Employment Agreement, dated October 1, 1997, between the
Registrant and Ronald L. Smith (filed as Exhibit 10.10)
(b) Reports on Form 8-K
The Company filed a Current Report on Form 8-K on October 15, 1997
reporting the acquisition of Parrott Mechanical, Inc. ("Parrott") pursuant to
Item 2 of Form 8-K. The Company also filed a Current Report on Form 8-K on
November 24, 1997 reporting combined operating results for the month of October
1997 for the Company and Hawk Heating & Air Conditioning, Inc., TML, Inc. and MT
Partnership (collectively, "TML"), Parrott and McAlister Heat & Air, Inc.
pursuant to Item 5 of Form 8-K. The Company also filed a Current Report on Form
8-K on November 26, 1997 containing the financial statements of TML and pro
forma financial statements pursuant to Item 5 of Form 8-K.
25
<PAGE> 26
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Report to be signed on
its behalf by the undersigned, thereunto duly authorized, in the City of
Nashville, State of Tennessee, on March 12, 1998.
SERVICE EXPERTS, INC.
By: /s/ ALAN R. SIELBECK
------------------------------------
Alan R. Sielbeck
Chairman, President and
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Report has been signed by the following persons on behalf of the Registrant in
the capacities and on the date indicated.
<TABLE>
<CAPTION>
NAME TITLE DATE
---- ----- ----
<C> <S> <C>
/s/ ALAN R. SIELBECK Chairman, President and March 12, 1998
- ----------------------------------------------------- Chief Executive Officer
Alan R. Sielbeck (principal executive officer)
/s/ ANTHONY M. SCHOFIELD Chief Financial Officer, March 12, 1998
- ----------------------------------------------------- Secretary and Treasurer
Anthony M. Schofield
Director
- -----------------------------------------------------
James D. Abrams
Director
- -----------------------------------------------------
Raymond J. De Riggi
/s/ NORMAN T. ROLF, JR. Director March 12, 1998
- -----------------------------------------------------
Norman T. Rolf, Jr.
/s/ WILLIAM G. ROTH Director March 12, 1998
- -----------------------------------------------------
William G. Roth
/s/ TIMOTHY G. WALLACE Director March 12, 1998
- -----------------------------------------------------
Timothy G. Wallace
</TABLE>
26
<PAGE> 27
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
SERVICE EXPERTS, INC. -- AUDITED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997
Report of Independent Auditors.............................. A-2
Consolidated Balance Sheets................................. A-3
Consolidated Statements of Operations....................... A-5
Consolidated Statements of Stockholders' Equity............. A-6
Consolidated Statements of Cash Flows....................... A-7
Notes to Consolidated Financial Statements.................. A-8
</TABLE>
A-1
<PAGE> 28
REPORT OF INDEPENDENT AUDITORS
The Stockholders
Service Experts, Inc.
We have audited the accompanying consolidated balance sheets of Service
Experts, Inc. (see Note 1) as of December 31, 1996 and 1997, and the related
consolidated statements of operations, stockholders' equity, and cash flows for
each of the three years in the period 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 audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
Service Experts, Inc. (see Note 1) at December 31, 1996 and 1997, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 1997, in conformity with generally
accepted accounting principles.
ERNST & YOUNG LLP
Nashville, Tennessee
February 23, 1998
A-2
<PAGE> 29
SERVICE EXPERTS, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
------------------
1996 1997
------- --------
(IN THOUSANDS)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $10,806 $ 11,192
Accounts receivable:
Trade, net of allowance for doubtful accounts of
$773,000 in 1996 and $1,550,000 in 1997............... 13,405 29,129
Related party.......................................... 130 202
Employee............................................... 114 365
Other.................................................. 208 2,099
------- --------
13,857 31,795
Inventories............................................... 5,245 11,570
Costs and estimated earnings in excess of billings........ 525 1,805
Prepaid expenses and other current assets................. 785 2,458
Current portion of notes receivable -- related parties.... 14 14
Current portion of notes receivable -- other.............. 294 284
Deferred income taxes..................................... 1,918 3,896
------- --------
Total current assets.............................. 33,444 63,014
Property, buildings and equipment:
Land...................................................... 1,198 1,365
Buildings................................................. 1,649 3,252
Furniture and fixtures.................................... 1,737 5,900
Machinery and equipment................................... 3,290 5,718
Vehicles.................................................. 7,078 14,754
Leasehold improvements.................................... 1,277 2,477
------- --------
16,229 33,466
Less accumulated depreciation and amortization.............. (4,976) (8,986)
------- --------
11,253 24,480
Notes receivable -- related parties, net of current
portion................................................... 352 338
Notes receivable -- other, net of current portion........... 679 591
Goodwill, net of accumulated amortization of $72,000 in 1996
and $1,883,000 in 1997.................................... 33,038 105,158
Other assets................................................ 1,404 1,229
------- --------
Total assets...................................... $80,170 $194,810
======= ========
</TABLE>
See accompanying notes.
A-3
<PAGE> 30
SERVICE EXPERTS, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
------------------
1996 1997
------- --------
(IN THOUSANDS)
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Line of credit and short-term debt........................ $ 1,477 $ --
Trade accounts payable and accrued liabilities............ 7,696 17,821
Cash consideration payable................................ 1,495 --
Accrued compensation...................................... 1,933 6,129
Accrued warranties........................................ 1,076 2,139
Income taxes payable...................................... 1,724 608
Deferred revenue.......................................... 3,685 6,816
Billings in excess of costs and estimated earnings........ 798 1,282
Current portion related party notes....................... 24 --
Current portion of long-term debt and capital lease
obligations............................................ 658 274
------- --------
Total current liabilities......................... 20,566 35,069
Related party notes, net of current portion................. 9 --
Long-term debt and capital lease obligations, net of current
portion................................................... 3,915 15,663
Deferred income taxes....................................... 361 1,676
Commitments (Note 11)
Stockholders' equity:
Common stock $.01 par value; 30,000,000 shares authorized;
11,621,847 and 15,422,269 shares issued and outstanding
at December 31, 1996 and 1997, respectively............ 116 154
Preferred stock, $.01 par value; 10,000,000 shares
authorized, no shares issued and outstanding........... -- --
Additional paid-in capital................................ 50,459 122,673
Retained earnings......................................... 4,759 19,575
Equity notes receivable................................... (15) --
------- --------
Total stockholders' equity........................ 55,319 142,402
------- --------
Total liabilities and stockholders' equity........ $80,170 $194,810
======= ========
</TABLE>
See accompanying notes.
A-4
<PAGE> 31
SERVICE EXPERTS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------
1995 1996 1997
------- ------- --------
(IN THOUSANDS,
EXCEPT PER SHARE DATA)
<S> <C> <C> <C>
Net revenue................................................. $49,748 $74,913 $238,692
Cost of goods sold.......................................... 38,227 52,628 154,598
------- ------- --------
Gross margin................................................ 11,521 22,285 84,094
Selling, general and administrative expenses................ 11,185 17,384 60,219
------- ------- --------
Income from operations...................................... 336 4,901 23,875
Other income (expense):
Interest expense.......................................... (610) (613) (688)
Interest income........................................... 66 361 775
Other income.............................................. 185 226 493
------- ------- --------
(359) (26) 580
------- ------- --------
Income (loss) before federal and state income taxes......... (23) 4,875 24,455
Provision (benefit) for income taxes:
Current................................................... 102 2,677 9,642
Deferred.................................................. 44 (1,541) (453)
------- ------- --------
146 1,136 9,189
------- ------- --------
Net income (loss)......................................... $ (169) $ 3,739 $ 15,266
======= ======= ========
Net income (loss) per share:
Basic..................................................... $ (.08) $ .74 $ 1.07
======= ======= ========
Diluted................................................... $ (.08) $ .74 $ 1.06
======= ======= ========
Weighted average shares outstanding:
Basic..................................................... 2,132 5,022 14,305
======= ======= ========
Diluted................................................... 2,132 5,051 14,453
======= ======= ========
</TABLE>
See accompanying notes.
A-5
<PAGE> 32
SERVICE EXPERTS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL EQUITY
--------------- PAID-IN RETAINED NOTES
SHARES AMOUNT CAPITAL EARNINGS RECEIVABLE TOTAL
------ ------ ---------- -------- ---------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Balance at January 1, 1995.............. 2,133 $ 21 $ 1,196 $ 2,669 $ -- $ 3,886
Capital distributions................. -- -- -- (584) -- (584)
Capital contributions................. -- -- 188 -- -- 188
Net loss.............................. -- -- -- (169) -- (169)
------ ---- -------- ------- ---- --------
Balance at December 31, 1995............ 2,133 21 1,384 1,916 -- 3,321
Change in retained earnings due to
conversion of Pooled Company to
calendar year-end.................. -- -- -- (4) -- (4)
Issuance of stock at initial public
offering........................... 2,588 26 28,087 -- -- 28,113
Predecessor companies (see Note 3)
Issuance of stock..................... 4,832 48 6,462 -- (15) 6,495
Capital distributions................. -- -- (18,699) -- -- (18,699)
Issuance of stock for acquired companies
(see Note 4).......................... 2,069 21 32,475 -- -- 32,496
Capital distributions................. -- -- -- (892) -- (892)
Capital contributions................. -- -- 750 -- -- 750
Net income............................ -- -- -- 3,739 -- 3,739
------ ---- -------- ------- ---- --------
Balance at December 31, 1996............ 11,622 116 50,459 4,759 (15) 55,319
Issuance of stock at secondary
offering.............................. 1,850 19 38,029 -- -- 38,048
Issuance of stock Employee Stock
Purchase Plan......................... 23 -- 250 -- -- 250
Issuance of stock for acquired companies
(see Note 4).......................... 1,927 19 33,905 -- -- 33,924
Capital distributions................. -- -- -- (450) -- (450)
Capital contributions................. -- -- 30 -- 15 45
Net income............................ -- -- -- 15,266 -- 15,266
------ ---- -------- ------- ---- --------
Balance at December 31, 1997.......... 15,422 $154 $122,673 $19,575 $ -- $142,402
====== ==== ======== ======= ==== ========
</TABLE>
See accompanying notes.
A-6
<PAGE> 33
SERVICE EXPERTS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------
1995 1996 1997
------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income (loss)........................................... $ (169) $ 3,739 $ 15,266
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation.............................................. 1,158 1,186 4,278
Amortization.............................................. -- 72 1,810
Provision (benefit) for deferred income taxes............. 44 (1,541) (453)
Loss (gain) on asset disposals............................ (51) (44) 151
Provision for loss on accounts receivable................. 213 391 385
Changes in operating assets and liabilities:
Receivables............................................. (674) (1,132) (8,587)
Inventories............................................. (200) (365) (1,229)
Prepaid expenses and other current assets............... 3 (318) (631)
Trade accounts payable and accrued liabilities.......... 143 (1,594) 2,740
Accrued compensation.................................... 32 (713) 2,324
Accrued warranties...................................... 59 150 237
Deferred revenue........................................ 56 435 (288)
Income taxes payable.................................... (207) 287 (2,040)
Costs and estimated earnings in excess of billings and
billings in excess of costs and estimated earnings..... (436) 37 (501)
------- -------- --------
Net cash flow provided by (used in) operating
activities.......................................... (29) 590 13,462
INVESTING ACTIVITIES
Payments (advances) on notes receivable..................... -- (250) 378
Purchase of property, buildings, and equipment.............. (2,472) (1,033) (9,886)
Proceeds from sale of property, buildings, and equipment.... 93 273 553
Cash acquired through acquisitions.......................... -- 3,961 3,995
Payment of cash for acquired companies...................... (25) (18,699) (46,568)
Increase (decrease) in other assets......................... (89) (334) 775
------- -------- --------
Net cash used in investing activities............... (2,493) (16,082) (50,753)
FINANCING ACTIVITIES
Increase (decrease) in short-term debt...................... 2,350 (1,341) (1,477)
Proceeds from notes payable to shareholders and related
parties................................................... -- 59 --
Payments on notes payable to shareholders and related
parties................................................... (9) (900) (1,495)
Issuance of stock at secondary offering, net of issuance
costs..................................................... -- 28,113 38,048
Issuance of stock, Employee Stock Purchase Plan............. -- -- 250
Proceeds of long-term debt and capital leases............... 1,426 2,424 15,500
Payments of long-term debt and capital leases............... (681) (2,270) (12,744)
Cash contributions received................................. 163 320 45
Distributions paid.......................................... (584) (892) (450)
------- -------- --------
Net cash provided by financing activities........... 2,665 25,513 37,677
------- -------- --------
Increase in cash and cash equivalents....................... 143 10,021 386
Cash and cash equivalents at beginning of period............ 739 882 10,806
Change in cash and cash equivalents due to conversion of
Pooled Company to calendar year-end....................... -- (97) --
------- -------- --------
Cash and cash equivalents at end of period.................. $ 882 $ 10,806 $ 11,192
======= ======== ========
SUPPLEMENTAL CASH FLOW INFORMATION
Interest paid............................................... $ 562 $ 613 $ 528
======= ======== ========
Income tax paid............................................. $ 99 $ 1,907 $ 11,036
======= ======== ========
Fair value of land contributed by stockholders.............. $ -- $ 430 $ --
======= ======== ========
DISTRIBUTION OF ASSETS TO STOCKHOLDERS
Book value of assets distributed............................ $ -- $ 1,324 $ --
------- -------- --------
Long-term debt assumed by stockholders...................... $ -- $ 488 $ --
------- -------- --------
Notes payable to stockholders retired....................... $ -- $ 343 $ --
======= ======== ========
</TABLE>
See accompanying notes.
A-7
<PAGE> 34
SERVICE EXPERTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
REPORTING ENTITY
Service Experts, Inc. (the "Company") was incorporated on March 27, 1996.
As a result of the adoption of Securities and Exchange Commission ("Commission")
Staff Accounting Bulletin No. 97 ("SAB 97") on July 31, 1996, the historical
financial statements of the Company for periods prior to August 21, 1996 are the
combined financial statements of AC Service & Installation Co., Inc. and
Donelson Air Conditioning Company, Inc. (collectively, the "Acquiring Company")
and seven subsequent acquisitions accounted for as poolings of interests (see
Note 2). AC Service & Installation Co., Inc. and Donelson Air Conditioning
Company, Inc. were under common control prior to August 21, 1996. On August 21,
1996 and simultaneous with the closing of its initial public offering, the
Company acquired in separate transactions, 12 heating, ventilating and air
conditioning ("HVAC") replacement and service businesses and Contractor Success
Group, Inc. (collectively, the "Predecessor Companies") in exchange for shares
of the Company's Common Stock and cash (the "Combination"). The Acquiring
Company was treated as the acquiror entity in this transaction in accordance
with SAB 97. The operations of the Predecessor Companies have been included in
the Company's financial statements from the date of acquisition. The
above-mentioned acquisitions have been accounted for using the historical cost
basis of the acquired companies in accordance with Commission Staff Accounting
Bulletin No. 48 ("SAB 48"). The Company operates in one industry segment and is
primarily engaged in the replacement and servicing of HVAC units for residential
and commercial customers. The Company has Service Centers located in cities
across the United States.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements of Service Experts, Inc. include the
accounts of the Company and its subsidiaries. All material intercompany
transactions have been eliminated in consolidation. Investments in affiliates
less than 50.0% owned are generally recorded on the equity method.
RECOGNITION OF REVENUE
Revenue on all of the Company's heating and air conditioning installation
contracts for commercial buildings is 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 residential heating and air conditioning
installation, service and maintenance jobs is recognized upon completion of the
services, which is usually within one to two days.
Earnings and estimated costs on contracts are reviewed throughout the terms
of the contracts, and any required adjustments are reflected in the periods in
which they first become known. When estimates indicate a probable loss on a
contract, the full amount thereof is accrued in the period in which it is first
determined. Most contracts are completed within six to 18 months.
Trade accounts receivable includes billings and billed retainage on
contracts. Also included in trade accounts receivable are unbilled retainage
amounts of $718,000 and $1,376,000 at December 31, 1996 and 1997, respectively.
The Company classifies these amounts as current assets because all balances are
expected to be collected in the current year. Concentrations of credit risk with
respect to trade receivables are limited due to the large number of customers
comprising the Company's customer base, and their dispersions across many
different industries and geographies.
The asset, "costs and estimated earnings in excess of billings," represents
revenue recognized in excess of amounts billed on in-progress contracts. The
liability, "billings in excess of costs and estimated earnings," represents
billings in excess of revenue recognized on in-progress contracts.
A-8
<PAGE> 35
SERVICE EXPERTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FAIR VALUE OF FINANCIAL INSTRUMENTS
Cash and Cash Equivalents
The carrying amounts reported in the consolidated balance sheets for cash
and cash equivalents approximate fair value.
Accounts Receivable, Notes Receivable, Accounts Payable and Accrued
Liabilities
The carrying amounts reported in the consolidated balance sheets for
accounts receivable, notes receivable, accounts payable and accrued liabilities
approximate fair value. Accounts receivable and notes receivable are usually
unsecured.
Long-Term Debt and Related Party Notes Payable
Based upon the borrowing rates currently available to the Company, the
carrying amounts reported in the consolidated balance sheets for long-term debt
and related party notes payable approximate fair value.
CONCENTRATIONS OF CREDIT RISK
At times, cash balances in the Company's accounts may exceed FDIC insurance
limits. The Company primarily purchases HVAC units that are manufactured by four
companies: Amana, Carrier Air Conditioning, Inc., Lennox Industries, Inc. and
The Trane Company. Total purchases of equipment and parts from these
manufacturers during 1997 totaled approximately $35.4 million.
CASH EQUIVALENTS
The Company considers all highly liquid investments with an original
maturity of three months or less to be cash equivalents.
ALLOWANCE FOR DOUBTFUL ACCOUNTS
During the years ended December 31, 1995, 1996 and 1997 amounts charged to
bad debts expense and accounts written off, net of recoveries, were as follows:
<TABLE>
<CAPTION>
BALANCE AT CHARGED TO CHARGED TO BALANCE AT
BEGINNING OF COSTS AND OTHER END OF
YEAR ENDED PERIOD EXPENSES ACCOUNTS DEDUCTIONS PERIOD
- ---------- ------------ ---------- ---------- ---------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
December 31, 1995.............. $259 $213 $ -- $170(1) $ 302
December 31, 1996.............. $302 $391 $390(2) $310(1) $ 773
December 31, 1997.............. $773 $385 $569(2) $177(1) $1,550
</TABLE>
- ---------------
(1) Uncollectible accounts written off, net of recoveries.
(2) Allowance for bad debts of acquired companies.
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.
A-9
<PAGE> 36
SERVICE EXPERTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
PROPERTY, BUILDINGS AND EQUIPMENT
Property, building and equipment are stated on the basis of cost.
Depreciation and amortization are provided on the straight-line and
declining-balance methods over the following useful lives:
<TABLE>
<CAPTION>
YEARS
-----
<S> <C>
Buildings................................................... 31.5
Furniture and fixtures...................................... 5
Machinery and equipment..................................... 5
Vehicles.................................................... 5
Leasehold improvements...................................... 7-30
</TABLE>
Assets acquired upon the acquisition of businesses are depreciated and
amortized over the shorter of the respective assets' remaining useful lives or
the above useful lives for new acquired assets.
GOODWILL
Goodwill consists of the excess of purchase price over the fair value of
acquired tangible and identifiable intangible assets. Excess cost over the fair
value of net assets acquired (or goodwill) is amortized on a straight-line basis
over 40 years.
LONG-LIVED ASSETS
Statement of Financial Accounting Standards 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, equipment and goodwill and
has determined that there were no indications of impairment as of December 31,
1996 and 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.
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 as
determined by the Board of Directors. The Board of Directors has the power and
authority to establish preferences related to dividends, redemptions, payment on
liquidation, conversion privileges and voting rights. As of December 31, 1997,
the Company had no shares of preferred stock issued and outstanding.
WARRANTIES
The Company provides the retail customer with a warranty ranging from one
to ten years on parts and labor from the date of installation of the HVAC unit.
This warranty generally runs concurrent with the manufacturer's warranty on
parts and labor for the first year. The Company provides an accrual for future
warranty costs based upon the relationship of prior years' sales to actual
warranty costs. It is the Company's practice to classify the entire warranty
accrual as a current liability.
A-10
<PAGE> 37
SERVICE EXPERTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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, in general, 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 1995, 1996 and
1997, the Company expensed $916,000, $1,782,000 and $8,183,000, respectively.
INCOME PER SHARE
In 1997, the Financial Accounting Standards Board ("FASB") issued Statement
No. 128, "Earnings Per Share" ("Statement 128"). Statement 128 replaced the
calculation of primary and fully diluted earnings per share with basic and
diluted earnings per share. Unlike primary earnings per share, basic earnings
per share excludes any dilutive effects of options, warrants and convertible
securities. Diluted earnings per share is very similar to the previously
reported fully diluted earnings per share, and uses the treasury stock method in
calculating dilution. All earnings per share amounts for all periods have been
presented and restated to conform to Statement 128 requirements.
NEWLY ISSUED ACCOUNTING STANDARDS
In June 1997, the FASB issued Statement No. 130, "Reporting Comprehensive
Income" ("Statement 130"). Statement 130 establishes standards for reporting and
displaying comprehensive income and its components in a full set of general
purpose financial statements. Statement 130 is effective for interim and annual
periods beginning in 1998. 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. Management of the
Company does not expect the adoption of Statement 130 to have a material impact
on the Company's financial statements.
In June 1997, the FASB issued Statement No. 131, "Disclosures about
Segments of an Enterprise and Related Information" ("Statement 131"). Statement
131 establishes standards for the way public business enterprises are to report
information about operating segments in annual financial statements and requires
these enterprises to report selected information about operating segments in
interim financial reports issued to shareholders. It also establishes standards
for related disclosures about products and services, geographic areas, and major
customers. Statement 131 is effective for fiscal years beginning after December
15, 1997. Management of the Company is currently reviewing the impact of
Statement 131. The Company will adopt Statement 131 on December 31, 1998 and
will report interim information effective in the first quarter of 1999.
2. BUSINESS COMBINATIONS
In December 1996, the Company completed business combinations with Custom
Air Conditioning, Inc. ("Custom") and Freschi Air Systems, Inc. ("Freschi")
through the exchange of 230,049 and 177,765 shares of the Company's Common
Stock, respectively. These business combinations were accounted for as poolings
A-11
<PAGE> 38
SERVICE EXPERTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
of interest and, accordingly, the consolidated financial statements were
restated in 1996 to include the accounts of these pooled companies. The Company
completed a business combination with C. Iapaluccio Company, Inc. ("Iapaluccio")
through the exchange of 92,553 shares of the Company's Common Stock in May 1997.
The Company also completed business combinations with Parrott Mechanical, Inc.,
including real property operations used by the company ("Parrott Mechanical et
al."), TML, Inc. and MT Partnership (collectively, "TML"), Hawk Heating & Air
Conditioning, Inc. ("Hawk") and McAlister Heat & Air, Inc. ("McAlister") through
the exchange of 171,230, 240,526, 34,426 and 32,786 shares, respectively, of the
Company's Common Stock in September 1997.
These five business combinations have been accounted for as poolings of
interests and, accordingly, the consolidated financial statements for the
periods presented have been restated to include the accounts of these pooled
companies. The following is a summary of results of operations of the separate
pooled entities acquired in 1997 for periods prior to the business combinations.
<TABLE>
<CAPTION>
YEAR ENDED THREE MONTHS NINE MONTHS
DECEMBER 31, ENDED ENDED
----------------- MARCH 31, SEPTEMBER 30,
1995 1996 1997 1997
------- ------- ------------ -------------
(UNAUDITED)
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Net revenue
Service Experts.................................. $24,876 $46,856 $33,355 $144,153
Iapaluccio....................................... 1,756 2,591 536 N/A
Parrott.......................................... 12,383 14,607 N/A 12,908
TML.............................................. 8,182 8,064 N/A 8,082
Hawk............................................. 1,041 1,206 N/A 1,077
McAlister........................................ 1,510 1,589 N/A 1,353
------- ------- ------- --------
Combined......................................... $49,748 $74,913 $33,891 $167,573
======= ======= ======= ========
Net income (loss)
Service Experts.................................. $ 708 $ 3,110 $ 1,827 $ 9,742
Iapaluccio....................................... 27 84 17 N/A
Parrott.......................................... (1,371) 360 N/A 816
TML.............................................. 380 38 N/A 596
Hawk............................................. 19 26 N/A 166
McAlister........................................ 68 121 N/A 195
------- ------- ------- --------
Combined......................................... $ (169) $ 3,739 $ 1,844 $ 11,515
======= ======= ======= ========
</TABLE>
3. RECAPITALIZATION, INITIAL PUBLIC OFFERING AND SECONDARY OFFERING
On August 21, 1996, the Company completed an initial public offering
("IPO") of 2,587,500 shares of Common Stock at $13.00 per share. Simultaneously
with the closing of the IPO, the Company issued 3,369,538 shares of Common Stock
and distributed $18,699,000 in cash (exclusive of 1,153,098 shares issued and
$5,027,947 cash distributed to the former stockholders of the Acquiring Company)
in exchange for the capital stock of the Predecessor Companies. The exchange is
being accounted for utilizing the historical cost basis in accordance with SAB
48 with the stock being valued at the historical cost of the net assets
exchanged. Cash consideration given in these acquisitions is treated for
accounting purposes as a dividend from the Company.
On March 18, 1997, the Company completed a secondary public stock offering,
which involved a sale to the public of 1,850,000 shares of Common Stock at
$22.00 per share which resulted in $38.0 million in net proceeds to the Company.
A portion of the net proceeds was used to pay the cash portion of the
consideration
A-12
<PAGE> 39
SERVICE EXPERTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
for acquisitions and to repay certain indebtedness arising from acquisitions.
The remaining proceeds were used to fund the Company's capital expenditures,
acquisitions and for general corporate purposes.
4. ACQUISITIONS
On November 18, 1996, the Company filed a shelf Registration Statement on
Form S-4 (the "Shelf Registration Statement") covering securities with a
collective aggregate offering price of $50.0 million for use in acquisitions.
The following table sets forth certain information regarding acquisitions in
1996 and 1997:
<TABLE>
<CAPTION>
SERVICE TOTAL TOTAL
CENTERS COMPANIES SHARES CASH TOTAL
ACQUIRED ACQUIRED ISSUED CONSIDERATION CONSIDERATION
-------- --------- --------- ------------- -------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
1996
Fourth Quarter................... 13 17 2,498,000 $ 2,983 $44,038
1997
First Quarter.................... 7 13 772,000 15,126 28,287
Second Quarter................... 9 18 470,000 10,788 21,625
Third Quarter.................... 10 20 717,000 10,252 30,254
Fourth Quarter................... 12 20 540,000 6,949 22,612
</TABLE>
The Company established an escrow account equal to 10% of the purchase
price for each acquisition, subject to final closing adjustments. The purchase
price was allocated to the acquired assets based on the fair values of those
assets as determined by the Company as set forth below for the acquisitions
accounted for under the purchase method:
<TABLE>
<CAPTION>
1996 1997
------- --------
(IN THOUSANDS)
<S> <C> <C>
Current assets.............................................. $ 7,032 $ 23,622
Property, buildings and equipment........................... 2,593 11,106
Other assets................................................ 392 1,665
Goodwill.................................................... 32,337 73,930
Liabilities assumed......................................... (6,787) (20,494)
------- --------
Purchase price.................................... $35,567 $ 89,829
======= ========
</TABLE>
The Company has four purchase agreements which provide for contingent
payments based on the four acquired companies achieving specified levels based
on earnings before income taxes, depreciation and amortization (EBITDA), pretax
income or net income during the 12 month period subsequent to the acquisition.
The maximum additional consideration under these earn-out agreements is
approximately $5.9 million. Any such payments will be capitalized as goodwill.
In connection with the acquisitions, the Company incurred $148,000 in costs
associated with the termination of acquired companies' 401(k) plans. These
amounts were capitalized as a part of the purchase price.
A-13
<PAGE> 40
SERVICE EXPERTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
OTHER INFORMATION REGARDING ACQUISITIONS
All of the foregoing acquisitions were accounted for using the purchase
method of accounting. The allocation of the purchase price associated with the
acquisitions has been determined by the Company based upon available
information and is subject to further refinement. The operating results of the
acquired companies have been included in the accompanying consolidated
statements of operations from the respective dates of acquisition. The
following unaudited pro forma results of operations give effect to the
operations of the entities acquired as if the respective transactions had
occurred as of the first day of the fiscal year immediately preceding the year
of the transactions. The pro forma results of operations do not purport to
represent what the Company's results of operations would have been had such
transactions in fact occurred at the beginning of the years presented or to
project the Company's results of operations in any future period.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------
1995 1996 1997
-------- -------- --------
(IN THOUSANDS, EXCEPT
PER SHARE DATA)
<S> <C> <C> <C>
Net revenue................................................. $136,928 $257,429 $286,024
Net income.................................................. 4,360 12,165 15,845
Income per common share:
Basic..................................................... $ .38 $ .90 $ 1.05
Diluted................................................... $ .38 $ .90 $ 1.04
</TABLE>
Subsequent to December 31, 1997, the Company completed the acquisition of
eight Service Centers by issuing approximately 321,000 shares of Common Stock
and paying cash consideration of approximately $6.0 million. The following
unaudited pro forma results of operations give effect to the operations of the
entities acquired during 1997 and subsequent to December 31, 1997 as if the
respective transactions had occurred as of the first day of the fiscal year
immediately preceding the year of the transactions. The pro forma results of
operations do not purport to represent what the Company's results of operations
would have been had such transactions in fact occurred at the beginning of the
years presented or to project the Company's results of operations in any future
period.
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
---------------------
1996 1997
--------- ---------
(IN THOUSANDS, EXCEPT
PER SHARE DATA)
<S> <C> <C>
Net revenue................................................. $282,300 $313,454
Net income.................................................. 13,091 16,984
Income per common share:
Basic..................................................... $ .96 $ 1.12
Diluted................................................... $ .96 $ 1.11
</TABLE>
A-14
<PAGE> 41
SERVICE EXPERTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
5. CONTRACTS IN PROCESS
Information relative to contracts in process is as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1996 1997
------- --------
(IN THOUSANDS)
<S> <C> <C>
Contracts on the percentage-of-completion method:
Expenditures on uncompleted contacts...................... $ 6,944 $ 19,974
Estimated earnings........................................ 2,348 7,127
------- --------
9,292 27,101
Less applicable billings.................................... (9,565) (26,578)
------- --------
$ (273) $ 523
======= ========
Included in the accompanying consolidated balance sheets
under the following captions:
Costs and estimated earnings in excess of billings........ $ 525 $ 1,805
Billings in excess of costs and estimated earnings........ (798) (1,282)
------- --------
$ (273) $ 523
======= ========
</TABLE>
Progress billings on contracts bear a relation to costs incurred, but are
not indicative of the ultimate profit or loss on a contract.
6. NOTES RECEIVABLE
Notes receivable are accepted from members of Contractor Success Group,
Inc. who desire to finance a portion of their initial membership fee. The
original principal balance generally does not exceed $15,000 and the notes
typically involve a three-year term, accrue interest at 18.0% and are payable in
equal monthly installments. The notes are periodically reviewed for
collectibility and reserves are established at the time it appears that
collectibility is uncertain.
Also included in notes receivable is a note receivable with a balance of
$181,000 and $174,000 at December 31, 1996 and 1997, respectively, which bears
interest at 9.0% and is due in monthly installments with all unpaid principle
due and payable as a balloon payment on July 1, 2009.
A-15
<PAGE> 42
SERVICE EXPERTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
7. LEASES
Total rental expense for all operating leases was $254,000, $574,000 and
$2,863,000 for 1995, 1996 and 1997, respectively. The Company leases office and
warehouse space from various stockholders of the Company. These lease agreements
expire at various dates through 2006. The major facilities' leases are for terms
of two to ten years and generally provide renewal options for terms up to five
additional years. In addition, some leases contain purchase options. Management
expects that in the normal course of business, most leases that expire will be
renewed or replaced by other leases. Related party rental expense for 1995, 1996
and 1997 was $215,000, $362,000 and $1,513,000, respectively. The Company leases
certain vehicles and office and warehouse facilities under terms of
non-cancelable operating lease agreements which expire at various dates through
2006. Minimum rental commitments at December 31, 1997 under operating leases
having an initial non-cancelable term of one year or more are as follows:
<TABLE>
<CAPTION>
CAPITAL OPERATING RELATED
LEASES LEASES PARTY TOTAL
------- --------- ------- ------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
1998................................................. 59 652 1,951 2,662
1999................................................. 55 569 1,910 2,534
2000................................................. 26 546 1,819 2,391
2001................................................. -- 433 1,584 2,017
2002................................................. -- 192 625 817
Thereafter........................................... -- 109 648 757
---- ----- ----- ------
140 2,501 8,537 11,178
===== ===== ======
Less amounts representing interest................... 19
----
Present value of net minimum rentals (including $50
classified as current)............................. $121
====
</TABLE>
The carrying value of assets under capital leases, which are included with
owned assets in the accompanying consolidated balance sheets is $154,000 at
December 31, 1996 and $120,000 at December 31, 1997.
Amortization of the assets under capital leases is included in depreciation
expense.
8. LONG-TERM DEBT
Long-term debt consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------
1996 1997
------ -------
(IN THOUSANDS)
<S> <C> <C>
Line of credit and short-term debt.......................... $1,477 $15,500
Mortgage notes payable...................................... 1,167 --
Installment and equipment notes............................. 207 316
Other....................................................... 3,076 --
------ -------
5,927 15,816
Less current portion........................................ 2,111 224
------ -------
$3,816 $15,592
====== =======
</TABLE>
At December 31, 1996, the Company had a Revolving Line of Credit agreement
with a Nashville, Tennessee bank for up to $10.0 million to be used for working
capital purposes and acquisitions and a Discretionary Line of Credit agreement
with a Nashville, Tennessee bank for up to $10.0 million to be used
A-16
<PAGE> 43
SERVICE EXPERTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
for acquisitions or such other purposes as may be approved by the bank. Any
principal amounts outstanding on the Lines of Credit were due on September 10,
1998. At December 31, 1996, there were no amounts outstanding under the above
Lines of Credit.
During September 1997, the Company terminated its $20.0 million Lines of
Credit and entered into a $50.0 million revolving credit facility with a banking
syndication available through September 3, 1999 (the "Credit Facility"). In
addition to a revolving credit loan, the Credit Facility provides for a swing
line commitment in the principal amount of up to $2.0 million. The Credit
Facility also provides stand by letters of credit of up to $5.0 million in the
aggregate. The maximum total amount available to be advanced under the revolving
credit loan, swing line commitment and letters of credit is $50.0 million. The
Company may make principal payments under the revolving credit notes at any
time, subject to minimum repayment amounts, for non-LIBOR advances and at the
end of the interest period for LIBOR advances.
Borrowings under the revolving credit loan bear interest, at the Company's
option, (i) the higher of the Banks' base rate or the federal funds rate plus
.5% or (ii) a 30, 60 or 90-day LIBOR plus a variable margin of from 75 to 150
basis points depending on the Company's funded debt to EBIA ratio determined on
a quarterly basis. Advances under the swing line bear interest at the banks'
base rate. All of the Company's subsidiaries have guaranteed the repayment of
indebtedness under the Credit Facility. The Credit Facility requires an annual
commitment fee, ranging from 20 to 37.5 basis points, of the average unused
portion of the revolving credit loan.
The Credit Facility contains covenants with respect to the maintenance of
certain financial ratios, maintaining a specified minimum net worth, limiting
the incurrence of additional indebtedness, the sale of substantial assets,
consolidations or mergers by the Company and the payments of dividends. At
December 31, 1997, the Company was in compliance with all covenants. There were
no amounts outstanding under letters of credit at December 31, 1996 and 1997.
The Company had a mortgage note payable to Free Will Baptist, Inc. that was
secured by the Company's office building and related land. The loan required
monthly installments of $8,400, including fixed principal and imputed interest.
The mortgage was transferred to the former shareholders of the Acquiring Company
on June 30, 1996 (see Note 13). The Company also had various mortgage notes
payable to various lenders which were secured by real estate. These notes were
paid off during 1997. In addition, the Company also had a $1.5 million line of
credit. The line of credit bore interest of a variable rate of the lender's
prime rate of interest plus 1.75% (9.875% at December 31, 1996). The line of
credit was secured by approximately $4.5 million of the accounts receivable and
inventory. At December 31, 1996, there was $1,477,000 outstanding under this
line of credit. The Company terminated this line of credit during 1997.
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 8.25% to 15.50% per annum with maturity dates
through 2000.
As of December 31, 1997, the aggregate amounts of annual principal
maturities of long-term debt are as follows (in thousands):
<TABLE>
<S> <C>
1998........................................................ $ 224
1999........................................................ 15,569
2000........................................................ 23
-------
$15,816
=======
</TABLE>
A-17
<PAGE> 44
SERVICE EXPERTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
9. STOCKHOLDERS' EQUITY AND STOCK PLANS
INCENTIVE STOCK OPTION PLAN
The Company has elected to follow Accounting Principles Board Opinion No.
25, "Accounting for Stock Issued to Employees" ("APB 25") and related
interpretations in accounting for its employee stock options because, as
discussed below, the alternative fair value accounting provided for under FASB
Statement No. 123, "Accounting for Stock-Based Compensation" ("Statement 123"),
requires use of option valuation models that were not developed for use in
valuing employee stock options. Under APB 25, because the exercise price of the
Company's employee stock options equals the market price of the underlying stock
on the date of grant, no compensation expense is recognized. Had compensation
expense for the stock option plans been determined consistent with the
provisions of Statement 123, the Company's net income and income per share would
have been as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------------
1996 1997
----------------- ------------------
AS PRO AS PRO
REPORTED FORMA REPORTED FORMA
-------- ------ -------- -------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
Net income.................................... $3,739 $3,618 $15,266 $14,648
Income per common share:
Basic....................................... $ .74 $ .72 $ 1.07 $ 1.02
Diluted..................................... $ .74 $ .72 $ 1.06 $ 1.01
</TABLE>
The resulting pro forma disclosures may not be representative of that to be
expected in future years.
The fair value of these options was estimated at the date of the grant
using the Black-Scholes option pricing model with the following range of
assumptions used for the option grants which occurred during 1996 and 1997.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------
1996 1997
----------- -----------
<S> <C> <C>
Volatility............................................. .25 and .55 .34
Interest rate.......................................... 5.97%-6.34% 5.37%-5.71%
Expected life (years).................................. 3 3
Dividend yields........................................ 0.0% 0.0%
</TABLE>
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options which have no vesting restrictions
and are fully transferable. In addition, option valuation models require the
input of highly subjective assumptions including the expected stock price
volatility. Because the Company's employee stock options have characteristics
significantly different from those of traded options, and because changes in the
subjective input assumptions can materially affect the fair value estimate, in
management's opinion, the existing models do not necessarily provide a reliable
single measure of the fair value of its employee stock options.
Under the Company's stock option plans, non-qualified and incentive stock
options to purchase Common Stock may be granted to officers, employees and
directors. Stock options are exercisable over a period determined by the Board
of Directors, but no longer than ten years after the date of the grant. The
Company has reserved 1.3 million shares of Common Stock under the Company's 1996
Incentive Stock Option Plan (the "Incentive Plan").
A-18
<PAGE> 45
SERVICE EXPERTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NONQUALIFIED STOCK OPTION PLAN
In May 1997, the Company adopted the Service Experts, Inc. 1997
Nonqualified Stock Option Plan (the "Nonqualified Option Plan") to award options
to employees of the Company and certain others who provide significant services
to the Company. Under the Nonqualified Option Plan options granted at any time
by the Compensation Committee may not exceed that number of shares which equals
the sum of (i) 9.5% of the total number of outstanding shares of Common Stock at
that time, minus (ii) the number of shares of Common Stock that are authorized
for issuance under the Incentive Plan. At December 31, 1997 no options had been
issued under this plan.
NON-EMPLOYEE DIRECTOR STOCK OPTION PLAN
The Company has a Non-Employee Director Stock Option Plan that provides for
a maximum issuance of 100,000 shares of Common Stock for grant to non-management
members of the Board of Directors.
Options to purchase a total of 15,000 and 3,000 shares of Common Stock with
an exercise price of $13.00 and $26.00 per share were issued during 1996 and
1997, respectively. Each option is exercisable in full upon receipt and shall
expire ten years after the grant date.
Information regarding the option plans for 1996 and 1997 are summarized
below:
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
STOCK OPTION PRICE EXERCISE
OPTIONS PER SHARE PRICE
------- ------------- --------
<S> <C> <C> <C>
Balance, January 1, 1996................................ -- -- --
Granted................................................. 517,811 $13.00-$17.25 $16.92
Exercised............................................... -- -- --
Cancelled............................................... -- -- --
-------
Balance, December 31, 1996.............................. 517,811 $13.00-$17.25 $16.92
Granted................................................. 220,000 $25.75-$27.00 $26.19
Exercised............................................... -- -- --
Cancelled............................................... (72,415) $13.00-$17.25 $16.92
-------
Balance, December 31, 1997.............................. 665,396 $13.00-$27.00 $19.96
=======
</TABLE>
<TABLE>
<CAPTION>
1996 1997
-------- --------
<S> <C> <C>
Weighted average fair value of options granted during the
year...................................................... $ 4.27 $ 7.91
Weighted average remaining contractual life of options...... 8.7(1) 9.4
Options available for grant................................. 182,189 634,604
</TABLE>
- ---------------
(1) 1996 has been restated to reflect the cancellation of options during 1997.
EMPLOYEE STOCK PURCHASE PLANS
In June 1996, the Company adopted an Employee Stock Purchase Plan (the
"Employee Purchase Plan"). A total of 200,000 shares of Common Stock have been
reserved for issuance under the Employee Purchase Plan. Employees are eligible
to participate in the Employee Purchase Plan if they are employed by the Company
or a participating subsidiary for at least 20 hours a week and more than five
months in any calendar year and have been employed for at least six months since
their last date of hire. The Employee Purchase Plan allows participants to
purchase shares of Common Stock in connection with option periods commencing on
January 1 of each year and ending the following December 31.
A-19
<PAGE> 46
SERVICE EXPERTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
In June 1997, the Company adopted a nonqualified stock purchase plan (the
"Nonqualified Purchase Plan"). The Company has reserved 100,000 shares of Common
Stock for issuance under the Nonqualified Purchase Plan. Participation in the
Nonqualified Purchase Plan is generally limited to individuals who were not
employed by the Company or one of its subsidiaries on January 1 of a calendar
year and, accordingly, were not eligible to receive an option under Employee
Purchase Plan. The Nonqualified Purchase Plan allows participants to purchase
shares of Common Stock in connection with option periods commencing on July 1 of
each year and ending the following December 31. The Employee Purchase Plan and
the Nonqualified Purchase Plan are referred to collectively as the "Purchase
Plans."
Each Purchase Plan permits eligible employees of the Company and certain of
its subsidiaries to purchase shares of Common Stock through payroll deductions,
which may not exceed 10% of the employee's base compensation, at a price equal
to 85% of the fair market value of the shares of Common Stock at the beginning
of the option period or at the end of the option period, whichever is lower.
During 1997, the Company issued 22,355 shares under the Employee Purchase Plan.
The Company expects to issue in 1998 approximately 54,000 shares under the
Purchase Plans for the 1997 plan year.
WARRANTS
In connection with the Company's IPO, Equitable Securities Corporation
received warrants to purchase 82,391 shares of the Company's Common Stock at an
exercise price of $13.00 per share. The warrants are exercisable for a period of
five years. The Company also issued warrants in connection with its acquisition
of ProAir Services, L.P. to purchase 200,000 shares of the Company's Common
Stock at an exercise price of $22.00 per share. These warrants are exercisable
for a period of five years. At December 31, 1997, no warrants had been
exercised.
INCOME (LOSS) PER SHARE
The following table sets forth the computation of basic and diluted income
per share:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------
1995 1996 1997
------ ------ -------
(IN THOUSANDS, EXCEPT PER
SHARE DATA)
<S> <C> <C> <C>
Numerator:
Net income (loss)......................................... $ (169) $3,739 $15,266
------ ------ -------
Numerator for basic income (loss) per share--income (loss)
available to common stockholders....................... (169) 3,739 15,266
------ ------ -------
Numerator for diluted income (loss) per share--income
(loss) available to common stockholders after assumed
conversions............................................ $ (169) $3,739 $15,266
Denominator:
Denominator for basic income (loss) per
share--weighted-average shares......................... 2,132 5,022 14,305
Effect of dilutive securities:
Employee stock options................................. -- 21 111
Warrants............................................... -- 8 37
------ ------ -------
Dilutive potential common shares.......................... -- 29 148
Denominator for diluted income (loss) per
share--adjusted weighted-average shares and assumed
conversions........................................... 2,132 5,051 14,453
====== ====== =======
Basic income (loss) per share............................... $ (.08) $ .74 $ 1.07
====== ====== =======
Diluted income (loss) per share............................. $ (.08) $ .74 $ 1.06
====== ====== =======
</TABLE>
A-20
<PAGE> 47
SERVICE EXPERTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
10. EMPLOYEE BENEFIT PLANS
The Company has defined-contribution employee benefit plans incorporating
provisions of section 401(k) of the Internal Revenue Code and the Davis-Bacon
Act. Generally, employees of the Company must have one year of service and work
500 hours during the plan year to be eligible. Under the plans' provisions, a
plan member may make contributions, on a tax-deferred basis, from 1.0% to 20.0%
of total compensation not to exceed the maximum established annually by the
Internal Revenue Service. Under the plans matching contributions are made by the
Company in amounts ranging from 1.0% to 50.0% of total contributions by a plan
member, to a maximum of between 2.0% and 6.0% of the employee's total calendar
year compensation. The Company's matching contributions totaled $358,000,
$309,000 and $576,000 as of December 31, 1995, 1996 and 1997, respectively.
11. COMMITMENTS AND CONTINGENT LIABILITIES
The Company is a party to a number of legal proceedings arising in the
ordinary course of its business. In the opinion of management, the resolution of
these proceedings will not have a material adverse effect on the financial
position or results of operations of the Company.
The Company maintains general liability insurance coverage and an umbrella
policy to ensure itself against any liabilities occurring in the normal course
of business. The Company believes that its insurance coverage is adequate.
12. INCOME TAXES
Income tax expense consists of the following:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------
1995 1996 1997
---- ------- ------
(IN THOUSANDS)
<S> <C> <C> <C>
Current:
Federal................................................... $ 56 $ 2,214 $7,539
State..................................................... 46 463 2,103
---- ------- ------
102 2,677 9,642
Deferred:
Federal................................................... -- (1,299) (219)
State..................................................... 44 (242) (234)
---- ------- ------
44 (1,541) (453)
---- ------- ------
Provision for income taxes.................................. $146 $ 1,136 $9,189
==== ======= ======
</TABLE>
A-21
<PAGE> 48
SERVICE EXPERTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Significant components of the deferred tax assets and liabilities are as
follows:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------
1996 1997
------ ------
(IN THOUSANDS)
<S> <C> <C>
Deferred tax liabilities:
Contract billings......................................... $ 168 $ 255
Accounts receivable....................................... 33 --
Inventory................................................. 9 20
Depreciation and amortization............................. 378 1,714
Other -- net.............................................. 71 --
------ ------
Deferred tax liabilities.................................... 659 1,989
Deferred tax assets:
Accounts receivable....................................... 268 553
Warranty reserves......................................... 355 786
Deferred revenue.......................................... 1,045 2,683
Accrued expenses.......................................... 369 150
Accounts payable.......................................... 19 --
Prepaid expenses.......................................... 11 --
Carryforwards, net........................................ 44 37
Other -- net.............................................. 105 --
------ ------
Total gross deferred tax assets............................. 2,216 4,209
------ ------
Net deferred tax assets........................... $1,557 $2,220
====== ======
</TABLE>
Management has evaluated the need for a valuation allowance for all or a
portion of the deferred tax assets and believes that the deferred tax assets
will be more likely than not realized. Accordingly, no valuation allowance has
been recognized.
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
1995 1996 1997
---- ------ ------
(IN THOUSANDS)
<S> <C> <C> <C>
Tax provision at statutory rate (34% in 1995 and 1996 and
35% in 1997).............................................. $ (8) $1,661 $8,559
State income tax less applicable federal tax benefit........ 59 146 1,215
Adjustments to eliminate S corporations..................... -- (218) (469)
Less benefit of graduated tax rates......................... 95 (257) --
Less benefit recognized upon termination of Subchapter S
election for
AC Service & Installation Co., Inc........................ -- (236) --
Goodwill amortization....................................... -- -- 525
Other -- net................................................ -- 40 (641)
---- ------ ------
$146 $1,136 $9,189
==== ====== ======
</TABLE>
The termination of S corporation status occurred on August 21, 1996 for AC
Service and Installation Co., Inc., and a deferred tax asset of $236,000 was
recorded. The effect of recognizing the deferred tax asset was included in the
provision for income taxes.
13. RELATED PARTY TRANSACTIONS
In addition to the lease agreements with related parties in Note 7, the
Company has the following related party transactions.
A-22
<PAGE> 49
SERVICE EXPERTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The Company has one outstanding note receivable from a stockholder of the
Company totaling $366,000 and $352,000 at December 31, 1996 and 1997,
respectively. The note is payable in 180 monthly installments of $3,905 and
bears annual interest of 9.0%.
On June 30, 1996, the Company distributed land, buildings, accounts
receivable and other assets with a net book value of $1,096,000 in satisfaction
of mortgage notes payable of $488,000, shareholder notes payable of $343,000,
and accrued compensation of $365,000 to the former shareholders of the Acquiring
Company.
James D. Abrams, a director and former chief operating officer of the
Company, and John R. Young, an employee and stockholder of the Company, are
principal stockholders of Service Now, Inc. ("Service Now"). Service Now is a
48% stockholder of SuccessWare, Inc. ("SuccessWare"), a corporation that
provides management and financial information systems software to the Company.
In 1996 and 1997, the Company and its subsidiaries made aggregate payments to
SuccessWare of approximately $50,000 and $450,000, respectively.
Mr. Abrams and Mr. Young are the sole stockholders of Fusion Filters, Inc.
("Fusion"), which licenses air filters and other products from manufacturers and
sublicenses them to HVAC contractors, including certain of the Company's
subsidiaries. The Company has not entered into any definitive agreements with
Fusion, but certain Service Centers purchase filters from Fusion from time to
time. In 1996 and 1997 the Company's Service Centers made aggregate payments to
Fusion of approximately $450,000 and $895,000, respectively. The Company and
many its subsidiaries also utilize, from time to time, the services of Travel
Now, Inc., a travel agency, of which Mr. Abrams and Mr. Young are principal
stockholders.
The Company owns approximately a 39% interest in Future University, Inc.
("Future University"). Fees paid to Future University for training during 1996
and 1997 totaled approximately $75,000 and $260,000, respectively.
14. QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
Quarterly financial information for the years ended December 31, 1996 and
1997 are summarized below:
<TABLE>
<CAPTION>
1996
-------------------------------------
QUARTER
-------------------------------------
1ST 2ND 3RD 4TH
------- ------- ------- -------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
Net revenue....................................... $11,269 $14,676 $20,916 $28,052
Gross profit...................................... 3,188 4,256 6,178 8,663
Income before income taxes........................ 224 322 1,899 2,430
Net income........................................ 235 432 1,628 1,444
Income per share
Basic........................................... $ .11 $ .20 $ .30 $ .14
Diluted......................................... $ .11 $ .20 $ .30 $ .14
</TABLE>
<TABLE>
<CAPTION>
1997
-------------------------------------
QUARTER
-------------------------------------
1ST 2ND 3RD 4TH
------- ------- ------- -------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
Net revenue....................................... $41,963 $60,140 $65,470 $71,119
Gross profit...................................... 14,444 20,587 24,264 24,799
Income before income taxes........................ 3,394 7,304 7,566 6,191
Net income........................................ 2,177 4,589 4,749 3,751
Income per share
Basic........................................... $ .18 $ .33 $ .32 $ .25
Diluted......................................... $ .18 $ .32 $ .32 $ .24
</TABLE>
A-23
<PAGE> 50
SERVICE EXPERTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The quarterly information for 1996 and the first two quarters of 1997 have
been restated to reflect the results of the 1997 Pooled Companies.
The 1996 and first three quarters of 1997 earnings per share amounts have
been restated to comply with Statement of Financial Accounting Standards No.
128, Earnings per share.
15. SUBSEQUENT EVENTS
Subsequent to December 31, 1997, the Company has acquired ten HVAC
businesses, of which eight are Service Centers, for an aggregate of
approximately $6.8 million cash and approximately 321,000 shares of Common
Stock. Additionally, the Company currently has agreements in principle to
acquire four HVAC businesses (the "Pending Acquisitions"). The Pending
Acquisitions are expected to close during the first six months of 1998. The
consideration to be paid by the Company for these businesses is approximately
$6.1 million, consisting of approximately 224,000 shares of Common Stock and
approximately $200,000 cash. All of these transactions are expected to be
accounted for using the purchase method. Of the purchase price, $4.9 million is
expected to be allocated to intangible assets which are to be amortized over a
40-year period. On a pro forma basis, these companies generated revenue in 1997
of approximately $7.8 million. The acquisitions are subject to customary
conditions, and there can be no assurance that the Company will be able to
consummate all of the acquisitions or to successfully integrate the businesses
of the acquired companies.
Subsequent to year-end, a new lease agreement was entered into for the
Company's corporate headquarters. This operating lease is for a term of five
years commencing on May 1, 1998, pending completion of the construction of the
new building. The minimum annual lease commitments are $361,000 for the first
year and increases annually during the term of the lease to $425,000 in the
fifth year. As a result of this agreement, the Company will cancel its current
lease obligation but will not incur any fees or penalties associated with such
cancellation.
On February 3, 1998, warrants issued in connection with the acquisition of
ProAir Services, L.P. were exercised. The holder of the Warrants purchased
34,634 shares of common stock at an exercise price of $22.00 per share.
In March 1998, the Company adopted the Service Experts, Inc. Service Center
Stock Option Plan (the "Service Center Option Plan") to award options to
employees of the Company who are not executive officers or subject to Section
16(b) of the Securities Exchange Act of 1934, as amended. A total of 214,697
shares of Common Stock have been reserved for issuance under the Service Center
Option Plan. No options have been issued under the Service Center Option Plan.
A-24
<PAGE> 1
EXHIBIT 10.9
EMPLOYMENT AGREEMENT
This Agreement is made this 1st day of August, 1997, between Service
Experts, Inc., a Delaware corporation (the "Company"), and Alfred W. Taylor III
("Employee").
W I T N E S S E T H:
WHEREAS, the Company, which maintains its principal executive offices
at 111 Westwood Place, Suite 420, Brentwood, Tennessee 37027, owns and operates
heating, ventilating and air conditioning ("HVAC") service and replacement
businesses under the name "Service Experts";
WHEREAS, the Company desires to employ Employee and Employee desires to
accept such employment by the Company subject to the terms and conditions
contained herein;
WHEREAS, in serving as an employee of the Company, Employee will
participate in the use and development of confidential proprietary information
about the Company, its customers and suppliers, and the methods used by the
Company and its employees in competition with other companies, as to which the
Company desires to protect fully its rights; and
WHEREAS, the effectiveness of this Agreement is contingent upon the
approval of the Board of Directors of the Company, and this Agreement shall be
of no force or effect until such approval is granted;
NOW, THEREFORE, in consideration of the premises and the mutual
covenants and agreements herein set forth, the parties hereto agree as follows:
1. Employment. The Company hereby employs Employee and Employee accepts
such employment with the Company, subject to the terms and conditions set forth
herein. Employee shall be employed as Senior Vice President of the Company,
shall perform all duties and services incident to such position, and such other
duties and services as may be assigned or delegated to him by the Board of
Directors of the Company from time to time; provided, however, that without
Employee's consent, the duties and services of Employee hereunder shall not be
materially increased or altered in a manner inconsistent with Employee's
position and original duties hereunder. During his employment hereunder,
Employee shall devote his best efforts and attention, on a full-time basis, to
the performance of the duties required of him as an employee of the Company.
2. Compensation. As compensation for services rendered by Employee
hereunder, Employee shall receive:
(a) An annual salary as set forth on Appendix I hereto, or
such higher salary as shall be established by the Compensation
Committee of the Board of Directors of the Company, which salary shall
be payable in arrears in equal monthly installments, plus insurance and
other benefits equivalent to the benefits provided other executive
employees of the Company;
(b) Compensated vacation time, equivalent to vacation time
provided
<PAGE> 2
to other executive employees of the Company, to be taken at any time
during each year of the term of this Agreement;
(c) Bonus compensation to be determined in the sole discretion
of the Compensation Committee; and
(d) Reimbursement for all reasonable expenses incurred by
Employee in the performance of his duties under this Agreement,
provided that Employee submits verification of such expenses in
accordance with the policies of the Company.
Prior to the end of each fiscal year during the term of this Agreement,
the Compensation Committee shall review with Employee his compensation
hereunder. Any increases in salary or changes in fringe benefits agreed upon by
Employee and the Compensation Committee at such annual review shall become
effective the following month unless otherwise agreed to by the Company and
Employee.
3. Confidential Information and Trade Secrets.
3.1 Employee recognizes that Employee's position with the Company
requires considerable responsibility and trust, and, in reliance on Employee's
loyalty, the Company may entrust Employee with highly sensitive confidential,
restricted and proprietary information involving Trade Secrets and Confidential
Information (as hereinafter defined).
3.2 For purposes of this Agreement, a "Trade Secret" is any scientific
or technical information, design, process, procedure, formula or improvement
that is valuable and not generally known to competitors of the Company.
"Confidential Information" is any data or information, other than Trade Secrets,
that is important, competitively sensitive, and not generally known by the
public, including, but not limited to, the Company's business plan, business
prospects, customer lists, training manuals, product development plans, bidding
and pricing procedures, market strategies, internal performance statistics,
financial data, confidential personnel information concerning employees of the
Company, supplier data, operational or administrative plans, policy manuals, and
terms and conditions of contracts and agreements. The terms "Trade Secret" and
"Confidential Information" shall not apply to information which is (i) received
by Employee from a third party with no restriction on disclosure, or (ii)
required to be disclosed by any applicable law.
3.3 Except as required to perform Employee's duties hereunder,
Employee will not use or disclose any Trade Secrets or Confidential Information
of the Company during employment, at any time after termination of employment
and prior to such time as they cease to be Trade Secrets or Confidential
Information through no act of Employee in violation of this Agreement.
3.4 Upon the request of the Company and, in any event, upon the
termination of employment hereunder, Employee will surrender to the Company all
memoranda, notes, records, manuals or other documents pertaining to the
Company's business or Employee's employment (including all copies thereof).
Employee will also leave with the Company all materials involving any Trade
Secrets or Confidential Information of the Company. All such information and
materials, whether or not made or developed by Employee, shall be the sole and
exclusive property of the Company, and Employee hereby assigns to the Company
all of Employee's right, title and interest in and to any and all of such
information and materials.
2
<PAGE> 3
4. Covenant Not to Compete.
4.1 Employee hereby covenants and agrees with the Company that during
the term hereof and for a period expiring two years after the termination or
expiration of this Agreement, Employee will not directly or indirectly (i)
operate, develop or own any interest other than the ownership of less than five
percent (5%) of the equity securities of a publicly traded company, in any
business which has significant (viewed in relation to the business of the
Company) activities relating to the ownership, management or operation of, or
consultation regarding an HVAC service and replacement company (an "HVAC
Business"); (ii) compete with the Company or its subsidiaries and affiliates in
the operation or development of any HVAC Business within fifty (50) miles of any
HVAC Business owned by the Company; (iii) be employed by or consult with any
business which owns, manages or operates an HVAC Business within fifty (50)
miles of any HVAC Business owned by the Company; (iv) interfere with, solicit,
disrupt or attempt to disrupt any past, present or prospective relationship,
contractual or otherwise, between the Company, or its subsidiaries or
affiliates, and any customer, client, supplier or employee of the Company, or
its subsidiaries or affiliates; or (v) solicit any past, present or prospective
management employee (including all corporate officers and managers, all regional
managers and all general managers) of the Company, or its subsidiaries or
affiliates, to leave their employment with the Company or its subsidiaries or
affiliates, or hire any such employee to work in any capacity; provided,
however, that this provision shall not apply if Employee's employment hereunder
is terminated without cause prior to the expiration of the Agreement.
4.2 If a judicial determination is made that any of the provisions of
this Section 4 constitutes an unreasonable or otherwise unenforceable
restriction against Employee, the provisions of this Section 4 shall be rendered
void only to the extent that such judicial determination finds such provisions
to be unreasonable or otherwise unenforceable. In this regard, the parties
hereto hereby agree that any judicial authority construing this Agreement shall
be empowered to sever any portion of the territory or prohibited business
activity from the coverage of this Section 4 and to apply the provisions of this
Section 4 to the remaining portion of the territory or the remaining business
activities not so severed by such judicial authority. Moreover, notwithstanding
the fact that any provisions of this Section 4 are determined not to be
specifically enforceable, the Company shall nevertheless be entitled to recover
monetary damages as a result of the breach of such provision by Employee. The
time period during which the prohibitions set forth in this Section 4 shall
apply shall be tolled and suspended as to Employee for a period equal to the
aggregate quantity of time during which Employee violates such prohibitions in
any respect.
5. Specific Enforcement. Employee specifically acknowledges and agrees
that the restrictions set forth in Sections 3 and 4 hereof are reasonable and
necessary to protect the legitimate interests of the Company and that the
Company would not have entered into this Agreement in the absence of such
restrictions. Employee further acknowledges and agrees that any violation of the
provisions of Sections 3 or 4 hereof will result in irreparable injury to the
Company, that the remedy at law for any violation or threatened violation of
such Sections will be inadequate and that in the event of any such breach, the
Company, in addition to any other remedies or damages available to it at law or
in equity, shall be entitled to temporary injunctive relief before trial from
any court of competent jurisdiction as a matter of course and to permanent
injunctive relief without the necessity of proving actual damages.
6. Term. This Agreement shall be effective on August 1, 1997 and
continue
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for an initial period of three (3) years from such date, unless sooner
terminated by either party in the manner set forth herein. The date upon which
this Agreement and Employee's employment hereunder shall terminate, whether
pursuant to the terms of this Section or pursuant to any other provision of this
Agreement shall hereafter be referred to as the "Termination Date."
7. Termination Upon Cessation of Company's Operations or Death of the
Employee. In the event the Company ceases its operations or the Employee dies
during the term of this Agreement, this Agreement shall immediately terminate
and neither the Employee nor the Company shall have any further obligations
hereunder, except that (a) the Company shall continue to be obligated under
Section 2(a) hereof for any unpaid salary, bonus, unreimbursed expenses or
payments pursuant to Section 10 hereof owed to Employee or his estate that have
accrued but not been paid as of the Termination Date and (b) in the event of
death of the Employee during the term of this Agreement, the Company shall pay
to Employee's estate an amount equal to three months salary.
8. Termination by Employee. Employee may at any time terminate his
employment by giving the Company ninety (90) days prior written notice of his
intent to terminate the Agreement. At the Termination Date, the Company shall
have no further obligation to Employee and Employee shall have no further rights
or obligations hereunder, except as set forth in Sections 3 and 4 above, and
except for the Company's obligation under Section 2(a) hereof for unpaid salary,
bonus or unreimbursed expenses that have accrued but have not been paid as of
the Termination Date.
9. Termination for Cause. The Company shall have the right at any time
to terminate Employee's employment immediately for cause, which shall include
any of the following reasons:
(a) If Employee shall violate the provisions of Sections 3 or
4 of this Agreement, or shall fail to comply with any other material
term or condition of this Agreement which materially and adversely
affects the business or affairs of the Company; or
(b) If Employee shall commit (i) a felony or (ii) an act of
dishonesty, willful mismanagement, fraud or embezzlement against the
Company.
Employee's obligations under Sections 3 and 4 hereof shall survive the
termination of the Agreement pursuant to this Section 9. In the event Employee's
employment hereunder is terminated in accordance with this Section, the Company
shall have no further obligation to make any payments to Employee hereunder
except for unpaid salary, bonus or unreimbursed expenses that have accrued but
have not been paid as of the Termination Date.
10. Termination Without Cause. In the event that Company breaches this
Agreement or Employee is terminated without cause during the term hereof (which
shall not include a termination pursuant to Sections 7, 8, 9, 11 or 12), the
Company shall (a) pay Employee all bonuses and unreimbursed expenses owed to
Employee that have accrued but have not been paid as of the Termination Date;
(b) continue to pay to Employee his salary set forth in Section 2(a) hereof for
the greater of two (2) years or the remaining term of this Agreement; and (c)
continue to provide the insurance and other benefits of Section 2(a) hereof for
the greater of two (2) years or the remaining term of this Agreement. The
Company's obligations pursuant to this Section 10 shall terminate immediately if
Employee obtains employment which would have been in violation of Section 4
hereof, as determined in good faith by the Board of Directors. If
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Employee is terminated without cause, the provisions of Section 4 will be void
and of no effect. In addition to the severance payment payable under this
Section 10, Employee shall be paid an amount equal to two (2) times the average
annual bonus earned by Employee in the two (2) years immediately preceding the
date of termination. Employee shall also be entitled to an accelerated vesting
of any awards granted to Employee under the Company's 1996 Incentive Stock Plan.
11. Termination Upon a Change in Control.
11.1 For purposes of this Agreement, a "Change in Control" shall mean
(a) the time that the Company first determines that any person and all other
persons who constitute a group (within the meaning of Section 13(d)(3) of the
Securities Exchange Act of 1934, as amended (the "Exchange Act")), have acquired
within any twelve (12) month period (i) direct or indirect beneficial ownership
(within the meaning of Section 13(d)(3) under the Exchange Act) of twenty
percent (20%) or more of the Company's outstanding securities or (ii) assets of
the Company having a fair market value in excess of one-third of the Company's
total assets, unless a majority of the Continuing Directors, as hereinafter
defined, approves the acquisition not later than ten (10) business days after
the Company makes that determination or (b) the first day on which a majority of
the members of the Company's Board of Directors are not Continuing Directors.
11.2 For purposes of this Agreement, "Continuing Directors" shall mean,
as of any date of determination, any member of the Board of Directors of the
Company who (i) was a member of the Board of Directors on August 16, 1996, (ii)
has been a member of the Board of Directors for the two years immediately
preceding such date of determination or (iii) was nominated for election or
elected to the Board of Directors with the affirmative vote of a majority of
Continuing Directors who were members of the Board at the time of such
nomination or election.
11.3 In the event of a termination upon a Change in Control, Employee
shall immediately be paid all accrued salary, bonus compensation to the extent
earned, vested deferred compensation (other than plan benefits which will be
paid in accordance with the applicable plan), any benefits under any plans of
the Company in which Employee is a participant to the full extent of Employee's
rights under such plans (including accelerated vesting of any awards granted to
Employee under the Company's 1996 Incentive Stock Plan), accrued vacation pay
and any appropriate business expenses incurred by Employee in connection with
his duties hereunder, all to the date of termination, and all severance
compensation provided in Section 11.4, but no other compensation or
reimbursement of any kind.
11.4 In addition, Employee shall be paid as severance compensation his
base salary in monthly installments (at the rate payable at the time of such
termination) through the remaining term of this Agreement and any extensions
hereof; provided, however, that if Employee is employed by a new employer during
such period, the severance compensation payable to Employee during such period
will be reduced by the amount of compensation that Employee is receiving from
the new employer. Employee is under no obligation to mitigate the amount owed
Employee pursuant to this Section 11.4 by seeking other employment or otherwise.
Notwithstanding anything in this Section 11.4 to the contrary, Employee may in
Employee's sole discretion, by delivery of a notice to the Company within thirty
(30) days following a termination upon a Change in Control, elect to receive
from the Company a lump sum severance payment by bank cashier's check equal to
the present value of the flow of cash payments that would otherwise be paid to
Employee pursuant to this Section 11.4. Such present value shall be determined
as of the date of delivery of the notice of election by Employee and shall be
based on a discount rate
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equal to the interest rate on 90-day U.S. Treasury bills, as reported in the
Wall Street Journal (or similar publication), on the date of delivery of the
election notice. If Employee elects to receive a lump sum severance payment, the
Company shall make such payment to Employee within ten (10) days following the
date on which Employee notifies the Company of Employee's election. In addition
to the severance payment payable under this Section 11.4, Employee shall be paid
an amount equal to two (2) times the average annual bonus earned by Employee in
the two (2) years immediately preceding the date of termination. Employee shall
also be entitled to an accelerated vesting of any awards granted to Employee
under the Company's 1996 Incentive Stock Plan. Employee shall continue to accrue
retirement benefits and shall continue to enjoy any benefits under any plans of
the Company in which Employee is a participant to the full extent of Employee's
rights under such plans, including any perquisites provided under this
Agreement, through the remaining term of this Agreement; provided, however, that
the benefits under any such plans of the Company in which Employee is a
participant, including any such perquisites, shall cease upon re-employment by a
new employer.
11.5 Notwithstanding anything else in this Agreement and solely in the
event of a termination upon a Change in Control, the amount of severance
compensation paid to Employee under this Section 11, but exclusive of any
payments to Employee in respect of any stock options then held by Employee (or
any compensation deemed to be received by Employee in connection with the
exercise of any stock options at any time), shall not include any amount the
Company is prohibited from deducting for federal income tax purposes by virtue
of Section 280G of the Internal Revenue Code or any successor provision.
12. Disability of Employee. If, on account of physical or mental
disability, Employee shall fail or be unable to perform his assigned duties in
any material respect for a period of 60 consecutive days, the Company shall pay
Employee his full salary as set forth in Section 2(a) hereof and shall provide
the insurance, bonus and other benefits of Section 2(a) for a period of six (6)
months from the date such disability began or for such shorter period as
Employee is unable to perform his duties hereunder; provided, however, that
Employee's salary shall be reduced by any disability income paid to him pursuant
to any disability insurance policy maintained under this Agreement. In the event
Employee is unable to perform his duties hereunder after the expiration of the
six-month period, this Agreement shall automatically terminate. Employee shall
not be required to perform his obligations under Section 1 hereof during any
period of disability.
13. Assignment.
(a) The rights and benefits of Employee under this Agreement,
other than accrued and unpaid amounts due under Section 2(a) hereof,
are personal to him and shall not be assignable. Discharge of
Employee's undertakings in Sections 3 and 4 hereof shall be an
obligation of Employee's executors, administrators, or other legal
representatives or heirs.
(b) This Agreement may not be assigned by the Company except
to an affiliate of the Company, provided, however, that if the Company
shall merge or effect a share exchange with or into, or sell or
otherwise transfer substantially all its assets to, another
corporation, the Company shall assign its rights hereunder to that
corporation and cause such corporation to assume the Company's
obligations under this Agreement.
14. Notices. Any notice or other communications under this Agreement
shall
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be in writing, signed by the party making the same, and shall be delivered
personally or sent by certified or registered mail, postage prepaid, addressed
as follows:
(a) If to Employee, to such address furnished to SEI or at
such other address as may be furnished by him to SEI in writing.
(b) If to the Company: Service Experts, Inc.
111 Westwood Place, Suite 420
Brentwood, Tennessee 37027
Attention: Chief Executive Officer
With a copy to: J. Chase Cole, Esq.
Waller Lansden Dortch & Davis,
A Professional Limited Liability
Company
2100 Nashville City Center
511 Union Street
Nashville, Tennessee 37219
or to such other address as may hereafter be designated by either party
hereto. All such notices shall be deemed given on the date personally
delivered or mailed.
15. Governing Law. This Agreement shall be interpreted and enforced in
accordance with the laws of the State of Tennessee.
16. Severability. Whenever possible, each provision of this Agreement
shall be interpreted in such manner as to be effective and valid, but if any one
or more of the provisions contained in this Agreement shall be invalid, illegal
or unenforceable in any respect for any reason, the validity, legality and
enforceability for any such provisions in every other respect and of the
remaining provisions of this Agreement shall not be in any way impaired.
17. Modification. No waiver of modification of this Agreement or of any
covenant, condition, or limitation herein contained shall be valid unless in
writing and duly executed by the party to be charged therewith and no evidence
of any waiver or modification shall be offered or received in evidence of any
proceeding, arbitration or litigation between the parties hereunder, unless such
waiver or modification is in writing, duly executed as aforesaid and the parties
further agree that the provisions of this section may not be waived except as
herein set forth.
18. Entire Agreement. This Agreement contains the entire agreement of
the parties hereto with respect to the subject matter contained herein. There
are no restrictions, promises, covenants or undertakings, other than those
expressly set forth herein. This Agreement supersedes all prior agreements and
understandings between the parties with respect to such subject matter. This
Agreement may not be changed except by a writing executed by the parties.
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<PAGE> 8
IN WITNESS WHEREOF, the undersigned have executed this Employment
Agreement on the day and year first above written.
SERVICE EXPERTS, INC.
By: /s/ Alan R. Sielbeck
---------------------------------
Alan R. Sielbeck
Its Chief Executive Officer
EMPLOYEE
/s/ Alfred W. Taylor III
--------------------------------------
Alfred W. Taylor III
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APPENDIX I
COMPENSATION AND BENEFITS
Annual Salary - $200,000
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EXHIBIT 10.10
EMPLOYMENT AGREEMENT
This Agreement is made this 1st day of October, 1997, between Service
Experts, Inc., a Delaware corporation (the "Company"), and Ronald L. Smith
("Employee").
W I T N E S S E T H:
WHEREAS, the Company, which maintains its principal executive offices
at 111 Westwood Place, Suite 420, Brentwood, Tennessee 37027, owns and operates
heating, ventilating and air conditioning ("HVAC") service and replacement
businesses under the name "Service Experts(R)";
WHEREAS, the Company desires to employ Employee and Employee desires to
accept such employment by the Company subject to the terms and conditions
contained herein; and
WHEREAS, in serving as an employee of the Company, Employee will
participate in the use and development of confidential proprietary information
about the Company, its customers and suppliers, and the methods used by the
Company and its employees in competition with other companies, as to which the
Company desires to protect fully its rights;
NOW, THEREFORE, in consideration of the premises and the mutual
covenants and agreements herein set forth, the parties hereto agree as follows:
1. Employment. The Company hereby employs Employee and Employee accepts
such employment with the Company, subject to the terms and conditions set forth
herein. Employee shall be employed as Chief Operating Officer of the Company,
shall perform all duties and services incident to such position, and such other
duties and services as may be assigned or delegated to him by the Board of
Directors of the Company from time to time; provided, however, that without
Employee's consent, the duties and services of Employee hereunder shall not be
materially increased or altered in a manner inconsistent with Employee's
position and original duties hereunder. During his employment hereunder,
Employee shall devote his best efforts and attention, on a full-time basis, to
the performance of the duties required of him as an employee of the Company.
Employee also shall be primarily responsible for the Company's wholly-owned
subsidiary, Venture International, Ltd., a Delaware corporation d/b/a Ron Smith
& Associates ("RSA"). From the date hereof until December 31, 1997, Employee
shall devote such time as necessary in the management of RSA to effectuate the
transition of a new chief executive officer. Such chief executive officer will
report directly to Employee.
2. Compensation. As compensation for services rendered by Employee
hereunder, Employee shall receive:
(a) An annual salary as set forth on Appendix I hereto, or
such higher salary as shall be established by the Compensation Committee of the
Board of Directors of the Company, which salary shall be payable in arrears in
equal monthly installments, plus insurance and other benefits equivalent to the
benefits provided other executive employees of the Company;
(b) Compensated vacation time, equivalent to vacation time
provided to other executive officers of the Company, to be taken at any time
during each year of the term of this Agreement;
<PAGE> 2
(c) Bonus compensation to be calculated based upon an assumed
base salary of $250,000 and determined in the sole discretion of the
Compensation Committee; and
(d) Reimbursement for all reasonable expenses incurred by
Employee in the performance of his duties under this Agreement, provided that
Employee submits verification of such expenses in accordance with the policies
of the Company.
Prior to the end of each fiscal year during the term of this Agreement,
the Compensation Committee shall review with Employee his compensation
hereunder. Any increases in salary or changes in fringe benefits agreed upon by
Employee and the Compensation Committee at such annual review shall become
effective the following month unless otherwise agreed to by the Company and
Employee.
3. Confidential Information and Trade Secrets.
3.1 Employee recognizes that Employee's position with the Company
requires considerable responsibility and trust, and, in reliance on Employee's
loyalty, the Company may entrust Employee with highly sensitive confidential,
restricted and proprietary information involving Trade Secrets and Confidential
Information (as hereinafter defined).
3.2 For purposes of this Agreement, a "Trade Secret" is any scientific
or technical information, design, process, procedure, formula or improvement
that is valuable and not generally known to competitors of the Company.
"Confidential Information" is any data or information, other than Trade Secrets,
that is important, competitively sensitive, and not generally known by the
public, including, but not limited to, the Company's business plan, business
prospects, customer lists, training manuals, product development plans, bidding
and pricing procedures, market strategies, internal performance statistics,
financial data, confidential personnel information concerning employees of the
Company, supplier data, operational or administrative plans, policy manuals, and
terms and conditions of contracts and agreements. The terms "Trade Secret" and
"Confidential Information" shall not apply to information which is (i) received
by Employee from a third party with no restriction on disclosure, or (ii)
required to be disclosed by any applicable law.
3.3 Except as required to perform Employee's duties hereunder, Employee
will not use or disclose any Trade Secrets or Confidential Information of the
Company during employment, at any time after termination of employment and prior
to such time as they cease to be Trade Secrets or Confidential Information
through no act of Employee in violation of this Agreement.
3.4 Upon the request of the Company and, in any event, upon the
termination of employment hereunder, Employee will surrender to the Company all
memoranda, notes, records, manuals or other documents pertaining to the
Company's business or Employee's employment (including all copies thereof).
Employee will also leave with the Company all materials involving any Trade
Secrets or Confidential Information of the Company. All such information and
materials, whether or not made or developed by Employee, shall be the sole and
exclusive property of the Company, and Employee hereby assigns to the Company
all of Employee's right, title and interest in and to any and all of such
information and materials.
4. Covenant Not to Compete.
4.1 Employee hereby covenants and agrees with the Company that during
the term hereof and for a period expiring two years after the termination or
expiration of this Agreement, Employee will not directly or indirectly (i)
operate, develop or own any interest other than the ownership of less than five
percent (5%) of the equity securities of a publicly
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traded company, in any business which has significant (viewed in relation to the
business of the Company) activities relating to the ownership, management or
operation of, or consultation regarding an HVAC service and replacement company
(an "HVAC Business"); (ii) compete with the Company or its subsidiaries and
affiliates in the operation or development of any HVAC Business within fifty
(50) miles of any HVAC Business owned by the Company; (iii) be employed by or
consult with any business which owns, manages or operates an HVAC Business
within fifty (50) miles of any HVAC Business owned by the Company; (iv)
interfere with, solicit, disrupt or attempt to disrupt any past, present or
prospective relationship, contractual or otherwise, between the Company, or its
subsidiaries or affiliates, and any customer, client, supplier or employee of
the Company, or its subsidiaries or affiliates; or (v) solicit any past, present
or prospective management employee (including all corporate officers and
managers, all regional managers and all general managers) of the Company, or its
subsidiaries or affiliates, to leave their employment with the Company or its
subsidiaries or affiliates, or hire any such employee to work in any capacity;
provided, however, that this provision shall not apply if Employee's employment
hereunder is terminated without cause prior to the expiration of the Agreement.
4.2 If a judicial determination is made that any of the provisions of
this Section 4 constitutes an unreasonable or otherwise unenforceable
restriction against Employee, the provisions of this Section 4 shall be rendered
void only to the extent that such judicial determination finds such provisions
to be unreasonable or otherwise unenforceable. In this regard, the parties
hereto hereby agree that any judicial authority construing this Agreement shall
be empowered to sever any portion of the territory or prohibited business
activity from the coverage of this Section 4 and to apply the provisions of this
Section 4 to the remaining portion of the territory or the remaining business
activities not so severed by such judicial authority. Moreover, notwithstanding
the fact that any provisions of this Section 4 are determined not to be
specifically enforceable, the Company shall nevertheless be entitled to recover
monetary damages as a result of the breach of such provision by Employee. The
time period during which the prohibitions set forth in this Section 4 shall
apply shall be tolled and suspended as to Employee for a period equal to the
aggregate quantity of time during which Employee violates such prohibitions in
any respect.
5. Specific Enforcement. Employee specifically acknowledges and agrees
that the restrictions set forth in Sections 3 and 4 hereof are reasonable and
necessary to protect the legitimate interests of the Company and that the
Company would not have entered into this Agreement in the absence of such
restrictions. Employee further acknowledges and agrees that any violation of the
provisions of Sections 3 or 4 hereof will result in irreparable injury to the
Company, that the remedy at law for any violation or threatened violation of
such Sections will be inadequate and that in the event of any such breach, the
Company, in addition to any other remedies or damages available to it at law or
in equity, shall be entitled to temporary injunctive relief before trial from
any court of competent jurisdiction as a matter of course and to permanent
injunctive relief without the necessity of proving actual damages.
6. Term. This Agreement shall be effective on October 1, 1997 and
continue for an initial period of three (3) years from such date, unless sooner
terminated by either party in the manner set forth herein. The date upon which
this Agreement and Employee's employment hereunder shall terminate, whether
pursuant to the terms of this Section or pursuant to any other provision of this
Agreement shall hereafter be referred to as the "Termination Date."
7. Termination Upon Cessation of Company's Operations or Death of the
Employee. In the event the Company ceases its operations or the Employee dies
during the term of this Agreement, this Agreement shall immediately terminate
and neither the Employee nor the Company shall have any further obligations
hereunder, except that (a)
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the Company shall continue to be obligated under Section 2(a) hereof for any
unpaid salary, bonus, unreimbursed expenses or payments pursuant to Section 10
hereof owed to Employee or his estate that have accrued but not been paid as of
the Termination Date and (b) in the event of death of the Employee during the
term of this Agreement, the Company shall pay to Employee's estate an amount
equal to three months salary.
8. Termination by Employee. Employee may at any time terminate his
employment by giving the Company ninety (90) days prior written notice of his
intent to terminate the Agreement. At the Termination Date, the Company shall
have no further obligation to Employee and Employee shall have no further rights
or obligations hereunder, except as set forth in Sections 3 and 4 above, and
except for the Company's obligation under Section 2(a) hereof for unpaid salary,
bonus or unreimbursed expenses that have accrued but have not been paid as of
the Termination Date.
9. Termination for Cause. The Company shall have the right at any time
to terminate Employee's employment immediately for cause, which shall include
any of the following reasons:
(a) If Employee shall violate the provisions of Sections 3 or
4 of this Agreement, or shall fail to comply with any other material term or
condition of this Agreement which materially and adversely affects the business
or affairs of the Company; or
(b) If Employee shall commit (i) a felony or (ii) an act of
dishonesty, willful mismanagement, fraud or embezzlement against the Company.
Employee's obligations under Sections 3 and 4 hereof shall survive the
termination of the Agreement pursuant to this Section 9. In the event Employee's
employment hereunder is terminated in accordance with this Section, the Company
shall have no further obligation to make any payments to Employee hereunder
except for unpaid salary, bonus or unreimbursed expenses that have accrued but
have not been paid as of the Termination Date.
10. Termination Without Cause. In the event that Company breaches this
Agreement or Employee is terminated without cause during the term hereof (which
shall not include a termination pursuant to Sections 7, 8, 9, 11 or 12), the
Company shall (a) pay Employee all bonuses and unreimbursed expenses owed to
Employee that have accrued but have not been paid as of the Termination Date;
(b) continue to pay to Employee his salary set forth in Section 2(a) hereof for
the greater of two (2) years or the remaining term of this Agreement; and (c)
continue to provide the insurance and other benefits of Section 2(a) hereof for
the greater of two (2) years or the remaining term of this Agreement. The
Company's obligations pursuant to this Section 10 shall terminate immediately if
Employee obtains employment which would have been in violation of Section 4
hereof, as determined in good faith by the Board of Directors. If Employee is
terminated without cause, the provisions of Section 4 will be void and of no
effect. In addition to the severance payment payable under this Section 10,
Employee shall be paid an amount equal to two (2) times the average annual bonus
earned by Employee in the two (2) years immediately preceding the date of
termination. Employee shall also be entitled to an accelerated vesting of any
awards granted to Employee under the Company's 1996 Incentive Stock Plan.
11. Termination Upon a Change in Control.
11.1 For purposes of this Agreement, a "Change in Control" shall mean
(a) the time that the Company first determines that any person and all other
persons who constitute a group (within the meaning of Section 13(d)(3) of the
Securities Exchange Act of
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1934, as amended (the "Exchange Act")), have acquired within any twelve (12)
month period (i) direct or indirect beneficial ownership (within the meaning of
Section 13(d)(3) under the Exchange Act) of twenty percent (20%) or more of the
Company's outstanding securities or (ii) assets of the Company having a fair
market value in excess of one-third of the Company's total assets, unless a
majority of the Continuing Directors, as hereinafter defined, approves the
acquisition not later than ten (10) business days after the Company makes that
determination or (b) the first day on which a majority of the members of the
Company's Board of Directors are not Continuing Directors.
11.2 For purposes of this Agreement, "Continuing Directors" shall mean,
as of any date of determination, any member of the Board of Directors of the
Company who (i) was a member of the Board of Directors on August 16, 1996, (ii)
has been a member of the Board of Directors for the two years immediately
preceding such date of determination or (iii) was nominated for election or
elected to the Board of Directors with the affirmative vote of a majority of
Continuing Directors who were members of the Board at the time of such
nomination or election.
11.3 In the event of a termination upon a Change in Control, Employee
shall immediately be paid all accrued salary, bonus compensation to the extent
earned, vested deferred compensation (other than plan benefits which will be
paid in accordance with the applicable plan), any benefits under any plans of
the Company in which Employee is a participant to the full extent of Employee's
rights under such plans (including accelerated vesting of any awards granted to
Employee under the Company's 1996 Incentive Stock Plan), accrued vacation pay
and any appropriate business expenses incurred by Employee in connection with
his duties hereunder, all to the date of termination, and all severance
compensation provided in Section 11.4, but no other compensation or
reimbursement of any kind.
11.4 In addition, Employee shall be paid as severance compensation his
base salary in monthly installments (at the rate payable at the time of such
termination) through the remaining term of this Agreement and any extensions
hereof; provided, however, that if Employee is employed by a new employer during
such period, the severance compensation payable to Employee during such period
will be reduced by the amount of compensation that Employee is receiving from
the new employer. Employee is under no obligation to mitigate the amount owed
Employee pursuant to this Section 11.4 by seeking other employment or otherwise.
Notwithstanding anything in this Section 11.4 to the contrary, Employee may in
Employee's sole discretion, by delivery of a notice to the Company within thirty
(30) days following a termination upon a Change in Control, elect to receive
from the Company a lump sum severance payment by bank cashier's check equal to
the present value of the flow of cash payments that would otherwise be paid to
Employee pursuant to this Section 11.4. Such present value shall be determined
as of the date of delivery of the notice of election by Employee and shall be
based on a discount rate equal to the interest rate on 90-day U.S. Treasury
bills, as reported in the Wall Street Journal (or similar publication), on the
date of delivery of the election notice. If Employee elects to receive a lump
sum severance payment, the Company shall make such payment to Employee within
ten (10) days following the date on which Employee notifies the Company of
Employee's election. In addition to the severance payment payable under this
Section 11.4, Employee shall be paid an amount equal to two (2) times the
average annual bonus earned by Employee in the two (2) years immediately
preceding the date of termination. Employee shall also be entitled to an
accelerated vesting of any awards granted to Employee under the Company's 1996
Incentive Stock Plan. Employee shall continue to accrue retirement benefits and
shall continue to enjoy any benefits under any plans of the Company in which
Employee is a participant to the full extent of Employee's rights under such
plans, including any perquisites provided under this Agreement, through the
remaining term of this Agreement; provided, however, that the benefits under any
such
5
<PAGE> 6
plans of the Company in which Employee is a participant, including any such
perquisites, shall cease upon re-employment by a new employer.
11.5 Notwithstanding anything else in this Agreement and solely in the
event of a termination upon a Change in Control, the amount of severance
compensation paid to Employee under this Section 11, but exclusive of any
payments to Employee in respect of any stock options then held by Employee (or
any compensation deemed to be received by Employee in connection with the
exercise of any stock options at any time), shall not include any amount the
Company is prohibited from deducting for federal income tax purposes by virtue
of Section 280G of the Internal Revenue Code or any successor provision.
12. Disability of Employee. If, on account of physical or mental
disability, Employee shall fail or be unable to perform his assigned duties in
any material respect for a period of 60 consecutive days, the Company shall pay
Employee his full salary as set forth in Section 2(a) hereof and shall provide
the insurance, bonus and other benefits of Section 2(a) for a period of six (6)
months from the date such disability began or for such shorter period as
Employee is unable to perform his duties hereunder; provided, however, that
Employee's salary shall be reduced by any disability income paid to him pursuant
to any disability insurance policy maintained under this Agreement. In the event
Employee is unable to perform his duties hereunder after the expiration of the
six-month period, this Agreement shall automatically terminate. Employee shall
not be required to perform his obligations under Section 1 hereof during any
period of disability.
13. Assignment.
(a) The rights and benefits of Employee under this Agreement,
other than accrued and unpaid amounts due under Section 2(a) hereof, are
personal to him and shall not be assignable. Discharge of Employee's
undertakings in Sections 3 and 4 hereof shall be an obligation of Employee's
executors, administrators, or other legal representatives or heirs.
(b) This Agreement may not be assigned by the Company except
to an affiliate of the Company, provided, however, that if the Company shall
merge or effect a share exchange with or into, or sell or otherwise transfer
substantially all its assets to, another corporation, the Company shall assign
its rights hereunder to that corporation and cause such corporation to assume
the Company's obligations under this Agreement.
14. Notices. Any notice or other communications under this Agreement
shall be in writing, signed by the party making the same, and shall be delivered
personally or sent by certified or registered mail, postage prepaid, addressed
as follows:
(a) If to Employee, to such address furnished to SEI or at
such other address as may be furnished by him to SEI in writing.
(b) If to the Company: Service Experts, Inc.
111 Westwood Place, Suite 420
Brentwood, Tennessee 37027
Attention: Chief Executive Officer
With a copy to: J. Chase Cole, Esq.
Waller Lansden Dortch & Davis,
A Professional Limited Liability
Company
2100 Nashville City Center
511 Union Street
Nashville, Tennessee 37219
6
<PAGE> 7
or to such other address as may hereafter be designated by either party
hereto. All such notices shall be deemed given on the date personally delivered
or mailed.
15. Governing Law. This Agreement shall be interpreted and enforced in
accordance with the laws of the State of Tennessee.
16. Severability. Whenever possible, each provision of this Agreement
shall be interpreted in such manner as to be effective and valid, but if any one
or more of the provisions contained in this Agreement shall be invalid, illegal
or unenforceable in any respect for any reason, the validity, legality and
enforceability for any such provisions in every other respect and of the
remaining provisions of this Agreement shall not be in any way impaired.
17. Modification. No waiver of modification of this Agreement or of any
covenant, condition, or limitation herein contained shall be valid unless in
writing and duly executed by the party to be charged therewith and no evidence
of any waiver or modification shall be offered or received in evidence of any
proceeding, arbitration or litigation between the parties hereunder, unless such
waiver or modification is in writing, duly executed as aforesaid and the parties
further agree that the provisions of this section may not be waived except as
herein set forth.
18. Entire Agreement. This Agreement contains the entire agreement of
the parties hereto with respect to the subject matter contained herein. There
are no restrictions, promises, covenants or undertakings, other than those
expressly set forth herein. This Agreement supersedes all prior agreements and
understandings between the parties with respect to such subject matter. This
Agreement may not be changed except by a writing executed by the parties.
7
<PAGE> 8
IN WITNESS WHEREOF, the undersigned have executed this Employment
Agreement on the day and year first above written.
SERVICE EXPERTS, INC.
By /s/ Alan R. Sielbeck
-------------------------------
Alan R. Sielbeck
Its Chief Executive Officer
EMPLOYEE
/s/ Ronald L. Smith
----------------------------------
Ronald L. Smith
8
<PAGE> 9
APPENDIX I
COMPENSATION AND BENEFITS
Annual Salary - $150,000
9
<PAGE> 1
Exhibit 10.12
AMENDED AND RESTATED
CREDIT AGREEMENT
dated as of September 18, 1997
by and among
SERVICE EXPERTS, INC.
AND
SUNTRUST BANK, NASHVILLE, N.A.
AGENT AND AS A LENDER
<PAGE> 2
TABLE OF CONTENTS
Article I. Definitions................................................... -1-
Article II. The Credit.................................................... -13-
Section 2.01 The Revolving Credit Loan............................. -13-
Section 2.02 Letters of Credit..................................... -13-
Section 2.03 Interest Rate......................................... -15-
Section 2.04 Procedure for Revolving Credit Borrowing.............. -15-
Section 2.05 Use of Proceeds....................................... -16-
Section 2.06 Participation......................................... -16-
Section 2.07 Term of This Agreement................................ -17-
Section 2.08 Payments to Principal Office; Debit Authority......... -17-
Section 2.09....................................................... -17-
(a) Required Prepayment................................... -17-
(b) Principal Payments and Optional Prepayments........... -17-
(c) Permanent Reductions.................................. -18-
(d) Interest Payments..................................... -18-
Section 2.10 Funding Losses........................................ -18-
Section 2.11 Apportionment of Payments............................. -19-
Section 2.12 Sharing of Payments, Etc.............................. -19-
Section 2.13 Right of Offset, Etc.................................. -19-
Section 2.14 Commitment Fee........................................ -19-
Section 2.15 Usury................................................. -20-
Section 2.16 Interest Rate Not Ascertainable, Etc.................. -20-
Section 2.17 Illegality............................................ -21-
Section 2.18 Increased Costs....................................... -21-
Section 2.19 Swing Line Commitment; Use of Proceeds................ -22-
(a) Availability.......................................... -22-
(b) Borrowing Procedure Under Swing Line Commitment....... -22-
(c) Use of Proceeds....................................... -23-
(d) Refunding Swing Line Loans With Proceeds of Mandatory
Revolving Loans..................................... -23-
Article III. Guarantors.................................................. -24-
Section 3.01 Guarantors............................................ -24-
Article IV. Representations and Warranties............................... -24-
Section 4.01 Corporate Existence................................... -24-
Section 4.02 Power and Authorization............................... -24-
Section 4.03 Binding Obligations................................... -24-
Section 4.04 No Legal Bar or Resultant Lien........................ -24-
Section 4.05 No Consent............................................ -25-
Section 4.06 Financial Condition................................... -25-
<PAGE> 3
Section 4.07 Investments, Advances, and Guaranties................. -25-
Section 4.08 Liabilities and Litigation............................ -25-
Section 4.09 Taxes; Governmental Charges........................... -25-
Section 4.10 No Default............................................ -25-
Section 4.11 Compliance with Laws, Etc............................. -26-
Section 4.12 ERISA................................................. -26-
Section 4.13 Consolidated Entities................................. -26-
Section 4.14 No Material Misstatements............................. -26-
Section 4.15 Solvency.............................................. -26-
Section 4.16 Regulation U.......................................... -26-
Section 4.17 Filings............................................... -27-
Section 4.18 Title, Etc............................................ -27-
Section 4.19 Investment Company Act................................ -27-
Section 4.20 Personal Holding Company.............................. -27-
Section 4.21 Burdensome Agreements................................. -27-
Section 4.22 Insurance............................................. -27-
Section 4.23 Subsidiaries.......................................... -28-
Article V. Conditions Precedent......................................... -28-
Section 5.01 Initial Conditions.................................... -28-
(a) Notes and Loan Documents.............................. -28-
(b) Resolutions........................................... -28-
(c) Certificate of Existence.............................. -28-
(d) Consents, Etc......................................... -28-
(e) Incumbency Certificate................................ -28-
(f) Charter and By-Laws and Organizational Documents...... -28-
(g) Attorneys Opinion Letter.............................. -29-
(h) Payment of Fees, Etc.................................. -29-
(i) No Default Certificate................................ -29-
(j) Other................................................. -29-
Section 5.02 All Borrowings........................................ -29-
Article VI. Affirmative Covenants........................................ -29-
Section 6.01 Financial Statements and Reports...................... -30-
(a) Annual Reports........................................ -30-
(b) Quarterly and Year-to-Date Reports.................... -30-
(c) Compliance Reports.................................... -30-
(d) SEC Filings and Public Information.................... -30-
(e) Other Information..................................... -31-
Section 6.02 Annual Certificates of Compliance..................... -31-
Section 6.03 Taxes and Other Liens................................. -31-
Section 6.04 Maintenance........................................... -31-
Section 6.05 Further Assurances.................................... -32-
Section 6.06 Performance of Obligations............................ -32-
Section 6.07 Insurance............................................. -32-
<PAGE> 4
Section 6.08 Accounts and Records.................................. -32-
Section 6.09 Right of Inspection................................... -33-
Section 6.10 Notice of Certain Events.............................. -33-
Section 6.11 ERISA Information and Compliance...................... -33-
Section 6.12 Management............................................ -33-
Section 6.13 Additional Guaranties................................. -34-
Section 6.14 Equity Proceeds....................................... -34-
Article VII. Negative Covenants......................................... -34-
Section 7.01 Debts, Guarantees, and Other Obligations.............. -34-
Section 7.02 Liens................................................. -35-
Section 7.03 Investments, Loans, and Advances...................... -35-
Section 7.04 Distributions, and Redemptions; Issuance of Stock..... -36-
Section 7.05 Sales and Leasebacks.................................. -36-
Section 7.06 Nature of Business.................................... -37-
Section 7.07 Mergers, Consolidations, Etc.......................... -37-
Section 7.08 Proceeds of Loan...................................... -37-
Section 7.09 Disposition of Assets................................. -37-
Section 7.10 Limitation on Business................................ -37-
Section 7.11 Inconsistent Agreements............................... -37-
Section 7.12 Acquisitions.......................................... -37-
Article VII.A. Financial Covenants........................................ -38-
Section 7A.01 Financial Covenants.................................. -38-
(a) Minimum Net Worth..................................... -38-
(b) Senior Funded Debt to EBIA............................ -38-
(c) Total Funded Debt to EBIA............................. -38-
(d) Adjusted Total Funded Debt to Capitalization.......... -38-
(e) Fixed Charge Coverage Ratio........................... -38-
Article VIII. Events of Default.......................................... -38-
Section 8.01 Events of Default..................................... -38-
(a) Principal and Interest Payments....................... -38-
(b) Representations and Warranties........................ -39-
(c) Obligations........................................... -39-
(d) Involuntary Bankruptcy or Receivership Proceedings.... -39-
(e) Voluntary Petitions................................... -39-
(f) Assignments for Benefit of Creditors, Etc............. -39-
(g) Undischarged Judgments................................ -39-
(h) Violation of Laws, Etc................................ -40-
(i) Execution of Guaranty by a Consolidated Entity........ -40-
(j) ERISA Liability....................................... -40-
(k) Change of Ownership................................... -40-
(l) Executive Committee................................... -40-
(m) Default to Other Persons.............................. -40-
<PAGE> 5
Section 8.02 Remedies............................................. -40-
Section 8.03 Default Conditions................................... -41-
Article IX. General Provisions........................................... -42-
Section 9.01 Notices.............................................. -42-
Section 9.02 Invalidity........................................... -42-
Section 9.03 Survival of Agreements............................... -42-
Section 9.04 Successors and Assigns............................... -43-
Section 9.05 Waivers.............................................. -43-
Section 9.06 Cumulative Rights.................................... -43-
Section 9.07 Governing Law........................................ -43-
Section 9.08 Time of Essence...................................... -43-
Section 9.09 Costs, Expenses, and Taxes........................... -43-
Section 9.10 Entire Agreement; No Oral Representations Limiting
Enforcement.......................................... -43-
Section 9.11 Amendments........................................... -43-
Section 9.12 Distribution of Information.......................... -44-
Article X. Jury Waiver.................................................. -44-
Section 10.01 Jury Waiver.......................................... -44-
Article XI. Hazardous Substances......................................... -44-
Section 11.01 Representation and Indemnity Regarding Hazardous
Substances........................................... -44-
Article XII. The Agent.................................................... -45-
Section 12.01 Appointment of Agent................................. -45-
Section 12.02 Authorization of Agent with Respect to the Loan
Documents............................................ -46-
Section 12.03 Agent's Duties Limited; No Fiduciary Duty............ -48-
Section 12.04 NO RELIANCE ON THE AGENT............................. -48-
Section 12.05 Certain Rights of Agent.............................. -49-
Section 12.06 Reliance by Agent.................................... -49-
Section 12.07 Indemnification of Agent............................. -49-
Section 12.08 The Agent in its Individual Capacity................. -50-
Section 12.09 Holders of Notes..................................... -50-
Section 12.10 Successor Agent...................................... -50-
Section 12.11 Notice of Default or Event of Default................ -51-
Section 12.12 Benefit of Agreement................................. -51-
<PAGE> 6
EXHIBITS
Exhibit A: form of Borrowing Request
Exhibit B: form of Continuation/Conversion Notice
Exhibit C: List of Guarantors
Exhibit D: form of Application and Agreement for Standby Letter of Credit
Exhibit E: form of Revolving Credit Note
Exhibit F: List of Consolidated Entities
Exhibit G: form of Compliance Certificate
<PAGE> 7
AMENDED AND RESTATED CREDIT AGREEMENT
THIS AMENDED AND RESTATED CREDIT AGREEMENT is made and entered into as
of this 18th day of September, 1997 by and between SERVICE EXPERTS, INC., a
Delaware corporation (the "Borrower"), SUNTRUST BANK, NASHVILLE, N.A. ("STB"),
and the other banks and lending institutions who become Lenders pursuant to
Section 12.12 herein (STB and such other banks and lending institutions are
referred to collectively as the "Lenders"), and SUNTRUST BANK, NASHVILLE, N.A.,
in its capacity as agent for the Lenders and each successive agent for such
Lenders as may be appointed from time to time pursuant to Article XII herein
(the "Agent").
RECITALS
1. The Borrower, Agent, and the Lender entered into a Credit Agreement
dated September 3, 1997.
2. Subsequent to the execution of the Credit Agreement, the Borrower,
the Lenders, and Agent determined to include a Swing Line Commitment.
3. The parties to the Credit Agreement desire to amend and restate the
Credit Agreement as provided herein.
4. This Amended and Restated Credit Agreement shall govern the terms
and conditions under which the Lenders have agreed to extend credit to the
Borrower.
NOW, THEREFORE, in consideration of the premises and for other good and
valuable consideration, the parties hereto agree as follows:
Article I. Definitions.
As used in this Agreement, the following terms shall have the following
meanings, unless the context expressly otherwise requires:
The terms defined in this article have the meanings attributed to them
in this article. Singular terms shall include the plural as well as the
singular, and vice versa. Words of masculine, feminine or neuter gender shall
mean and include the correlative words of other genders.
All references herein to a separate instrument are to such separate
instrument as the same may be amended or supplemented from time to time pursuant
to the applicable provisions thereof.
All accounting terms not otherwise defined herein have the meanings
assigned to them, and all computations herein provided for shall be made, in
accordance with generally accepted
<PAGE> 8
accounting principles applied on a consistent basis. All references herein to
"generally accepted accounting principles" refer to such principles as they
exist at the date of application thereof.
All references herein to designated "Articles", "Sections" and other
subdivisions or to lettered Exhibits are to the designated Articles, Sections
and other subdivisions hereof and the Exhibits annexed hereto unless the context
otherwise clearly indicates. All Article, Section, other subdivision and Exhibit
captions herein are used for reference only and in no way limit or describe the
scope or intent of, or in any way affect, this Agreement.
"Acquisition" means the acquisition by any Consolidated Entity of
any of the following: (a) the controlling interest in any Person, (b) a
Consolidated Entity, or (c) all or substantially all of the Property of
any Person.
"Adjusted Total Funded Debt" means the sum of: (a) Total Funded
Debt for the Consolidated Entities, plus (b) consolidated rent expense
for the Consolidated Entities calculated in accordance with Standard &
Poor's Corporation methodology, as such may change from time to time.
"Advance" or "Advances" means any and all amounts advanced by
Lenders to or for the account of the Borrower hereunder or under the
Revolving Credit Loan and all amounts advanced by the Swing Line Lender
under the Swing Line Loan, including, without limitation, advances of
loan proceeds, payments in overdraft, and amounts evidenced by Letters
of Credit. The terms "Advance" and "Loan" are used interchangeably in
this Agreement.
"Affiliate" of any specified Person means any other Person which
directly or indirectly through one or more intermediaries controls, or
is controlled by, or is under common control with such specified
Person. For purposes of this definition, "control" when used with
respect to any specified Person means the power to direct or cause the
direction of the management and policies of such Person, directly or
indirectly, whether through the ownership of voting securities, by
contract or otherwise; and the terms "controls" and "controlled" have
meanings correlative to the foregoing.
"Agent" means SunTrust Bank, Nashville, N.A. or its successor as
appointed pursuant to the provisions of Article XII herein.
"Agreement" means this Amended and Restated Credit Agreement
(including all exhibits hereto) as the same may be modified, amended,
or supplemented from time to time.
"Applicable Margin" means the number of basis points per annum
determined on the Determination Date in accordance with the following
table for the purpose of calculating the Commitment Fee, the LIBOR
Option, and the Letter of Credit Fee:
-2-
<PAGE> 9
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
RATIO OF TOTAL FUNDED DEBT TO EBIA
----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Purpose less than 1.0x greater than or equal to 1.0x but greater than or equal to 1.5x but greater than or equal to 2.0x
less than 1.5x less than 2.0x
- ------------------------------------------------------------------------------------------------------------------------------------
Commitment 20 basis points 25 basis points 30 basis points 37.5 basis
Fee per annum per annum per annum points per
Calculation annum
- ------------------------------------------------------------------------------------------------------------------------------------
Calculation 75 basis points 100 basis points 125 basis points 150 basis
of LIBOR per annum per annum per annum points per
Option and annum
Letter of
Credit Fee
====================================================================================================================================
</TABLE>
"Applicable Rate" means either the Base Rate Option or the LIBOR
Option, except in the case of an Advance under the Swing Line Loan, the
Applicable Rate shall mean the Swing Line Rate.
"Assignment and Acceptance" means an Assignment and Acceptance
form executed by a Lender assigning its interest in the Revolving
Credit Loan, or any portion therein (other than as a participation), to
an Eligible Assignee in a form reasonably satisfactory to Agent.
"Bankruptcy Code" means the Bankruptcy Code, as set forth in 11
U.S.C. Section 101 et seq., as such may be amended from time to time.
"Base Rate" means the rate of interest equal to the higher of (i)
the rate of interest most recently announced by Agent as its "base" or
"prime" lending rate, as the case may be, for dollar loans in the
United States; and (ii) the Federal Funds Rate (as in effect from time
to time) plus one-half of one percent (1/2%) per annum. The Base Rate
is determined daily. The "base" or "prime" lending rate is a reference
rate and does not necessarily represent the lowest or best interest
rate actually charged to any customer. Each change in the "base" or
"prime" lending rate announced by Agent shall take effect at the
opening of business on the day such announcement is made. The Agent may
make commercial loans or other loans at rates of interest at, above, or
below such "base" or "prime" lending rate.
"Base Rate Option" shall mean that rate of interest equal to the
Base Rate.
"Borrower" shall have the same meaning attributed to that term in
the preamble to this Agreement.
-3-
<PAGE> 10
"Borrowing Date" means that date on which the Advances are to be
funded and which must be a day other than a Saturday, Sunday, or day on
which commercial banks are authorized to close for business in New York
City or the State of Tennessee.
"Borrowing Request" means a request in the form of Exhibit A
hereto submitted by the Borrower to Agent for an Advance as described
in Section 2.04 of this Agreement.
"Business Day" means any day other than a Saturday, Sunday or day
on which commercial banks are authorized to close for business in New
York City or the State of Tennessee; provided, however, when used with
reference to LIBOR Advances (including the making, continuing,
prepaying, or repaying of any LIBOR Advances), the term "Business Day"
shall also exclude any day on which banks are not open for dealings in
deposits of U.S. dollars in the London interbank market.
"Business Sweep System" means the procedure and policies
established from time to time by the Swing Line Lender and which may
change without notice to Borrower by which: (i) the Swing Line Lender
causes funds to be deposited into and removed from the Funding Account
to meet certain operational requirements of Borrower, and (ii)
automatic payments, to the extent funds are available, are applied to
the Swing Line Loan.
"Capitalization" means an amount equal to Total Funded Debt of the
Consolidated Entities plus Consolidated Net Worth.
"Closing Date" means the 3rd day of September, 1997.
"Code" means the Internal Revenue Code of 1986, as amended from
time to time, and any successor statute.
"Commitment Fee" has the same meaning as set forth in Section 2.14
herein.
"Conditions Precedent" means those matters or events that must be
completed or must occur or exist prior to the Lenders' being obligated
to fund any Advance, including, but not limited to, those matters
described in Article V hereof.
"Consolidated Amortization" means the amount attributed to
amortization on the Financial Statements of the Consolidated Entities,
as calculated in accordance with GAAP.
"Consolidated Entity" or "Consolidated Entities" means: (a) the
Borrower, (b) all present and future Subsidiaries, Controlled
Partnerships, and Controlled LLC's of the Borrower, and (c) any Person
the financial statements of which are consolidated with any other
Consolidated Entity identified in subparts (a) and (b) hereof. (The
current Consolidated Entities are depicted on Exhibit F hereto.)
-4-
<PAGE> 11
"Consolidated Interest Expense" means the aggregate interest
expense and amortization of deferred loan costs of the Consolidated
Entities, on a consolidated basis for such period (calculated without
regard to any limitations on the payment thereof), imputed interest on
capitalized lease obligations of the Consolidated Entities, and net
costs under interest rate protection agreements for the Consolidated
Entities, all as determined in conformity with GAAP.
"Consolidated Net Income" shall mean for any fiscal period the
consolidated net income of the Consolidated Entities, as calculated in
accordance with GAAP.
"Consolidated Net Worth" means on a consolidated basis the excess
of (A) total assets over (B) total liabilities, for the Consolidated
Entities, as determined in accordance with GAAP.
"Continuation/Conversion Notice" means the notice delivered on
behalf of the Borrower to Agent in the form of Exhibit B hereto.
"Control Group" means any Person and all Affiliates of such
Person.
"Controlled LLC" means a limited liability company, the ownership
and management of which is held by and/or controlled by any
Consolidated Entity.
"Controlled Partnership" means a general partnership or joint
venture of which any Consolidated Entity is a general partner or joint
venturer, or a limited partnership which has any Consolidated Entity as
a general partner and with respect to which general partnership, joint
venture, or limited partnership, any Consolidated Entity serving as
general partner or joint venturer is entitled to receive not less than
51% of any distributions of cash or other Property made to the partners
or joint venturers thereof.
"Conversion Date" means that date on which Advances on which
interest accrues at the Base Rate Option are converted to LIBOR
Advances and that date on which LIBOR Advances are converted to
Advances on which interest accrues at the Base Rate Option.
"Debt" means, with respect to any Consolidated Entity, without
duplication, on a consolidated basis, (i) Total Funded Debt, and (ii)
all other liabilities contingent or otherwise, which in accordance with
GAAP would be classified on a balance sheet of such Consolidated Entity
as a liability, but in any event including (a) liabilities secured by
any mortgage, pledge or lien existing on Property owned by such
Consolidated Entity and subject to such mortgage, pledge or lien,
whether or not the liability secured thereby shall have been assumed by
any Consolidated Entity, (b) endorsements (other than endorsements of
negotiable instruments for purposes of collection in the ordinary
course of business) and obligations to supply funds for the purchase or
payment of Debt of others, and (c) all outstanding indemnities.
-5-
<PAGE> 12
"Default" or "Event of Default" means the occurrence of any of the
events specified in Section 8.01 hereof, whether or not any requirement
for notice or lapse of time or other condition precedent has been
satisfied.
"Default Conditions" or "Default Condition" means the occurrence
of any of the events specified in Section 8.03 hereof.
"Default Rate" means interest rate equal to two percent (2%) per
annum above the Base Rate.
"Determination Date" means that date which is ten (10) Business
Days subsequent to Agent's receipt of the Borrower's most recent
consolidated Financial Statements and most recent quarterly
calculations of Borrower's ratio of Total Funded Debt to EBIA.
"EBIA" means Consolidated Net Income, plus Consolidated Interest
Expense, plus Consolidated Amortization, as determined in accordance
with GAAP.
"Eligible Assignee" means: (i) a financial institution organized
under the laws of the United States or any state thereof having total
assets in excess of $1,000,000,000, which has been approved by Borrower
and Agent as an Eligible Assignee, provided that Borrower and Agent
shall not unreasonably withhold its approval of any financial
institution seeking to become an Eligible Assignee, and provided that,
the approval of the Borrower and the Agent shall not be required if an
Event of Default exists hereunder or (ii) any Lender.
"Environmental Law" means any federal, state, or local law,
statute, ordinance, or regulation applicable or pertaining to health,
industrial hygiene, waste materials, removal of waste materials, oil,
gas, underground storage tanks, Hazardous Substances, other
environmental conditions on, under, or affecting any of the Property of
any Consolidated Entity.
"Equity Proceeds" means the net proceeds obtained by any
Consolidated Entity through the public or private placement of shares
of stock of any Consolidated Entity or the issuance of subordinated
debt of any Consolidated Entity (the form, substance, and terms of
which subordinated debt shall first be determined to be acceptable to
Lenders).
"ERISA" means the Employee Retirement Income Security Act of 1974,
as amended from time to time, including (unless the context otherwise
requires) any rules or regulations promulgated thereunder.
"Facing Fee" means the fee as stipulated in a letter agreement
between Borrower and Agent dated September 2, 1997, referred to therein
as the "Fee Letter."
"Federal Funds Rate" means for any period, a fluctuating interest
rate per annum
-6-
<PAGE> 13
equal for each day during such period to the weighted average of the
rates on overnight Federal funds transactions with member banks of the
Federal Reserve System arranged by Federal funds brokers for such day,
as published on the next succeeding Business Day by the Federal Reserve
Bank of Atlanta, or, if such rate is not so published for any day that
is a Business Day, the average of the quotations for such day on such
transactions received by the Agent from three (3) Federal funds brokers
of recognized standing selected by the Agent.
"Financial Statements" means (i) the consolidated financial
statement or statements of the Consolidated Entities, described or
referenced in Section 4.06 hereof and delivered with this Agreement to
Agent for distribution to Lenders, and (ii) subsequent financial
statements as described or referenced in Section 6.01 and required to
be provided pursuant to this Agreement.
"Fiscal Quarter" means each of the quarters of the Fiscal Year
ending on the last day of each March, June, September, and December.
"Fiscal Year" or "Annually" means the twelve-month accounting
period ending December 31st of each year and presently used by the
Borrower as its fiscal year for accounting purposes, or such other
twelve (12) month accounting period adopted by Borrower as its fiscal
year and ending on the last day of March, June, or September.
"Fixed Charges" means the sum of Consolidated Interest Expense,
plus long-term Debt paid by the Consolidated Entities on a consolidated
basis (excluding any amounts paid under this Agreement), and plus cash
dividends paid, as determined on a consolidated basis for the
Consolidated Entities in accordance with GAAP.
"Funding Account" shall mean that certain account maintained by
the Borrower with Agent, bearing account no. 7020176082.
"GAAP" means generally accepted accounting principles in the
United States.
"Guarantor" and "Guarantors" mean each and all of the Persons
described on Exhibit C herein, as well as all future Persons executing
or required to execute a Guaranty pursuant to Section 6.13 herein.
"Guaranty" and "Guaranties" mean the guaranty agreements executed
by each of the Guarantors in form and substance approved by Agent.
"Hazardous Substances" means those substances included within the
definition of hazardous substances, hazardous materials, toxic
substances, or solid waste under the Comprehensive Environmental
Response, Compensation and Liability Act of 1980, as amended, 42 U.S.C.
Section 9601, et seq.; the Resource Conservation and Recovery Act of
1976, 42 U.S.C. Section 6901, et seq.; the Hazardous Materials
Transportation Act, 49 U.S.C.
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Section 1801, et seq.; any applicable state law and in the regulations
promulgated pursuant to such acts and laws, and such other substances,
materials, and waste which are or become regulated under any
Environmental Law.
"Interest Rate Period" means with respect to any LIBOR Advances:
(i) initially, the period commencing on any Borrowing Date or on
any Conversion Date, as the case may be, and ending one, two, three, or
six months thereafter, as designated by Borrower on its Borrowing
Request or on its Continuation/Conversion Notice, as the case may be,
given with respect thereto, or as otherwise provided herein; and
(ii) thereafter each period commencing on the last day of the
next preceding Interest Rate Period and ending one, two, three, or six
months thereafter as selected by Borrower on the applicable
Continuation/Conversion Notice given with respect thereto, or as
otherwise provided herein;
provided that all foregoing provisions relating to Interest Rate
Periods are subject to the following:
(1) if any Interest Rate Period would otherwise end on a day
that is not a Business Day, such Interest Rate Period shall be extended
to the next succeeding Business Day unless the result of such extension
would be to carry such Interest Rate Period into another calendar
month, in which event such Interest Rate Period shall end on the
immediately preceding Business Day;
(2) any Interest Rate Period that would otherwise extend beyond
the Maturity Date shall end on the Maturity Date; and
(3) any Interest Rate Period that begins on the last Business
Day of a calendar month (or on a day for which there is no numerically
corresponding day in the calendar month at the end of such Interest
Rate Period) shall end on the last Business Day of a calendar month.
"Lender" or "Lenders" means STB, the other financial institutions
listed on the signature pages hereof and each permitted assignee
thereof, if any, pursuant to Section 12.12, but shall not include any
participant.
"Letter of Credit Application Agreement" means that certain
Application and Agreement for Issuance of a Letter of Credit in the
form of Exhibit D hereto or any other similar form required by the
Agent appropriately completed by the Borrower pursuant to Section
2.02(a) herein.
"Letter of Credit Fee", as set forth in Section 2.02(b) herein,
means an amount
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equal to the product of: (a) the Applicable Margin relating to the
Letter of Credit Fee calculation in effect for each period of
calculation multiplied by (b) the face amount of the Letter of Credit.
"Letters of Credit" has the same meaning as set forth in Section
2.02 herein.
"LIBOR" shall mean, for any Interest Rate Period, the offered
rates for deposits in U.S. Dollars for a period comparable to the
selected Interest Rate Period appearing on the Telerate Screen Page
3750 as of 11:00 A.M. London time, on the day that is two (2) Business
Days prior to the first day of the applicable Interest Rate Period. If
any of the Interest Rate Periods is unavailable on Telerate Screen Page
3750, then such rate shall be determined by and based on any other
interest rate reporting service of generally recognized standing
designated by the Agent to the Borrower.
"LIBOR Advances" means Advances made hereunder calculated at the
LIBOR Option.
"LIBOR Loans" shall have the same meaning as set forth in Section
2.18(a)(ii)(A) herein.
"LIBOR Option" means that rate of interest equal to LIBOR, plus
the Applicable Margin, as such may be adjusted for applicable reserve
requirements, if any.
"Lien" means any interest in Property securing an obligation owed
to, or a claim by, a Person, other than the owner of the Property,
whether such interest is based on the common law, statute, or contract,
and including, but not limited to, the lien or security interest
arising from a mortgage, encumbrance, pledge, security agreement,
conditional sale, or trust receipt or a lease, consignment, or bailment
for security purposes. The term "Lien" shall include reservations,
exceptions, encroachments, easements, rights-of-way, covenants,
conditions, restrictions, leases, and other title exceptions and
encumbrances affecting the Property. For the purposes of this
Agreement, a Consolidated Entity shall be deemed to be the owner of any
Property that such Consolidated Entity has acquired or holds subject to
a conditional sale agreement, financing lease, or other arrangement
pursuant to which title to the Property has been retained by or vested
in some other Person for security purposes.
"Loan" or "Loans" means any borrowing by the Borrower under this
Agreement, and/or any extension of credit by Lenders or Swing Line
Lender to or for the Borrower pursuant to this Agreement, the Revolving
Credit Loan, the Swing Line Loan, or any other Loan Document, including
any renewal, amendment, extension, or modification thereof.
"Loan Documents" means, collectively, each document, paper or
certificate executed, furnished or delivered in connection with this
Agreement (whether before, at,
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or after the Closing Date), including, without limitation, this
Agreement, the Revolving Credit Notes, the Swing Line Note, the
Guaranties, and all other documents, certificates, reports, and
instruments that this Agreement requires or that were executed or
delivered (or both) at Agent's request.
"Majority Lenders" means those Lenders with an aggregate Pro Rata
Share equal to or greater than 66 2/3%.
"Maturity Date" for the Revolving Credit Loan and the Swing Line
Loan shall mean the earlier of (i) September 3, 1999 and (ii) the date
the repayment of the Revolving Credit Loan or the Swing Line Loan is
accelerated pursuant to Article VIII herein.
"Maximum Total Amount" means the principal amount of $50,000,000,
or such lesser amount which may result from the Borrower permanently
reducing the maximum principal amount that may be borrowed under the
Revolving Credit Loan pursuant to Section 2.09(c).
"PBGC" means the Pension Benefit Guaranty Corporation and any
entity succeeding to any or all of its functions under ERISA.
"Permitted Encumbrances" means: (i) taxes, assessments, and other
governmental charges that are not delinquent or that are being
contested in good faith by appropriate proceedings duly pursued and
subject to maintenance of adequate reserves as required by GAAP; (ii)
mechanic's, materialmen's, contractors', landlords', warehousemen, or
other similar Liens imposed by law and arising in the ordinary course
of business, securing obligations that are not delinquent or that are
being contested in good faith by appropriate proceedings duly pursued
and subject to maintenance of adequate reserves as required by GAAP;
(iii) zoning restrictions, easements, and restrictions on the use of
any of the Consolidated Entities' real property which do not materially
impair the use of such real property; (iv) Liens disclosed on the
consolidated Financial Statement of Borrower dated March 31, 1997; (v)
Liens securing purchase money Debt of the Consolidated Entities which
in the aggregate does not exceed $5,000,000 at any one time; (vi)
customary Liens incurred or deposits made in the ordinary course of
business in connection with workers' compensation, unemployment
insurance, ERISA, or social security; (vii) customary Liens to secure
the performance of tenders, statutory obligations, surety and appeal
bonds, and similar obligations, and (viii) rights reserved or vested in
governmental agencies and affecting the Property of any of the
Consolidated Entities, but which does not materially impair the use of
such Property.
"Person" means any individual, corporation, partnership, joint
venture, association, joint stock company, trust, unincorporated
organization, government, or any agency or political subdivision
thereof, or any other form of entity.
"Plan" means any employee benefit or other plan established or
maintained, or to
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which contributions have been made, by any Consolidated Entity and
covered by Title IV of ERISA or to which Section 412 of the Code
applies.
"Principal Office" means the principal office of the Agent located
at 201 Fourth Avenue North, Nashville, Tennessee 37219.
"Pro Rata Share" means the percentage of Maximum Total Amount
committed to by each of the Lenders as set forth opposite their
respective signature hereto, as such percentage may be adjusted from
time to time as a result of assignments or amendments made pursuant to
this Agreement.
"Property" or "Properties" means any interest in any kind of
property or asset, whether real, personal, or mixed, or tangible or
intangible.
"Revolving Credit Loan" means the aggregate principal amount
evidenced by the Revolving Credit Notes.
"Revolving Credit Loan Commitment" means, relative to any Lender,
such Lender's obligation to make Advances pursuant to Section 2.01(a)
of this Agreement.
"Revolving Credit Note" and "Revolving Credit Notes" means, as the
context may require: (a) any of the revolving credit notes executed by
the Borrower, payable to the order of any Lender, substantially in the
form of Exhibit E hereto, originally in the principal amounts each such
Lender's Pro Rata Share bears to the Maximum Total Amount, evidencing
the aggregate indebtedness of the Borrower to such Lender resulting
from the outstanding Revolving Credit Loan, as each such Revolving
Credit Note may from time to time be amended, increased, decreased,
extended, renewed, restated, and/or changed in any way, and all other
promissory notes accepted from time to time in amendment, renewal,
payment and/or substitution thereof and/or therefor, and/or (b)
collectively, all of the foregoing.
"Seller Notes" means any promissory note issued by any
Consolidated Entity in connection with an Acquisition by such
Consolidated Entity, which promissory notes and the payment thereunder
has been subordinated to the obligations of the Borrower and the
Guarantors arising under this Agreement and all other Loan Documents
pursuant to such subordination agreement satisfactory to Agent.
"Senior Funded Debt" means, with respect to any Consolidated
Entity, without duplication, on a consolidated basis, the sum of (i)
all indebtedness for money borrowed; (ii) purchase money Debt; (iii)
the amount of principal payments required to be made under Sellers
Notes during the term of this Agreement; (iv) capitalized leases; (v)
amounts evidenced by the aggregate face amount of all outstanding
letters of credit; (vi) outstanding amounts under asset securitization
vehicles, conditional sales contracts and similar title retention debt
instruments; and (vii) all indebtedness guaranteed by any
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Consolidated Entity. Additionally, the calculation of Funded Debt shall
include the redemption amount with respect to any redeemable preferred
stock of any Consolidated Entity required to be redeemed within the
next twelve (12) months.
"Subsidiary" means, with respect to any Person, any corporation of
which more than fifty percent (50%) of the issued and outstanding
Voting Stock is owned or controlled by such Person at the time as of
which any determination is being made either directly or indirectly
through one or more other Subsidiaries.
"Swing Line Commitment" means, at any time for the Swing Line
Lender, the principal amount of up to $2,000,000.00, as evidenced by
the Swing Line Note. The Swing Line Commitment shall be part of,
subsumed within, and not in addition to, the Revolving Credit Loan
Commitment of the Swing Line Lender.
"Swing Line Lender" means the Agent and any successor thereto or
assign thereof.
"Swing Line Loan" means all Advances made under the Swing Line
Note up to the Swing Line Commitment.
"Swing Line Note" means the Swing Line Note of the Borrower
payable to the order of the Swing Line Lender in a form approved by the
Swing Line Lender in the principal amount of up to $2,000,000.00, as
such may be from time to time supplemented, modified, amended, renewed,
or extended.
"Swing Line Rate" means a rate of interest equal to one-half of
one percent (.50%) per annum below the Base Rate, calculated on a
360-day year for actual number of days elapsed.
"Telerate Screen Page 3750" means the "British Bankers Association
LIBOR Rates" shown on Page 3750 of the Telerate System Incorporated
Service.
"Total Funded Debt" means, without duplication, the sum of (i)
Senior Funded Debt, plus (ii) the aggregate outstanding principal
amount of Seller Notes.
"Voting Stock" means securities of any class of a corporation, the
holders of which are ordinarily, in the absence of contingencies,
entitled to elect a majority of the corporate directors (or persons
performing similar functions).
Article II. The Credit.
Section 2.01 The Revolving Credit Loan. (a) Subject to the conditions
and pursuant to the terms of the Loan Documents and in reliance upon the
representations, warranties, and covenants set forth in the Loan Documents, each
Lender severally agrees to make Advances (relative to
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such Lender) to the Borrower under the Revolving Credit Loan equal to such
Lender's Pro Rata Share of the aggregate amount of the borrowing of total
Advances (excluding Advances requested under the Swing Line Loan) requested by
the Borrower to be made on such day.
(b) The Maximum Total Amount available to be advanced under the
Revolving Credit Loan shall be reduced dollar-for-dollar by the sum of:
(i) the face amount of any outstanding Letter of Credit, and (ii) the
principal amount outstanding from time to time under the Swing Line
Note. In no event shall the Borrower permit the sum of (x) the face
amount of outstanding Letters of Credit, plus (y) the outstanding
principal amount of the Swing Line Note, plus (z) the outstanding
principal amount of the Revolving Credit Loan to exceed the Maximum
Total Amount.
(c) On the terms and subject to the conditions hereof and the
Revolving Credit Notes, and provided no Event of Default or Default
Condition shall have occurred, the Borrower, may borrow, repay, and
reborrow under the Revolving Credit Loan.
(d) The failure of any Lender to make an Advance under its
Revolving Credit Loan Commitment shall not relieve any other Lender of
its obligations, if any, hereunder to make Advances under such Lender's
Revolving Credit Loan Commitment, but no Lender shall be responsible
for the failure of any other Lender to make an Advance to be made by
such other Lender on the date of any requested borrowing.
Section 2.02 Letters of Credit. (a) Provided no Event of Default or
Default Condition exists, and subject to the terms and conditions of the Loan
Documents, the Lenders have agreed that the Agent on behalf of the Lenders will
issue to third party beneficiaries on the Borrower's account, standby letters of
credit ("Letters of Credit") in the face amount of up to $5,000,000 in the
aggregate. In connection with the issuance of each Letter of Credit, the
Borrower shall complete and execute a Letter of Credit Application Agreement in
form and substance satisfactory to Agent.
(b) In connection with the issuance of any Letter of Credit, and
on the first Business Day following the conclusion of each Fiscal
Quarter, the Borrower shall pay to Agent a Letter of Credit Fee
quarterly in arrears calculated as of the last day of each Fiscal
Quarter, or on the expiration date of the Letter of Credit, whichever
is sooner, calculated on the basis of a year of 360 days for the actual
number of days elapsed and to be apportioned and paid by Agent to each
of the Lenders pursuant to the Pro Rata Share of each Lender. If the
term of any Letter of Credit is less than thirty (30) days, the Letter
of Credit Fee shall be calculated as if the term of the Letter of
Credit was equal to thirty (30) days.
(c) In connection with the issuance of any Letter of Credit, and
on the first Business Day of each Fiscal Quarter, the Borrower shall
pay to Agent a Facing Fee quarterly in arrears calculated as of the
last day of each Fiscal Quarter, or on the expiration date of the
Letter of Credit, whichever is sooner, calculated on the basis of a
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year of 360 days for the actual number of days elapsed and to be
retained by Agent. None of the Lenders, except for the Agent, shall
share in the Facing Fee.
(d) The Agent agrees to use its best efforts to issue and deliver
to the Borrower each requested Letter of Credit within three (3)
Business Days following submission by the Borrower of a properly
completed Letter of Credit Application Agreement.
(e) No Letter of Credit shall be issued for a term in excess of
twelve (12) months, and no Letter of Credit shall be issued for a term
that extends beyond the Maturity Date. The language of each Letter of
Credit, including the requirements for a draw thereunder, shall be
subject to the reasonable approval of the Agent.
(f) The issuance of any Letter of Credit shall reduce the
Borrower's ability to receive Advances under the Revolving Credit Loan
by an amount equal to the face amount of the Letter of Credit and for
so long as the Letter of Credit is outstanding. Additionally, any
payment by the Agent under a Letter of Credit shall be treated as an
Advance (with interest calculated at the Base Rate Option) under the
Revolving Credit Loan, and the terms and provisions of repayment shall
be treated as an Advance under the Revolving Credit Loan.
(g) The Lenders shall participate in all Letters of Credit
requested by the Borrower. Each Lender, upon issuance of a Letter of
Credit by the Agent, shall be promptly notified by Agent and shall be
deemed to have purchased without recourse a risk participation from the
Agent in such Letter of Credit and the obligations arising thereunder,
in each case in an amount equal to its Pro Rata Share of all
obligations under such Letter of Credit and shall absolutely,
unconditionally, and irrevocably assume, as primary obligor and not as
surety, and be obligated to pay to the Agent therefor and discharge
when due, its Pro Rata Share of all obligations arising under such
Letter of Credit. Without limiting the scope and nature of each
Lender's participation in any Letter of Credit, to the extent that the
Agent has not been reimbursed as required hereunder or under any such
Letter of Credit, each such Lender shall pay to the Agent its Pro Rata
Share of such unreimbursed drawing in same day funds on the day of
notification by the Agent if so notified by Noon (Nashville, Tennessee
time) on such day, otherwise by the next succeeding Business Day, of an
unreimbursed drawing. The obligation of each Lender to so reimburse the
Agent shall be absolute and unconditional and shall not be affected by
the occurrence of a Default Condition or an Event of Default or any
other occurrence or event.
Section 2.03 Interest Rate.
(a) The Applicable Rate for Advances under the Revolving Credit
Loan shall either be the Base Rate Option or the LIBOR Option, as
selected by the Borrower pursuant to the procedure specified in parts
(b) and (c) below. The Applicable Rate for
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the Swing Line Loan shall be the Swing Line Rate.
(b) So long as the Borrower complies with Section 2.04 herein, the
Borrower may elect that any Advance under the Revolving Credit Loan
shall bear interest at either the Base Rate Option or the LIBOR Option.
In the event that the Borrower fails to designate an Applicable Rate,
or in the event the Borrower fails to make an interest rate election in
strict compliance herewith, then it shall be conclusively presumed that
the Borrower has selected the Base Rate Option.
(c) In no event shall there be more than ten (10) different
Interest Rate Periods applicable to LIBOR Advances.
(d) Upon the occurrence of an Event of Default, the indebtedness
described herein and all obligations hereunder immediately shall bear
interest at the Default Rate.
(e) All interest and fees shall be calculated on the basis of a
360-day year for the actual number of days elapsed.
Section 2.04 Procedure for Revolving Credit Borrowing. The Borrower may
borrow under the Revolving Credit Loan Commitments from the date hereof until
the Maturity Date pursuant to the following procedure:
(a) the Borrower, acting through either its: (i) Chief Executive
Officer, (ii) Chief Financial Officer, or (iii) any Person designated
in writing by the Chief Executive Officer to request Advances (which
designation shall be delivered by the Borrower to the Agent), requests
an Advance by delivering a Borrowing Request to Agent;
(b) in the case of Advances which the Borrower elects to bear
interest at the Base Rate Option the Borrowing Request must be
delivered to the Agent no later than on or before 11:00 A.M.
(Nashville, Tennessee time) on the Borrowing Date, and in the case of
Advances which the Borrower elects to bear interest at the LIBOR Option
the Borrowing Request must be delivered to the Agent no later than on
or before 11:00 A.M. (Nashville, Tennessee time) three (3) Business
Days prior to the Borrowing Date, and any Borrowing Request received by
Agent after 11:00 A.M. (Nashville, Tennessee time) will be deemed given
on the next succeeding Business Day and all telephonic notices shall be
promptly confirmed in writing delivered to Agent;
(c) all Borrowing Requests shall specify (i) the amount of the
requested Advance, which amount must be in a minimum amount of $200,000
and in increments of $50,000 for Advances at the Base Rate Option, and
in a minimum amount of $2,500,000 and in increments of $500,000 for
Advances at the LIBOR Option, (ii) whether the borrowing is to be (A) a
new Advance at the LIBOR Option or Base Rate Option or a combination
thereof or (B) a conversion from a LIBOR Option to a Base Rate Option
or a Base Rate Option to a LIBOR Option or (C) a rollover of an
existing Advance at the
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LIBOR Option, and (iv) if the Advance is to be entirely or partly made
as a LIBOR Loan, the chosen Interest Rate Period;
(d) at least three (3) Business Days prior to the expiration of
any applicable Interest Rate Period for an Advance at the LIBOR Option,
the Borrower shall designate a new Applicable Rate, and in the event
that the Borrower fails to make such designation, then it shall be
conclusively presumed that the Borrower has selected the Base Rate
Option until designated otherwise;
(e) the Borrower authorizes the Agent to cause all Advances to be
deposited into the Funding Account;
(f) the Agent and the Lenders shall have no liability to the
Borrower arising out of their compliance with the borrowing procedure
specified in this Section 2.04, except for acts of gross negligence or
willful misconduct; and
(g) the giving of notice by the Borrower that it is requesting an
Advance shall constitute a warranty by the Borrower that as of the date
of the request and as of the date the Advance is made: (i) no Event of
Default or Default Condition has occurred; and (ii) the representations
and warranties contained in Article IV of this Agreement remain true,
correct, and accurate, except that the representation contained in the
first sentence of Section 4.13 herein shall not be deemed to be a
continuing representation.
Section 2.05 Use of Proceeds. Proceeds of the Revolving Credit Loan
shall be used to fund Borrower's working capital, for Acquisitions and capital
expenditures needs, for Borrower's general corporate purposes, and to repay and
to cancel all outstanding amounts owed to STB under the existing credit
facility.
Section 2.06 Participation. Any Lender shall have the right to enter
into one or more participation agreements with one or more Affiliates, banks, or
financial institutions on such terms and conditions as such Lender shall deem
advisable. The Borrower shall furnish a sufficient number of copies of reports
and certificates to Lenders so that Lenders and each participating lender shall
receive a copy of each such document.
Section 2.07 Term of This Agreement. This Agreement shall be binding on
the Borrower so long as there is any Revolving Credit Loan or Swing Line Loan
outstanding, provided and except, the Borrower's representations, warranties,
and indemnity agreements shall survive the payment in full of such indebtedness.
Section 2.08 Payments to Principal Office; Debit Authority. Each
payment under the Revolving Credit Loan and the Swing Line Loan shall be made
without defense, setoff, or counterclaim to Agent at its Principal Office in
U.S. dollars for the account of Lenders and in immediately available funds no
later than on or before 1:00 P.M. (Nashville, Tennessee time) on the date such
payment is due. The Agent may, but shall not be obligated to, debit the amount
of
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any such payment which is not made by such time to any deposit account of the
Borrower with the Agent. Additionally, payments under the Swing Line Loan shall
be made pursuant to the procedure specified in the Business Sweep Agreement.
Section 2.09
(a) Required Prepayment. Whenever the aggregate amount outstanding
under the Revolving Credit Loan exceeds the Maximum Total Amount, the
Borrower shall immediately pay to Agent for the account of Lenders such
amounts as may be necessary to cause the aggregate principal amount
outstanding under the Revolving Credit Loan to be equal to or less than
the Maximum Total Amount. Whenever the amount outstanding under any
individual Revolving Credit Note exceeds the maximum amount permitted
to be outstanding under such Revolving Credit Note, the Borrower shall
immediately pay to Agent for the account of the respective Lender such
amounts as may be necessary to cause the principal amount outstanding
under such Revolving Credit Note to be equal to or less than such
Revolving Credit Note's maximum permitted amount. Whenever the amount
outstanding under the Swing Line Note exceeds the maximum amount
permitted to be outstanding under the Swing Line Loan, the Borrower
shall immediately pay to the Agent such amounts as may be necessary to
cause the principal amount outstanding under the Swing Line Note to be
equal to or less than the maximum amount permitted to be outstanding
under the Swing Line Loan.
(b) Principal Payments and Optional Prepayments. The Borrower may
make principal reductions and prepayments under the Revolving Credit
Notes provided that (i) in the case of amounts outstanding under the
Revolving Credit Notes calculated at the LIBOR Option, (A) principal
reductions and prepayments may only be made at the end of the
applicable Interest Rate Period, (B) the Borrower delivers written
notice to Agent no later than on or before 1:00 P.M. (Nashville,
Tennessee time) three (3) Business Days prior to such payment, and (C)
each such payment shall be received on or before 1:00 P.M. (Nashville,
Tennessee time) on the date of such payment and shall be in a principal
amount of not less than $1,000,000 and in integral multiples of
$100,000, and (ii) in the case of amounts outstanding under the
Revolving Credit Notes calculated at the Base Rate Option, the Borrower
shall give notice and make such payment no later than on or before 1:00
P.M. (Nashville, Tennessee time) on any Business Day and provided each
such payment shall be in a principal amount of not less than $200,000
and in integral multiples of $50,000. Any such payments and prepayments
shall be subject to payment of the amounts described in Section 2.10,
in the manner set forth therein, but not to any other prepayment
charge, fee or premium. All such payments and prepayments will be
applied first to unpaid expenses (if any), then to breakage costs (if
any), then to accrued interest, then to principal in the inverse order
of maturity, allocated, in the case of the Revolving Credit Notes,
pro-rata among the Lenders.
(c) Permanent Reductions. Upon three (3) Business Days prior
written notice delivered from the Borrower to Agent, the Borrower may
permanently reduce the
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maximum principal amount that may be borrowed under the Revolving
Credit Loan; provided that such permanent principal reduction shall be
in a principal amount of at least $5,000,000 and in integrals of
$1,000,000, and provided that such reductions may not be made on
Advances calculated at the LIBOR Option except at the end of the
applicable Interest Rate Period and provided that such reduction shall
also be subject to the amounts described in Section 2.10 herein. In the
event that a permanent principal reduction is made under the Revolving
Credit Loan, the Maximum Total Amount and the Revolving Credit Loan
Commitment of each Lender shall permanently be reduced on a pro rata
basis.
(d) Interest Payments. Interest shall be paid on the Revolving
Credit Loan no later than on or before 1:00 P.M. (Nashville, Tennessee
time) as follows: (i) on Advances calculated at the Base Rate Option,
all accrued interest shall be paid on a quarterly basis and in arrears
by Borrower to Agent, with such payment to be made on the first
Business Day following the end of each Fiscal Quarter, or if such day
is not a Business Day, then on the next succeeding Business Day; (ii)
on Advances calculated at the LIBOR Option, all accrued interest shall
be paid in arrears by Borrower to Agent on the last day of each
Interest Rate Period, provided that for all Advances at the LIBOR
Option that have an Interest Rate Period in excess of three (3) months,
accrued interest on such Advances shall also be paid on the last day of
each three (3) month period calculated from the initiation of such
Interest Rate Period; and (iii) on the Maturity Date, the Borrower
shall pay to the Agent an amount equal to all accrued interest.
Section 2.10 Funding Losses. The Borrower shall compensate each Lender,
upon any Lender's written request to the Borrower, copied to Agent (which
request shall set forth the basis for requesting such amounts in reasonable
detail and which request shall be made by Lender in good faith) for all losses,
additional cost, expenses, and liabilities (including, without limitation, any
interest paid by such Lender to lenders of funds borrowed by it to make or carry
loans on which interest is calculated at LIBOR to the extent not recovered by
such Lender in connection with the reemployment of such funds), which such
Lender may sustain because a repayment (including mandatory prepayments) of any
amounts to which LIBOR applies occurs on a date that is not the last Business
Day of an applicable Interest Rate Period.
Section 2.11 Apportionment of Payments. Aggregate principal and
interest payments in respect of Advances under the Revolving Credit Loan shall
be apportioned among all outstanding Revolving Credit Loan Commitments to which
such payments relate proportionately to the Lenders' respective Pro Rata Share
of such Revolving Credit Loan Commitments. In the event the Agent receives
payment under the Revolving Credit Loan on or before 1:00 P.M. (Nashville,
Tennessee time), then the Agent shall promptly thereafter distribute to each
Lender its share of all such payments received by the Agent on such Business
Day. Payments received by Agent subsequent to 1:00 P.M. (Nashville, Tennessee
time) shall be treated as received on the next succeeding Business Day. Payments
received by Agent for the Swing Line Loan shall not be apportioned but shall be
delivered to the Swing Line Lender.
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Section 2.12 Sharing of Payments, Etc. If any Lender shall obtain any
payment or reduction (including, without limitation, any amounts received as
adequate protection of a deposit treated as cash collateral under the Bankruptcy
Code) of the indebtedness relating to Advances under the Revolving Credit Loan
(whether voluntary, involuntary, through the exercise of any right of set-off or
otherwise) in excess of its Pro Rata Share of payments or reductions of the
Revolving Credit Loan, such Lender shall forthwith (a) notify the Agent, upon
which the Agent shall promptly thereafter notify each of the other Lenders of
such receipt, and (b) purchase from the other Lenders such participations in the
Revolving Credit Loan as shall be necessary to cause such purchasing Lender to
share the excess payment or reduction, net of costs incurred in connection
therewith, ratably with each of them, provided that if all or any portion will
be rescinded and the purchase price restored to the extent of such recovery or
such additional costs, but without interest unless the Lender obligated to
return such funds is required to pay interest on such funds. The Borrower agrees
that any Lender so purchasing a participation from another Lender pursuant to
this Section 2.12 may, to the fullest extent permitted by law, exercise all its
rights to receive payment (including the right of set-off) with respect to such
participation as fully as if such Lender were the direct creditor of the
Borrower in the amount of such participation.
Section 2.13 Right of Offset, Etc. The Borrower hereby agrees that, in
addition to (and without limitation of) any right of set-off, banker's lien or
counterclaim the Lenders may otherwise have, the Lenders shall be entitled, at
their option, to offset balances held by any of them at any of their offices
against any principal of or interest on the indebtedness described herein which
is not paid when due by reason of a failure by the Borrower to make any payment
when due to such Lender (regardless whether such balances are then due to the
Borrower), in which case such offsetting Lender shall promptly notify the
Borrower, provided that its failure to give such notice shall not affect the
validity thereof.
Section 2.14 Commitment Fee. Commencing on the first Business Day
following September 30, 1997 and on the first Business Day following the end of
each Fiscal Quarter thereafter (or if such day is not a Business Day, then on
the next succeeding Business Day) and on the Maturity Date, the Borrower shall
pay to the Agent on or before 1:00 P.M. (Nashville, Tennessee time) for
distribution upon receipt promptly thereafter to the Lenders based on their Pro
Rata Share a Commitment Fee equal to the average unused portion of the Revolving
Credit Loan (less the face amount of Letters of Credit outstanding during such
time period issued by Agent pursuant to Section 2.02 herein) for the Fiscal
Quarter (or portion thereof) then ended, multiplied by the Applicable Margin
then in effect relating to the Commitment Fee calculation; provided that the
payment made on the first Business Day following September 30, 1997 shall be for
a time period from the Closing Date to and including September 30, 1997. The
Commitment Fee shall be calculated based on a year of 360 days for the actual
number of days elapsed.
Section 2.15 Usury. The parties to this Agreement intend to conform
strictly to applicable usury laws as presently in effect. Accordingly, if the
transactions contemplated hereby would be usurious under applicable law
(including the laws of the United States of America and the State of Tennessee),
then, in that event, notwithstanding anything to the contrary in any Loan
Document or agreement executed in connection with the indebtedness described
herein, Borrower, Agent,
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and Lenders agree as follows: (i) the aggregate of all consideration that
constitutes interest under applicable law which is contracted for, charged, or
received under any of the Loan Documents or agreements, or otherwise in
connection with the indebtedness described herein, shall under no circumstance
exceed the maximum lawful rate of interest permitted by applicable law, and any
excess shall be credited on the indebtedness by the holder thereof (or, if the
indebtedness described herein shall have been paid in full, refunded to the
Borrower); and (ii) in the event that the maturity of the indebtedness described
herein is accelerated as a result of any Event of Default or otherwise, or in
the event of any required or permitted prepayment, then such consideration that
constitutes interest may never include more than the maximum amount of interest
permitted by applicable law, and excess interest, if any, for which this
Agreement provides, or otherwise, shall be cancelled automatically as of the
date of such acceleration or prepayment and, if previously paid, shall be
credited on the indebtedness described herein (or, if the indebtedness shall
have been paid in full, refunded to the Borrower).
Section 2.16 Interest Rate Not Ascertainable, Etc. In the event that
the Agent shall in good faith have determined that on any date for determining
LIBOR, by reason of any changes arising after the date of this Agreement
affecting the London interbank market or the Agent's position in such market,
adequate and fair means do not exist for ascertaining the applicable interest
rate on the basis provided for in the definition of LIBOR, then, and in any such
event, the Agent shall forthwith give notice (by telephone confirmed in writing)
to the Borrower of such determination and a summary of the basis for such
determination. At the expiration of any Interest Rate Period then in effect and
until the Agent notifies the Borrower that the circumstances giving rise to the
suspension described herein no longer exist (which notice shall be given
forthwith after such determination is made by the Agent), all Loans shall bear
interest at the Base Rate Option.
Section 2.17 Illegality. (a) In the event that the Agent shall have
determined at any time that the making or continuance of any Advance bearing
interest at the LIBOR Option has become unlawful by compliance by any of the
Lenders in good faith with any applicable law, governmental rule, regulation,
guideline or order (whether or not having the force of law and whether or not
failure to comply therewith would be unlawful), then, in any such event, the
Agent shall give prompt notice (by telephone confirmed in writing) to the
Borrower of such determination and a summary of the basis for such
determination.
(b) Upon the giving of the notice to the Borrower referred to in
Section 2.17(a), the Borrower's right to elect a LIBOR Option shall be
immediately suspended, and all Advances shall bear interest at the Base
Rate Option.
Section 2.18 Increased Costs. (a) If by reason of (i) after the date
hereof, the introduction of or any change (including, without limitation, any
change by way of imposition or increase of reserve requirements) in or in the
interpretation of any law or regulation, or (ii) the compliance with any
guideline or request from any central bank or other governmental authority or
quasi-governmental authority exercising control over banks or financial
institutions generally (whether or not having the force of law):
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(A) the Agent or any Lender shall be subject to any tax, duty or
other charge with respect to any Advances bearing interest at the LIBOR
Option (all such Advances being collectively referred to as the "LIBOR
Loans") or its obligation to make LIBOR Loans, or the basis of taxation
of payments to the Agent or any Lender of the principal of or interest
on its LIBOR Loans or its obligation to make LIBOR Loans shall have
changed (except for changes in the tax on the overall net income of the
Agent or such Lender, or similar taxes, pursuant to the laws of
jurisdictions with taxing authority over the Agent or such Lender); or
(B) any reserve (including, without limitation, any reserve
imposed by the Board of Governors of the Federal Reserve System),
special deposit or similar requirement against assets of, deposits with
or for the account of, or credit extended by, the Agent or any Lender
shall be imposed or deemed applicable or any other condition affecting
its LIBOR Loans or its obligation to make LIBOR Loans shall be imposed
on the Agent or any Lender or the London interbank market;
and as a result thereof there shall be any increase in the cost to the Agent or
any Lender of agreeing to make, fund or maintain LIBOR Loans (except to the
extent already included in the determination of the interest rate for LIBOR
Loans), or there shall be a reduction in the amount received or receivable by
the Agent or any Lender, then the Borrower shall from time to time, upon written
notice from and demand in good faith by the Agent on the Borrower, pay to the
Agent for the account of the Lenders (or any Lender) within five (5) Business
Days after the date of such notice and demand, additional amounts sufficient to
indemnify the Agent or such Lender against such increased cost; provided,
however, that nothing in this section shall require the Borrower to indemnify
the Agent or any Lender for withholding taxes.
(b) If the Agent shall in good faith determine that at any time,
because of the circumstances described in Section 2.18(a)(i) or (ii)
arising after the date of this Agreement affecting the Agent or any
Lender or the London interbank market or the Agent or any Lender's
position in such market, the calculations for the interest rates for
LIBOR Loans as determined by the Agent or any Lender will not
adequately and fairly reflect the cost to the Agent or any Lender of
funding such LIBOR Loans, the Agent shall forthwith give notice (by
telephone confirmed in writing) to the Borrower of such advice, and a
summary of the basis for such determination, and then, and in any such
event and until Agent notifies the Borrower that such circumstances no
longer exist (which notice shall be given forthwith after such
determination is made by the Agent):
(i) The Borrower's right to request, and the Agent's and
any Lender's obligation to make or permit portions of the
indebtedness described herein to remain outstanding past the last
day of the then current Interest Rate Period as LIBOR Loans shall
be immediately suspended; and
(ii) After the last day of the then-current Interest Rate
Period, all
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indebtedness described herein shall bear interest at the Base Rate
Option.
Section 2.19 Swing Line Commitment; Use of Proceeds.
(a) Availability. Subject to and upon the terms and conditions
herein set forth, the Swing Line Lender, from and after the Closing
Date through Business Day next preceding the Maturity Date, hereby
agrees to make available to the Borrower from time to time, Swing Line
Loans which shall not exceed in aggregate the principal amount at any
time outstanding under the Swing Line Commitment.
(b) Borrowing Procedure Under Swing Line Commitment. The Borrower
may borrow under the Swing Line Commitment from the date hereof until
the Maturity Date pursuant to the following procedure:
(i) the Borrower, acting through either its (A) Chief
Executive Officer, (B) Chief Financial Officer, or (C) any Person
designated in writing by its Chief Executive Officer to request
Advances under the Swing Line Loan (which designation shall be
delivered by the Borrower to the Agent), may request an Advance
under the Swing Line Loan no later than on or before 11:00 A.M.
(Nashville, Tennessee time) on the date an Advance under the Swing
Line Loan is desired; provided that any request for an Advance
under the Swing Line Loan received by Agent after 11:00 A.M.
(Nashville, Tennessee time) will be deemed given on the next
succeeding Business Day;
(ii) in addition to the procedure specified in subpart (i)
above, Advances under the Swing Line Loan may be automatically
funded by the Swing Line Lender pursuant to the procedure
specified in the Business Sweep System;
(iii) the Borrower authorizes the Agent to cause all Advances
to be deposited into the Funding Account; and
(iv) the giving of notice by the Borrower that it is
requesting an Advance under the Swing Line Loan and the acceptance
by the Borrower of Advances pursuant to such request or pursuant
to the procedure comprising the Business Sweep System shall
constitute a warranty by the Borrower that as of the date of the
request and as of the date the Advance: (A) no Event of Default or
Default Condition has occurred; and (B) the representations and
warranties contained in Article IV of this Agreement remain true,
correct, and accurate, except that the representation contained in
the first sentence of Section 4.13 herein shall not be deemed to
be a continuing representation.
(c) Use of Proceeds. The proceeds of Swing Line Loans shall be
used by the Borrower for acquisitions, capital expenditures, working
capital, and other general corporate purposes.
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(d) Refunding Swing Line Loans With Proceeds of Mandatory
Revolving Loans. If (i) any Swing Line Loan shall be outstanding upon
the occurrence of an Event of Default, or (ii) after giving effect to
any request for a Swing Line Loan or a Revolving Credit Loan, the
aggregate principal amount of the Revolving Credit Loans and Swing Line
Loans outstanding to the Swing Line Lender would exceed the Swing Line
Lender's Revolving Credit Loan Commitment, then each Lender hereby
agrees, upon request from the Swing Line Lender, to make a Revolving
Credit Loan (which shall be initially funded as a Base Rate Option) in
an amount equal to such Lender's Pro Rata Share of the outstanding
principal amount of the Swing Line Loans (the "Refunded Swing Line
Loans") outstanding on the date such notice is given. On or before
11:00 a.m. (Nashville, Tennessee time) on the first Business Day
following receipt by each Lender of a request to make Revolving Credit
Loans as provided in the preceding sentence, each such Lender (other
than the Swing Line Lender) shall deposit in an account specified by
the Agent to the Lenders from time to time the amount so requested in
same day funds, whereupon such funds shall be immediately delivered to
the Swing Line Lender (and not the Borrower) and applied to repay the
Refunded Swing Line Loans. On the day such Revolving Credit Loans are
made, the Swing Line Lender's pro rata share of the Refunded Swing Line
Loans shall be deemed to be paid with the proceeds of the Revolving
Credit Loans made by the Swing Line Lender. Upon the making of any
Revolving Credit Loan pursuant to this clause, the amount so funded
shall become due under such Lender's Revolving Credit Note and shall no
longer be owed under the Swing Line Note. Each Lender's obligation to
make the Revolving Credit Loans referred to in this clause shall be
absolute and unconditional and shall not be affected by any
circumstance, including, without limitation, (i) any setoff,
counterclaim, recoupment, defense or other right which such Lender may
have against the Swing Line Lender, the Borrower or any other Person
for any reason whatsoever; (ii) the occurrence or continuance of any
Default Condition or Event of Default; (iii) any adverse change in the
condition (financial or otherwise) of the Borrower or any other
Consolidated Entity; (iv) the acceleration or maturity of any Loans or
the termination of the Revolving Credit Loan Commitments after the
making of any Swing Line Loan; (v) any breach of this Agreement by the
Borrower or any other Lender; or (vi) any other circumstance, happening
or event whatsoever, whether or not similar to any of the foregoing.
Article III. Guarantors.
Section 3.01 Guarantors. The obligations of the Borrower under the Loan
Documents shall be guaranteed jointly and severally by each of the Guarantors
pursuant to the Guaranties.
Article IV. Representations and Warranties.
To induce Lenders to enter this Agreement and extend credit under this
Agreement, the Borrower covenants, represents and warrants to Agent and to
Lenders as follows:
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Section 4.01 Corporate Existence. The Borrower is a corporation duly
organized, legally existing, and in good standing under the laws of the State of
Tennessee, and it is duly qualified as a foreign corporation in all
jurisdictions in which the Property owned or the business transacted by it makes
such qualification necessary, except where failure to so qualify does not have a
material adverse effect on the Borrower, its respective business, or its
respective Properties. The Borrower will not commence doing business in any
state unless and until the Borrower shall have qualified to do business in such
state.
Section 4.02 Power and Authorization. The Borrower is duly authorized
and empowered to execute, deliver, and perform under all Loan Documents; the
board of directors of the Borrower has authorized the Borrower to execute and
perform under the Loan Documents; and all other corporate and shareholder action
on Borrower's part required for the due execution, delivery, and performance of
the Loan Documents has been duly and effectively taken.
Section 4.03 Binding Obligations. This Agreement is, and the Loan
Documents when executed and delivered in accordance with this Agreement will be,
legal, valid and binding upon and against the Borrower and its respective
Properties, and this Agreement and the Loan Documents are enforceable in
accordance with their respective terms, subject to no defense, counterclaim,
set-off, or objection of any kind.
Section 4.04 No Legal Bar or Resultant Lien. The Borrower's execution,
delivery and performance of the Loan Documents does not constitute a default
under, and will not violate any provisions of the articles of incorporation (or
charter), bylaws, articles of organization, and/or operating agreement of the
Borrower, any contract, agreement, law, regulation, order, injunction, judgment,
decree, or writ to which the Borrower is subject, or result in the creation or
imposition of any Lien upon any Properties of the Borrower.
Section 4.05 No Consent. The Borrower's execution, delivery, and
performance of the Loan Documents do not require the consent or approval of any
other Person.
Section 4.06 Financial Condition. The consolidated Financial Statements
which have been delivered to Agent and to Lenders for the Consolidated Entities
dated March 31, 1997 have been prepared in accordance with GAAP consistently
applied, and such consolidated Financial Statements present fairly the financial
condition of the Consolidated Entities as of the date or dates and for the
period or periods stated therein. No material adverse change in the financial
condition of the Consolidated Entities taken as a whole has occurred since the
date of such Financial Statements.
Section 4.07 Investments, Advances, and Guaranties. None of the
Consolidated Entities has made investments in, advances to, or guaranties of the
obligations of any Person, or committed or agreed to undertake any of these
actions or obligations, except as referred to or reflected in the Financial
Statements.
Section 4.08 Liabilities and Litigation. None of the Consolidated
Entities has any material
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liabilities (individually or in the aggregate) direct or contingent, except as
referred to or reflected in the Financial Statements. Except as disclosed in
writing to Agent by Borrower from time to time, there is no litigation, legal or
administrative proceeding, investigation, or other action of any nature pending
or, to the knowledge of the Borrower, threatened against or affecting any of the
Consolidated Entities that involves the possibility of any judgment or liability
not fully covered by insurance and that may materially and adversely affect the
business or the Properties of any of the Consolidated Entities or their
respective ability to carry on their business as now conducted.
Section 4.09 Taxes; Governmental Charges. Each of the Consolidated
Entities has filed or caused to be filed all tax returns and reports required to
be filed and has paid all taxes, assessments, fees, and other governmental
charges levied upon each of them or upon any of their respective Properties or
income, which are due and payable, including interest and penalties, except
where being contested in good faith by appropriate proceedings and subject to
maintenance of adequate reserves as required by GAAP by the Borrower or the
affected Consolidated Entity. Each of the Consolidated Entities has made all
required withholding deposits.
Section 4.10 No Default. None of the Consolidated Entities is in
default in any respect that materially and adversely affects its business,
Properties, operations, or condition, financial or otherwise, under any
indenture, mortgage, deed of trust, credit agreement, note, agreement, or other
instrument to which any of the Consolidated Entities is a party or by which any
of them or their Properties are bound. None of the Consolidated Entities is in
violation of its respective Articles of Incorporation (or Charter), Bylaws,
Articles of Organization, or operating agreements. No Default Conditions
hereunder have occurred or are continuing as of the date hereof.
Section 4.11 Compliance with Laws, Etc. None of the Consolidated
Entities is in violation of any law, judgment, decree, order, ordinance, or
governmental rule or regulation to which any of the Consolidated Entities, or
any of their respective Properties is subject in any respect that materially and
adversely affects their respective business, Properties, or financial condition.
None of the Consolidated Entities has failed to obtain any license, permit,
franchise, or other governmental authorization necessary to the ownership of any
of their respective Properties or to the conduct of their business, which if not
obtained would have or has a material adverse effect on any of the Consolidated
Entities. All improvements on the real estate owned by, leased to, or used by
the Consolidated Entities conform in all material respects to all applicable
state and local laws, zoning and building ordinances and health and safety
ordinances, and such real estate is zoned for the various purposes for which
such real estate and improvements thereon are presently being used.
Section 4.12 ERISA. Each of the Consolidated Entities is in compliance
in all material respects with the applicable provisions of ERISA. None of the
Consolidated Entities has incurred any "accumulated funding deficiency" within
the meaning of ERISA which is material to the financial condition of the
Consolidated Entities taken as a whole, and none of the Consolidated
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Entities has incurred any liability to PBGC in connection with any Plan which
liability is adverse and material to financial condition of the Consolidated
Entities taken as a whole.
Section 4.13 Consolidated Entities. Each of the Consolidated Entities
is duly organized, validly existing, and in good standing under the laws of the
jurisdiction of its incorporation or formation, has all requisite power and
authority, licenses, permits, and authorizations necessary to own Property and
to carry on its business as now being conducted, and is qualified to do business
in every jurisdiction required by law, except in those instances where the
failure to be so qualified or to obtain such licenses, permits, and
authorizations does not have a material adverse effect on such Consolidated
Entity.
Section 4.14 No Material Misstatements. No information, exhibit, or
report furnished or to be furnished by the Consolidated Entities to Agent or to
Lenders in connection with this Agreement, contain any material misstatement of
fact or fail to state any material fact, the omission of which would render the
statements therein materially false or misleading.
Section 4.15 Solvency. The Borrower is solvent. The Borrower is
generally paying its debts as they mature and the fair value of the Borrower's
assets substantially exceeds the sum total of its respective liabilities.
Section 4.16 Regulation U. None of the Consolidated Entities is engaged
principally, nor as one of its important activities, in the business of
extending credit for the purpose of purchasing or carrying margin stock within
the meaning of Regulation U of the Board of Governors of the Federal Reserve
System. No part of the indebtedness described herein shall be used at any time
to purchase or to carry margin stock within the meaning of Regulation U or to
extend credit to others for the purpose of purchasing or carrying any margin
stock if to do so would cause the Lenders to violate the provisions of
Regulation U. Each Consolidated Entity is in full compliance with, and has not
violated or allowed to be violated any provision of, any of the regulations G,
T, U or X, any laws and regulations to employee benefit plans, and/or applicable
environmental laws, rules, or regulations.
Section 4.17 Filings. The Borrower has filed all reports and statements
required to be filed with the Securities and Exchange Commission. As of their
respective dates, the reports and statements referred to above complied in all
material respects with all rules and regulations promulgated by the Securities
and Exchange Commission and did not contain any untrue statement of a material
fact or omit to state a material fact required to be stated therein or necessary
to make the statements therein, in light of the circumstances under which they
were made, not misleading.
Section 4.18 Title, Etc. Each of the Consolidated Entities has good
title to its respective Properties, free and clear of all Liens except those
permitted by Section 7.02 herein, and except for any defects in title which
would not have a material adverse effect on the business, Properties, financial
condition or operations of any of the Consolidated Entities or on the ability of
the Borrower to perform its respective obligations under this Agreement or any
of the other
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Loan Documents. The Consolidated Entities possess all trademarks, copyrights,
trade names, patents, licenses, and rights therein, free from burdensome
restrictions, which are adequate for the conduct of their respective business as
now conducted and presently proposed to be conducted, except for such that would
not have a material adverse effect on the business, Properties, financial
condition or operations of any of the Consolidated Entities or on the ability of
the Borrower to perform its respective obligations under this Agreement or any
of the other Loan Documents.
Section 4.19 Investment Company Act. None of the Consolidated Entities
is an "investment company" or a company "controlled" by an "investment company"
within the meaning of the Investment Company Act of 1940, as amended.
Section 4.20 Personal Holding Company. The Borrower is not a "personal
holding company" as defined in Section 542 of the Code.
Section 4.21 Burdensome Agreements. The Consolidated Entities are not
parties to any agreements that materially restrict their ability to conduct
their business as presently conducted or that may be expected to have a
material, adverse effect on the financial condition of any of the Consolidated
Entities.
Section 4.22 Insurance. Schedule 4.22 attached hereto depicts the type
and amount of insurance coverage maintained by each of the Consolidated Entities
with respect to their respective Properties and businesses. The Consolidated
Entities have paid all material amounts of insurance premiums now due and owing
with respect to such insurance policies and coverages, and such policies and
coverages are in full force and effect. The Consolidated Entities shall continue
to maintain substantially similar insurance coverage on their respective
Properties and businesses throughout the term of this Agreement.
Section 4.23 Subsidiaries. Schedule 4.23 sets forth all Subsidiaries
existing as of the Closing Date, the jurisdiction of their incorporation, and
the direct or indirect ownership interest of the Borrower therein.
Article V. Conditions Precedent.
Section 5.01 Initial Conditions. Lenders' obligation to extend credit
and to issue any Letter of Credit hereunder and the Swing Line Lender's
obligation to extend credit is subject to the Conditions Precedent that Agent
shall have received (or agreed in writing to waive or defer receipt of) all of
the following, each duly executed, dated and delivered as of the date hereof, in
form and substance satisfactory to Agent and its counsel:
(a) Notes and Loan Documents. This Agreement, the Revolving Credit
Notes, Swing Line Note, the Guaranties of each of the Guarantors, any
Letter of Credit Application Agreements, and other documents executed
in connection with this Agreement (the "Loan Documents").
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<PAGE> 34
(b) Resolutions. Certified copies of resolutions of the Board of
Directors of the corporate Borrower and each of the Guarantors
authorizing or ratifying the execution, delivery, and performance,
respectively, of Loan Documents to which each is a party.
(c) Certificate of Existence. A certificate of existence of the
Borrower and each of the Guarantors from the state or commonwealth in
which the Borrower and the Guarantors are incorporated or organized,
which certificate shall contain no facts objectionable to Agent.
(d) Consents, Etc. Certified copies of all documents evidencing
any necessary corporate action, consents, and governmental approvals
(if any) with respect to this Agreement and the Loan Documents.
(e) Incumbency Certificate. A certificate of the secretary or any
assistant secretary of the Borrower and each of the Guarantors
certifying: (i) the names of the officer or officers of the Borrower
and each of the Guarantors authorized to sign the respective Loan
Documents, together with a sample of the true signature of such
officer(s), and (ii) as to representations and warranties of, and
litigation involving, the Borrower and each of the Guarantors.
(f) Charter and By-Laws and Organizational Documents. A copy of
the Borrower's and the Guarantors' respective by-laws and charter or
articles of incorporation and/or articles of organization and operating
agreement, if applicable, (including all amendments thereto) certified
by the secretary or any assistant secretary of the Borrower and
Guarantors, as applicable, and in the case of the charter or articles
of incorporation, by the Secretary of State of the state or
commonwealth in which the Borrower and the Guarantors are incorporated,
as being true and complete copies of the current charter or articles of
incorporation and by-laws of each.
(g) Attorneys Opinion Letter. An opinion letter from counsel to
the Borrower and the Guarantors favorably opining as to such matters as
required by Agent.
(h) Payment of Fees, Etc. Payment of all outstanding fees and
expenses to Agent, and to any Lender, including all of Agent's
reasonable legal fees.
(i) No Default Certificate. Delivery of a certificate dated as of
the Closing Date executed by the Chief Executive Officer or the Chief
Financial Officer of the Borrower certifying to Agent and to Lenders
that no Default Condition or Event of Default exists.
(j) Other. Such other documents as Agent may reasonably request.
Section 5.02 All Borrowings. The Lenders' obligation to extend credit
pursuant to this
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Agreement and to issue any Letter of Credit and the Swing Line Lender's
obligation to extend credit pursuant to this Agreement is subject to the
following additional Conditions Precedent which shall be met each time an
Advance under the Revolving Credit Loan (including the request for the issuance
of a Letter of Credit) and Advance under the Swing Line Loan is made:
(a) The representations of the Borrower contained in Article IV
are true and correct as of the date of the requested Advance, with the
same effect as though made on the date additional funds are advanced;
(b) There has been no material adverse change in the Borrower's
consolidated financial condition or other condition since the date of
the last borrowing hereunder; (c) No Default Conditions and no Event of
Default have occurred and continue to exist; (d) No material litigation
(including, without limitation, derivative actions), arbitration
proceedings or governmental proceedings not disclosed in writing by the
Borrower to the Agent prior to the date of the execution and delivery
of this Agreement is pending or known to be threatened against any of
the Consolidated Entities and no material development not so disclosed
has occurred in any litigation, arbitration proceedings or governmental
proceedings so disclosed, which could reasonably be expected to
adversely affect the financial position or business of the Consolidated
Entities taken as a whole or impair the ability of the Borrower to
perform its respective obligations under this Agreement or any other
Loan Documents.
Article VI. Affirmative Covenants.
The Borrower covenants that, during the term of this Agreement
(including any extensions hereof) and until all indebtedness described herein
shall have been finally paid in full, unless the Required Lenders shall
otherwise first consent in writing, the Borrower shall:
Section 6.01 Financial Statements and Reports. Promptly furnish to
Agent (with sufficient copies for distribution by Agent to each Lender):
(a) Annual Reports. As soon as available, and in any event within
one hundred (100) days after the close of each Fiscal Year of the
Borrower, the audited consolidated Financial Statements of the
Consolidated Entities setting forth the audited consolidated balance
sheets of the Consolidated Entities as at the end of such year, and the
audited consolidated statements of income, statements of cash flows,
and statements of retained earnings, along with supporting notes to
such consolidated Financial Statements, of the Consolidated Entities
for such year, setting forth in each case in comparative form
(beginning when comparative data are available) the corresponding
figures for the preceding Fiscal Year accompanied by the report of the
Borrower's certified public accountants, and by an unaudited
consolidating balance sheet and unaudited consolidating statements of
income, and statements of retained earnings of the Borrower duly
certified by the Borrower's chief financial officer as being correct
reflections of the information used for the audited consolidated
Financial Statements. The audit opinion in respect of the consolidated
Financial Statements of the Consolidated Entities shall be the
unqualified opinion of one of the nationally recognized "Big Six" firms
of independent certified public
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accountants acceptable to Agent and shall be accompanied by such
certificates as reasonably required by Agent;
(b) Quarterly and Year-to-Date Reports. As soon as available and
in any event within fifty (50) days after the end of each Fiscal
Quarter, the consolidated balance sheets of the Borrower as of the end
of such Fiscal Quarter, and the consolidated and consolidating balance
sheets and consolidating statements of income and statements of cash
flow of the Borrower for such quarter and for a period from the
beginning of the Fiscal Year to the close of such Fiscal Quarter, all
certified by the chief financial officer or chief accounting officer of
the Borrower as being true and correct to the best of his or her
knowledge;
(c) Compliance Reports. As soon as available and in any event
within one hundred days (100) after the end of a Fiscal Year or within
fifty (50) days after the end of each Fiscal Quarter that is not the
end of a Fiscal Year, the calculations with supporting details by the
Borrower of the financial covenants contained in Article VII A herein,
all in a format similar to that described on Exhibit G hereto, along
with a certificate of compliance certified by the chief executive
officer or chief financial officer of the Borrower stating that such
officer has no knowledge of any Event of Default or Default Condition,
or if such officer has obtained such knowledge, disclosing the nature,
details, and period of existence of such event;
(d) SEC Filings and Public Information. Within three (3) days
after such are filed with the Securities and Exchange Commission,
copies of all filings made (including Borrower's 8-K reports) except
for the Borrower's 10-Q and 10-K reports which shall be due within ten
(10) days after such are filed; and
(e) Other Information. Promptly upon its becoming available, such
other material information, including, but not limited to, material
violations of environmental laws or regulations and important matters
relating to funding of employee benefit plans, about the Consolidated
Entities as a whole or the indebtedness described herein, or such other
information that any Lender through the Agent may reasonably request
from time to time.
All such balance sheets and other Financial Statements referred to in Sections
6.01(a) and (b) hereof shall conform to GAAP.
Section 6.02 Annual Certificates of Compliance. Concurrently with the
furnishing of the annual audited consolidated Financial Statements pursuant to
Section 6.01(a) hereof, furnish or cause to be furnished to Agent (with
sufficient copies for distribution to each Lender) a certificate of compliance
in a form reasonably satisfactory to Agent prepared by one of the nationally
recognized "Big Six" accounting firms stating that in making the examination
necessary for their audit they have obtained no knowledge of any Default
Condition or Event of Default, or event which, after notice or lapse of time (or
both), would constitute a Default Condition or Event of
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Default or, if they have obtained such knowledge, disclosing the nature,
details, and period of existence of such event.
Section 6.03 Taxes and Other Liens. Pay and discharge promptly all
taxes, assessments, and governmental charges or levies imposed upon any of the
Consolidated Entities or upon any of their respective income or Property as well
as all claims of any kind (including claims for labor, materials, supplies, and
rent) which, if unpaid, might become a Lien upon any Consolidated Entity's
Property; provided, however, that none of the Consolidated Entities shall be
required to pay any such tax, assessment, charge, levy, or claim if the amount,
applicability, or validity thereof shall currently be contested in good faith by
appropriate proceedings diligently conducted and if such of the Consolidated
Entities, as applicable, shall establish reserves therefor adequate under GAAP.
Section 6.04 Maintenance.
(a) Except as otherwise provided herein, (i) continue to engage in
business of the same general type as conducted on the Closing Date by
the Consolidated Entities, taken as a whole, and (ii) maintain and
cause each Consolidated Entity to maintain its corporate, partnership,
joint venture, limited partnership, and/or limited liability company
existence, name, rights, and franchises;
(b) observe and comply and cause each Consolidated Entity to
observe and comply (to the extent necessary so that any failure will
not materially and adversely affect the business or Property of any of
the Consolidated Entities) with all applicable laws, environmental laws
and regulations, statutes, codes, acts, ordinances, orders, judgments,
decrees, injunctions, rules, regulations, certificates, franchises,
permits, licenses, authorizations, and requirements of all federal,
state, county, municipal, and other governments;
(c) maintain and cause each Consolidated Entity to maintain its
Property (and any Property leased by or consigned to it or held under
title retention or conditional sales contracts) in good and workable
condition at all times and make all repairs, replacements, additions,
and improvements to its Property reasonably necessary and proper to
ensure that the business carried on in connection with its Property may
be conducted properly and efficiently at all times; and
(d) maintain and cause each Consolidated Entity to maintain
ownership of, and all presently existing benefits and rights arising
from, their respective patents, trademarks, franchises, and other
intellectual property.
Section 6.05 Further Assurances. Promptly cure any defects in the
creation, issuance, and delivery of the Loan Documents. The Borrower at its
expense promptly will execute and deliver to Agent upon request all such other
and further documents, agreements, and instruments in compliance with or
accomplishment of the covenants and agreements of the Borrower in the Loan
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Documents, or to correct any omissions in the Loan Documents, all as may be
reasonably necessary or appropriate in connection therewith.
Section 6.06 Performance of Obligations.
(a) Pay the indebtedness described herein according to the terms
of the Loan Documents; and
(b) do and perform, and cause to be done and to be performed,
every act and discharge all of the obligations provided to be performed
and discharged by the Borrower under the Loan Documents, at the time or
times and in the manner specified.
Section 6.07 Insurance. Maintain and continue to maintain, and cause
each Consolidated Entity to maintain and continue to maintain, with financially
sound and reputable insurers, insurance satisfactory in type, coverage and
amount to Agent against such liabilities, casualties, risks, and contingencies
and in such types and amounts as is customary in the case of corporations
engaged in the same or similar businesses and similarly situated. Upon request
of any Lender, through the Agent, the Borrower will furnish or cause to be
furnished to Agent from time to time a summary of the insurance coverage of the
Consolidated Entities in form and substance satisfactory to Agent and if
requested will furnish each Lender copies of the applicable policies.
Section 6.08 Accounts and Records. Keep books of record and account, in
which full, true, and correct entries will be made of all dealings or
transactions in accordance with GAAP, except only for changes in accounting
principles or practices with which the Borrower's certified public accountants
concur and which changes have been reported to Agent in writing and with an
explanation thereof.
Section 6.09 Right of Inspection. Permit and cause each Consolidated
Entity to permit any officer, employee, or agent of Agent or any Lender as may
be designated by Agent to visit and inspect any of the Property of any of the
Consolidated Entities, to examine the books of record and accounts of any of the
Consolidated Entities, and to discuss the affairs, finances, and accounts of any
of the Consolidated Entities with the respective officers, accountants, and
auditors of any of the Consolidated Entities, all at such reasonable times and
as often as Agent may reasonably desire.
Section 6.10 Notice of Certain Events. Promptly notify Agent if the
Borrower learns of the occurrence of (i) any event that constitutes a Default
Condition or Event of Default together with a detailed statement by a
responsible officer of the steps being taken as a result thereof; or (ii) the
receipt of any notice from, or the taking of any other action by, the holder of
any promissory note, debenture, or other evidence of Debt of any of the
Consolidated Entities with respect to a claimed default, together with a
detailed statement by a responsible officer of the respective Consolidated
Entity specifying the notice given or other action taken by such holder and the
nature of the claimed default and what action the affected Consolidated Entity
is taking or
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proposes to take with respect thereto; or (iii) any legal, judicial, or
regulatory proceedings, including, but not limited to, environmental matters,
affecting any of the Consolidated Entities in which the amount involved is
material and is not adequately covered by insurance or which, if adversely
determined, would have a material and adverse effect on the business or the
financial condition of the Consolidated Entities taken as a whole; or (iv) any
dispute between any of the Consolidated Entities and any governmental or
regulatory authority or any other Person, entity, or agency which, if adversely
determined, might interfere with the normal business operations of the
Consolidated Entities taken as a whole; or (v) any material adverse changes,
either individually or in the aggregate, in the assets, liabilities, financial
condition, business, operations, affairs, or circumstances of any of the
Consolidated Entities from those reflected in the Financial Statements or from
the facts warranted or represented in any Loan Document.
Section 6.11 ERISA Information and Compliance. Comply and cause each of
the Consolidated Entities to comply with ERISA and all other applicable laws
governing any pension or profit sharing plan or arrangement to which any of the
Consolidated Entities is a party, provided that no Event of Default or Default
Condition shall be deemed to have occurred unless the failure to comply with
ERISA or such other laws governing any pension or profit sharing plan or
arrangement has a material, adverse impact on the financial condition of the
Consolidated Entities taken as a whole. The Borrower shall provide and shall
cause each of the Consolidated Entities to provide Agent with notice of any
"reportable event" or "prohibited transaction" or the imposition of a
"withdrawal liability" within the meaning of ERISA.
Section 6.12 Management. Give immediate notice to Agent of any material
change in the composition of Persons comprising the senior management or the
executive committee of the Borrower.
Section 6.13 Additional Guaranties. At the same time that any of the
Consolidated Entities acquires any Person that is or becomes a Consolidated
Entity, the Borrower shall cause such new Consolidated Entity to execute a
Guaranty in the form of the Guaranties executed by the Guarantors, and to
deliver to Agent such Guaranties and other documents, instruments and items with
respect thereto that are similar to those documents, instruments and items
delivered by the Guarantors with regard to their Guaranties. Additionally, in
such case upon Agent's request, the Borrower shall cause the Agent to receive a
counsel's opinion letter issued by counsel acceptable to Agent regarding such
matters involving such Consolidated Entity as may be required by Agent.
Immediately upon any Person becoming a Consolidated Entity, the Borrower shall
give notice thereof to Agent. The Borrower shall pay the costs and expenses,
including without limitation, the Agent's legal fees and expenses, in connection
with the preparation, negotiation, execution and review of the Guaranty of such
Consolidated Entity and the other items described in this Section.
The provisions of this Section 6.13 shall not apply to Future
University, Inc. in the event that it becomes a Consolidated Entity until and
unless: (i) the Borrower or any other Consolidated Entity acquires one hundred
percent (100%) ownership of the common stock of Future University, Inc., or (ii)
any Consolidated Entity makes loans or advances to Future University,
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Inc.
Section 6.14 Equity Proceeds. Give to Agent five (5) Business Days
prior notice of any proposed transaction intended to raise Equity Proceeds.
Article VII. Negative Covenants.
The Borrower covenants and agrees that, during the term of this
Agreement and any extensions hereof and until the indebtedness described herein
has been paid and satisfied in full, unless Required Lenders shall otherwise
first consent in writing, the Borrower will not, either directly or indirectly,
and will not allow any of the Consolidated Entities to:
Section 7.01 Debts, Guarantees, and Other Obligations. Except as
otherwise set forth in this Agreement, incur, create, assume, or in any manner
become or be liable with respect to any Debt; provided that subject to all other
provisions of this Article VII, the foregoing prohibitions shall not apply to:
(a) any indebtedness owed to Lenders and to the Swing Line Lender
as set forth in this Agreement;
(b) endorsements of negotiable or similar instruments for
collection or deposit in the ordinary course of business;
(c) trade payables, accruals, deferrals or similar obligations and
liabilities (other than for borrowed money or purchase money
obligations) from time to time incurred or accrued in the ordinary
course of business not to exceed amounts historically and customarily
incurred or accrued by any Consolidated Entity;
(d) taxes, assessments, or other governmental charges that are not
yet assessed or are being contested in good faith by appropriate action
promptly initiated and diligently conducted, if the appropriate
Consolidated Entity shall have made any reserve therefor required by
GAAP;
(e) indebtedness (direct or contingent) to others, excluding
Seller Notes, that does not exceed $5,000,000 in the aggregate for all
Consolidated Entities;
(f) indebtedness owed or guaranties provided by the Guarantors to
the Borrower, or indebtedness owed or guaranties provided by the
Guarantors to each other, or indebtedness owed or guaranties provided
by the Borrower to the Guarantors; and
(g) Seller Notes not to exceed $20,000,000 in the aggregate
outstanding principal balance at any one time.
Section 7.02 Liens. Create, incur, assume, or permit to exist any Lien
on any of their
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respective Property (real, personal, or mixed now owned or hereafter acquired)
except, subject to all other provisions of this Article, the foregoing
restrictions shall not apply to:
(a) Liens securing the payment of any of the indebtedness
described in this Agreement; and
(b) Permitted Encumbrances.
Section 7.03 Investments, Loans, and Advances. Make or permit to remain
outstanding any loans or advances to or investments in any Person, except that,
subject to all other provisions of this Article, the foregoing restriction shall
not apply to:
(a) investments in direct obligations of the United States of
America or any agency thereof having maturities of less than one year;
(b) investments in direct obligations of any political
subdivisions of the United States of America or any State of the United
States of America having a senior unsecured senior debt rating from
Standard and Poor's Corporation or Moody's Investors Services, Inc. of
AA or better and having maturities of less than one year;
(c) investments in commercial paper of the highest credit rating
of Standard and Poor's Corporation or Moody's Investors Services, Inc.,
or upon the discontinuance or either or both of such services, any
other nationally recognized rating service,
(d) investments in bankers' acceptances and certificates of
deposit having maturities of less than one year, or repurchase
agreements issued by commercial banks in the United States of America
having capital and surplus in excess of $50,000,000, or commercial
paper of the highest quality;
(e) investments in money market funds so long as the fund is rated
or so long the fund is a fund operated by a commercial bank of the type
specified in (d) above;
(f) tax exempt cash equivalents secured by a standby letter of
credit (issued by a bank with single "A" or better rating by Standard &
Poor's Corporation or A2 or better rating by Moody's Investors
Services, Inc.) or by credit insurance sufficient to obtain a "AAA"
rating by Standard & Poor's Corporation or Aaa by Moody Investors
Services, Inc. or having an underlying credit rating of single "A" or
better rating by Standard & Poor's Corporation or A2 or better rating
by Moody's Investors Services, Inc.;
(g) advances to officers and employees of Borrower made in the
ordinary course of business and not in excess of amounts customarily
and historically loaned to such officers and employees not to exceed
$100,000 in the aggregate;
(h) the endorsement of negotiable or similar instruments in the
ordinary course
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of business;
(i) investments in stock of any existing Subsidiary; and
(j) investments in the form of stock purchases incurred in
Acquisitions permitted by Section 7.12 herein.
Section 7.04 Distributions, and Redemptions; Issuance of Stock. (a)
Purchase, redeem, or otherwise acquire for value any of its stock now or
hereafter outstanding, provided that the Borrower may be permitted to redeem up
to 2% of its outstanding Voting Stock in any Fiscal Year, (b) return any capital
to its stockholders, or (c) make any distribution of its assets to its
stockholders as such; provided that these restrictions shall not be deemed to
restrict the Borrower's ability to issue dividends in the ordinary course of
business so long as no Event of Default or Default Condition exists or would
exist immediately after such dividends have been made.
Section 7.05 Sales and Leasebacks. Enter into any arrangement, directly
or indirectly, with any Person by which any Consolidated Entity shall sell or
transfer any material portion of its Property, whether now owned or hereafter
acquired, and by which any Consolidated Entity shall then or thereafter rent or
lease as lessee such Property or any part thereof or other Property that such
Consolidated Entity intends to use for substantially the same purpose or
purposes as the Property sold or transferred.
Section 7.06 Nature of Business. Suffer or permit any material change
to be made in the character of the business of any of the Consolidated Entities,
as carried on as of the date hereof.
Section 7.07 Mergers, Consolidations, Etc. Merge, consolidate or
reorganize with or into, or sell, assign, lease, transfer, or otherwise dispose
of (whether in one transaction or in a series of transactions) all or
substantially all of its Property (whether now owned or hereafter acquired) to,
or become an Affiliate of, any Person; provided, however, so long as no Event of
Default and no Default Condition has occurred or will occur immediately
thereafter as a result of such: (a) any Consolidated Entity other than the
Borrower may transfer assets to the Borrower or to any other Consolidated
Entity; (b) the Borrower may merge, reorganize or consolidate with any Person as
long as, after giving effect to any such merger, reorganization or consolidation
the Borrower is the surviving corporation; and (c) excluding the Borrower, any
other Consolidated Entity may merge into another Consolidated Entity.
Section 7.08 Proceeds of Loan. Permit the proceeds of the Advances to
be used for any purpose other than those permitted under this Agreement.
Section 7.09 Disposition of Assets. Dispose of any of the assets of any
of the Consolidated Entities other than in the ordinary course of such of the
Consolidated Entities' (as applicable) present business upon terms standard in
such of the Consolidated Entities' (as applicable) industry; provided that this
restriction shall not prohibit any of the Consolidated
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Entities from disposing of any portion of its assets if such disposition does
not have a material, adverse effect on the financial or other condition of the
Consolidated Entities taken as a whole, and provided that this restriction shall
not prohibit any Consolidated Entity from transferring its assets to the
Borrower or to another Consolidated Entity (excluding Future University, Inc.
until such time as Future University, Inc. becomes a Guarantor).
Section 7.10 Limitation on Business. Engage in any business other than
the business in which the Consolidated Entities are currently primarily engaged
as a whole as of this Agreement, nor transact business between Borrower and/or
any other Consolidated Entity except on an arm's length basis for fair
consideration.
Section 7.11 Inconsistent Agreements. Enter into any agreement
containing any provision which would be violated or breached by the performance
by the Borrower of its obligations.
Section 7.12 Acquisitions. Make any Acquisition in which: (A) less than
fifty percent (50%) of the consideration paid or given in such Acquisition
consists of stock, and (B) the cash paid exceeds $5,000,000.
Section 7.13 Advances to Future University, Inc. Make any loans or
advances of monies funded under the Revolving Credit Loans to Future University,
Inc. until Future University, Inc. becomes a Guarantor.
Article VII.A. Financial Covenants.
The Borrower covenants and agrees that, during the term of this
Agreement and any extensions hereof and until the indebtedness described herein
has been paid and satisfied in full, unless Majority Lenders shall otherwise
first consent in writing, the Borrower will not:
Section 7A.01 Financial Covenants.
(a) Minimum Net Worth. Permit the Consolidated Net Worth to be
less than a minimum amount equal to: (i) $91,000,000, plus (ii) on a
quarterly basis for each Fiscal Quarter beginning with the Second
Fiscal Quarter for the 1997 Fiscal Year, a cumulative amount equal to
75% of quarterly Consolidated Net Income, plus (iii) 100% of the net
proceeds of any Equity Proceeds raised subsequent to Closing Date. For
the purpose of this calculation, Consolidated Net Income shall never be
less than 0.
(b) Senior Funded Debt to EBIA. Permit the ratio of Senior Funded
Debt of the Consolidated Entities divided by EBIA to exceed a ratio of
2.5 to 1.0 calculated as of the end of each Fiscal Quarter. For the
purpose of this calculation, the number attributed to EBIA shall be
determined by using the two most profitable quarterly EBIA calculations
for the preceding three Fiscal Quarters multiplied by two (2).
(c) Total Funded Debt to EBIA. Permit the ratio of Total Funded
Debt of the
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Consolidated Entities divided by EBIA to exceed a ratio of 3.0 to 1.0
calculated as of the end of each Fiscal Quarter. For the purpose of
this calculation, the number attributed to EBIA shall be determined by
using the two most profitable quarterly EBIA calculations for the
preceding three Fiscal Quarters multiplied by two (2).
(d) Adjusted Total Funded Debt to Capitalization. Permit the ratio
of Adjusted Total Funded Debt to Capitalization to exceed .40 to 1.0 at
any time, all as determined at the end of each Fiscal Quarter.
(e) Fixed Charge Coverage Ratio. Permit the ratio of EBIA to Fixed
Charges, as calculated at the end of each Fiscal Quarter on a trailing
four quarter basis, to be less than 2.5 to 1.0 at any time.
Article VIII. Events of Default.
Section 8.01 Events of Default. Any of the following events shall be
considered an Event of Default as those terms are used in this Agreement:
(a) Principal and Interest Payments. The Borrower fails to make
payment by of principal when due in accordance with the terms of the
Loan Documents or the Borrower fails to pay within five (5) days when
due any payment of interest or any other amount when due in accordance
with the terms of the Loan Documents; or
(b) Representations and Warranties. Any representation or warranty
made by the Borrower in any Loan Document is incorrect in any material
respect as of the date thereof; or any representation, statement
(including Financial Statements), certificate, or data furnished or
made by the Borrower in any Loan Document with respect to any
indebtedness is untrue in any material respect, as of the date as of
which the facts therein set forth were stated or certified; or
(c) Obligations. The Borrower fails to perform any of its
respective obligations as required by and contained in any Loan
Document or a breach or violation occurs under any of the promises,
agreements, or covenants contained herein and such breach or violation
is not cured within thirty (30) days after delivery of written notice
by Agent to Borrower, provided and except that such thirty (30) day
cure period shall not apply and an Event of Default shall be deemed to
exist without opportunity to cure upon the breach or violation of any
of the following articles and sections of this Agreement: Section
6.04(a)(i), 6.10, 6.11, 6.12, 6.13, 6.14, Article VII, and Article
VII.A; or
(d) Involuntary Bankruptcy or Receivership Proceedings . A
receiver, custodian, liquidator, or trustee of the Borrower or any of
the Guarantors, or of any of their respective Property, is appointed by
the order or decree of any court or agency or supervisory authority
having jurisdiction; or the Borrower or any of the Guarantors is
adjudicated bankrupt or insolvent; or any of the Property of the
Borrower or any of the
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Guarantors is sequestered by court order; or a petition is filed
against the Borrower or any of the Guarantors under any state or
federal bankruptcy, reorganization, debt arrangement, insolvency,
readjustment of debt, dissolution, liquidation, or receivership law of
any jurisdiction, whether now or hereafter in effect, which petition is
not dismissed within sixty (60) days after it has been filed; or
(e) Voluntary Petitions. The Borrower or any of the Guarantors
takes affirmative steps to prepare to file, or the Borrower or any of
the Guarantors files a petition in voluntary bankruptcy or to seek
relief under any provision of any bankruptcy, reorganization, debt
arrangement, insolvency, readjustment of debt, dissolution, or
liquidation law of any jurisdiction, whether now or hereafter in
effect, or consents to the filing of any petition against it under any
such law; or
(f) Assignments for Benefit of Creditors, Etc. The Borrower or any
of the Guarantors makes an assignment for the benefit of its creditors,
or admits in writing its inability to pay its debts generally as they
become due, or consents to the appointment of a receiver, trustee, or
liquidator of the Borrower or any of the Guarantors or of all or any
part of their respective Properties; or
(g) Undischarged Judgments. If a final, non-appealable judgment
for the payment of money in excess of $500,000 is rendered by any
court or other governmental authority against the Borrower or any of
the Guarantors which is not fully covered by valid collectible
insurance, or if any judgment by any court or governmental authority is
entered against the Borrower, any of the Guarantors, or any Property of
the Borrower or the Guarantors, which judgment has a material adverse
affect on the Borrower or any of the Guarantors and which judgment is
not discharged, stayed, or deferred for sixty (60) days after date of
entry; or
(h) Violation of Laws, Etc. The Borrower or any of the Guarantors
violates or otherwise fails to comply with any law, rule, regulation,
decree, order, or judgment under the laws of the United States of
America, or of any state or jurisdiction thereof the effect of which
has a material and adverse impact on the Borrower or any of the
Guarantors; or Borrower or any of the Guarantors fails or refuses at
any and all times to remain current in its or their financial reporting
requirements pursuant to such laws, rules, and regulations or pursuant
to the rules and regulations of any exchange upon which the shares of
the Borrower or any Guarantors are traded; or
(i) Execution of Guaranty by a Consolidated Entity. Should any
Consolidated Entity not execute and deliver to Agent the guaranty and
other items required by Section 6.13 herein; or
(j) ERISA Liability. The Borrower or any of the Guarantors incurs
any liability under ERISA that has a material adverse effect on the
financial condition or other condition of the Borrower or any of the
Guarantors; or
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(k) Change of Ownership. More than thirty percent (30%) of the
outstanding common stock of Borrower becomes owned by any Control Group
who does now own more than thirty percent (30%) of the outstanding
Voting Stock; or
(l) Executive Committee. A significant change occurs in the
membership of Borrower's executive committee; or
(m) Default to Other Persons. A default, breach, or event of
default occurs under any promissory note for an amount in excess of
$500,000 issued by Borrower or any Guarantor to any Person or a
default, breach, or event of default occurs under any agreement between
Borrower or any Guarantor and any Person involving Debt of $500,000 or
more, the effect of which is to permit or cause the Person to
accelerate such indebtedness and to demand payment thereof, provided,
that an Event of Default shall not be deemed to have occurred if the
Borrower or any Guarantor in good faith is contesting by appropriate
proceedings the demand and acceleration and if the Borrower or
Guarantor, as applicable, has established an appeal bond (if
appropriate), cash bonds, sureties, bonds, or cash reserves in such
amounts as reasonably required by Agent or in the case of an appeal
bond, as required by law.
Section 8.02 Remedies. Upon the happening of any Event of Default set
forth above, with the exception of those events set forth in Section 8.01(d) and
8.01(e): (i) Agent, acting pursuant to Lenders' direction as set forth in
Article XII, may declare the entire principal amount of all indebtedness then
outstanding, including interest accrued thereon, to be immediately due and
payable without presentment, demand, protest, notice of protest, or dishonor or
other notice of default of any kind, all of which the Borrower hereby expressly
waives, (ii) Agent, acting pursuant to Lenders' direction as set forth in
Article XII may terminate and cancel all obligations of the Lenders (including
the Swing Line Lender) under this Agreement unless and until the Lenders
(including the Swing Line Lender) shall reinstate such obligations in writing;
or (iii) Agent, acting pursuant to Lenders' direction as set forth in Article
XII, may bring an action to protect or enforce the rights of the Agent and the
Lenders (including the Swing Line Lender) under the Loan Documents or seek to
collect the indebtedness described herein by any lawful means.
Upon the happening of any event specified in Section 8.01(d) and
Section 8.01(e) above: (i) all indebtedness described herein, including all
principal, accrued interest, and other charges or monies due in connection
therewith shall be immediately and automatically due and payable in full,
without presentment, demand, protest, or dishonor or other notice of any kind,
all of which the Borrower hereby expressly waives, (ii) all obligations of
Lenders (including the Swing Line Lender) under this Agreement shall immediately
cease and terminate unless and until each of the Lenders (including the Swing
Line Lender) shall reinstate such obligations in writing; or (iii) Agent, acting
pursuant to Lenders' direction as set forth in Article XII, may bring an action
to protect or enforce their rights under the Loan Documents or seek to collect
the indebtedness described herein and/or enforce the obligations evidenced
herein by any lawful means.
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Section 8.03 Default Conditions. Any of the following events shall be
considered a Default Condition:
(a) The Borrower suffers a material adverse change in its
financial condition; or
(b) Should any event occur that except for the giving of notice
and/or the passage of time would be an Event of Default.
Upon the occurrence of a Default Condition or at any time thereafter
until such Default Condition no longer exists, the Borrower agrees that subject
to Article XII, the Agent and the Lenders (including the Swing Line Lender), in
their sole discretion, and without notice to the Borrower, may immediately cease
making any Advances, all without liability whatsoever to the Borrower or any
other Person whomsoever, all of which is expressly waived hereby. The Borrower
releases the Lenders (including the Swing Line Lender) and the Agent from any
and all liability whatsoever, whether direct, indirect, or consequential, and
whether seen or unforeseen, resulting from or arising out of or in connection
with Lenders' determination to cease making Advances pursuant to this Section.
Article IX. General Provisions.
Section 9.01 Notices. All communications under or in connection with
this Agreement or any of the other Loan Documents shall be in writing and shall
be mailed by first class certified mail, postage prepaid, or otherwise sent by
telex, telegram, telecopy, or other similar form of rapid transmission confirmed
by mailing (in the manner stated above) a written confirmation at substantially
the same time as such rapid transmission, or personally delivered to an officer
of the receiving party. All such communications shall be mailed, sent, or
delivered as follows:
(a) if to the Borrower, to its address shown below, or to such
other address as Borrower may have furnished to Agent in writing:
Mr. Alan R. Sielbeck
CEO and Chairman of the Board
Service Experts, Inc.
111 Westwood Place
Suite 420
Nashville, Tennessee 37027
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(b) if to Agent, to its address shown below, or to such other
address or to such individual's or department's attention as it may
have furnished the Borrower in writing:
SunTrust Bank, Nashville, N.A., Agent
201 Fourth Avenue, North
Nashville, Tennessee 37219
Attention: Allen Oakley
(c) if to Lenders, to the address of each of the Lenders as shown
beside the respective signature of each of the Lenders.
Any communication so addressed and mailed by certified mail shall be deemed to
be given when so mailed.
Section 9.02 Invalidity. In the event that any one or more of the
provisions contained in any Loan Document for any reason shall be held invalid,
illegal, or unenforceable in any respect, such invalidity, illegality, or
unenforceability shall not affect any other provision of any Loan Document.
Section 9.03 Survival of Agreements. All representations and warranties
of the Borrower in this Agreement and all covenants and agreements in this
Agreement not fully performed before the Closing Date of this Agreement shall
survive the Closing Date.
Section 9.04 Successors and Assigns. The Borrower may not assign its
respective rights or delegate duties under this Agreement or any other Loan
Document. All covenants and agreements contained by or on behalf of the Borrower
in any Loan Document shall bind the Borrower's successors and assigns and shall
inure to the benefit of the Agent, each Lender, the Swing Line Lender, and their
respective successors and assigns.
Section 9.05 Waivers. Pursuant to T.C.A. Section 47-50-112, no action
or course of dealing on the part of Agent or any Lender or the Swing Line
Lender, their respective officers, employees, consultants, or agents, nor any
failure or delay by Agent or any Lender or the Swing Line Lender with respect to
exercising any right, power, or privilege of Agent or any Lender or the Swing
Line Lender under any of the Loan Documents shall operate as a waiver thereof,
except as otherwise provided in this Agreement. Acting pursuant to the
requirements of Article XII herein, Agent may from time to time waive any
requirement hereof, including any of the Conditions Precedent; however no waiver
shall be effective unless in writing and signed by the Agent. The execution by
Agent of any waiver shall not obligate Agent or any Lender or the Swing Line
Lender to grant any further, similar, or other waivers.
Section 9.06 Cumulative Rights. Rights and remedies of Agent or any
Lender or the Swing Line Lender under each Loan Document shall be cumulative,
and the exercise or partial exercise of any such right or remedy shall not
preclude the exercise of any other right or remedy.
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Section 9.07 Governing Law. This Agreement and the other Loan Documents
constitute a contract made under and shall be construed in accordance with and
governed by the laws of the State of Tennessee.
Section 9.08 Time of Essence. Time is of the essence with regard to
each and every provision of this Agreement.
Section 9.09 Costs, Expenses, and Taxes. The Borrower agrees to pay on
demand all reasonable out-of-pocket costs and expenses of Agent (including the
reasonable fees and out-of-pocket expenses of counsel for Agent) incurred by
Agent in connection with the preparation, execution, delivery, administration,
enforcement, or protection of Agent's or any Lender's or Swing Line Lender's
rights under the Loan Documents (including any suit for declaratory judgment or
interpretation of the provisions hereof).
Section 9.10 Entire Agreement; No Oral Representations Limiting
Enforcement. This Agreement represents the entire agreement between the parties
hereto except for such other agreements set forth in the Loan Documents, and any
and all oral statements heretofore made regarding the matters set forth herein
are merged herein.
Section 9.11 Amendments. The parties hereto agree that this Agreement
may not be modified or amended except in writing signed by the parties hereto.
Section 9.12 Distribution of Information. The Borrower hereby
authorizes the Agent and each Lender (including the Swing Line Lender), as the
Agent and each Lender (including the Swing Line Lender) may elect in its sole
discretion, to discuss with and furnish to any Affiliate, to any government or
self-regulatory agency with jurisdiction over the Agent and each Lender
(including the Swing Line Lender), or to any participant or prospective
participant, all financial statements, audit reports and other information
pertaining to the Borrower, the Guarantors, and/or the Consolidated Entities,
whether such information was provided by the Borrower or prepared or obtained by
the Agent or third parties. Neither the Agent nor any of its employees,
officers, directors or agents make any representation or warranty regarding any
audit reports or other analyses of the Borrower which the Agent may elect to
distribute, whether such information was provided by the Borrower or prepared or
obtained by the Agent or third parties, nor shall the Agent or any of its
employees, officers, directors or agents be liable to any Person receiving a
copy of such reports or analyses for any inaccuracy or omission contained in
such reports or analyses or relating thereto.
Article X. Jury Waiver.
Section 10.01 Jury Waiver. IF ANY ACTION OR PROCEEDING INVOLVING THIS
LOAN AGREEMENT OR ANY LOAN DOCUMENT IS COMMENCED IN ANY COURT OF COMPETENT
JURISDICTION, THE BORROWER, AGENT, AND EACH LENDER (INCLUDING THE SWING LINE
LENDER) HEREBY WAIVE THEIR RIGHTS TO DEMAND A JURY TRIAL.
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Article XI. Hazardous Substances.
Section 11.01 Representation and Indemnity Regarding Hazardous
Substances.
(a) The Borrower has no knowledge of any spills, releases,
discharges, or disposal of Hazardous Substances that have occurred or
are presently occurring on or onto any of its Property or on any of the
Property of any Consolidated Entity; or of any spills or disposal of
Hazardous Substances that have occurred or are occurring off any of its
Property (or the Property of any Consolidated Entity) as a result of
any construction on or operation and use of such Property; in each case
under this paragraph (a) so as to violate any Environmental Law in a
manner that would have a material adverse effect on the business,
Properties or financial condition of the Borrower or the Consolidated
Entities or on the ability of the Borrower or the Guarantors to perform
their respective obligations under this Agreement or any of the other
Loan Documents.
(b) The Borrower represents that its Property and any current
operation concerning its Property (and the Property of any of the
Consolidated Entities) and its business operations are not in violation
of any applicable Environmental Law, and the Borrower has no actual
knowledge or any notice from any governmental body claiming that such
Property or such business operations or operations or uses of the
Property have or may result in any violation of any Environmental Law
or requiring or calling attention to the need for any work, repairs,
corrective actions, construction alterations or installation on or in
connection with the Property or any of the Borrower's business in order
to comply with any Environmental Law with which Borrower has not
complied, in each case under this paragraph (b) wherein such violation
would have a material adverse effect on the business, Properties, or
financial condition of the Borrower and/or any of the Consolidated
Entities. If there are any such notices which would have such effect
with which the Borrower has not complied, the Borrower shall provide
Agent with copies thereof. If the Borrower receives any such notice
which would have such effect, the Borrower will immediately provide a
copy to Agent.
(c) The Borrower agrees to indemnify and hold Agent and each of
the Lenders (including the Swing Line Lender) harmless from and against
any and all claims, demands, damages, losses, liens, liabilities,
penalties, fines, lawsuits, and other proceedings, costs and expenses
(including, without limitation, reasonable attorneys' fees), arising
directly or indirectly from or out of, or in any way connected with (i)
the presence of any Hazardous Substances on any of the Property of any
Consolidated Entity in violation of any Environmental Law; (ii) any
violation or alleged violation of any Environmental Law relating to
Hazardous Substances on any of the Property of any Consolidated Entity,
whether attributable to events occurring before or after Borrower's
acquisition of any of its Property or the acquisition of such property
by any Consolidated Entity; (iii) any violation of any Environmental
Law by any of the Consolidated Entities resulting from the conduct of
its business, use of its Property, or otherwise; or (iv) any
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inaccuracy in the certifications contained in Section 11.01(a).
Article XII. The Agent.
Section 12.01 Appointment of Agent. Each Lender hereby designates STB
as Agent to administer all matters concerning the Loans and to act as herein
specified. Each Lender hereby irrevocably authorizes, and each holder of any
Revolving Credit Note by the acceptance of a Revolving Credit Note shall be
deemed irrevocably to authorize, the Agent to take such actions on its behalf
under the provisions of this Agreement, the other Loan Documents and all other
instruments and agreements referred to herein or therein, and to exercise such
powers and to perform such duties hereunder and thereunder as are specifically
delegated to or required of the Agent by the terms hereof and thereof and such
other powers as are reasonably incidental thereto. The Agent may perform any of
its duties hereunder by or through its agents or employees. The Lenders agree
that neither the Agent nor any of its directors, officers, employees, or agents
shall be liable for any action taken or omitted to be taken by it or them
hereunder or in connection herewith, except for its or their own gross
negligence or willful misconduct. The Lenders agree that the Agent shall not
have any duties or responsibilities, except those expressly set forth herein, or
any fiduciary relationship with any of the Lenders, and no implied covenants,
functions, responsibilities, duties, obligations or liabilities shall be read
into this Agreement or otherwise be imposed upon or exist against the Agent.
Section 12.02 Authorization of Agent with Respect to the Loan
Documents. (a) Each Lender hereby authorizes the Agent to enter into each of the
Loan Documents and to take all action contemplated thereby, all in its capacity
as Agent for the ratable benefit of the Lenders. All rights and remedies under
the Loan Documents may be exercised by the Agent for the benefit of the Agent
and the Lenders upon the terms thereof. The Lenders further agree that the Agent
may assign its rights and obligations under any of the Loan Documents to any
Affiliate of the Agent, if necessary or appropriate under applicable law, which
assignee in each such case shall (subject to compliance with any requirements of
applicable law governing the assignment of such Loan Documents) be entitled to
all the rights of the Agent under and with respect to the applicable Loan
Document.
(b) The Agent shall administer the Loans described herein and the
Loan Documents on behalf of and for the benefit of the Lenders in all
respects as if the Agent were the sole Lender under the Loan Documents,
except that:
(i) The Agent shall administer the Loans and the Loan
Documents with a degree of care at least equal to that customarily
employed by the Agent in the administration of similar credit
facilities for its own account.
(ii) The Agent shall not, without the consent of the Majority
Lenders, take any of the following actions:
(A) agree to a waiver of any material requirements,
covenants,
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or obligations of the Borrower or any of the Guarantors
contained herein;
(B) agree to any amendment to or modification of any of
the terms of any of the Loan Documents, except Agent may
agree to amendments and modifications to the Swing Line Note
with only the consent of the Swing Line Lender;
(C) waive any Event of Default or Default Condition as
set forth in this Agreement;
(D) accelerate the indebtedness described in this
Agreement following an Event of Default; or
(E) initiate litigation or pursue other remedies to
enforce the obligations contained in any Loan Document or to
collect the indebtedness described herein.
(iii) The Agent shall not, without the consent of all of the
Lenders, take any of the following actions:
(A) increase or extend any Revolving Credit Loan
Commitment or the Maximum Total Amount;
(B) extend the maturity of any payment of principal of
or interest on the indebtedness described herein;
(C) reduce any fees paid to or for the benefit of
Lenders under this Agreement;
(D) reduce the rate of interest charged on the
indebtedness described herein;
(E) release any Guaranty;
(F) waive, amend, modify or change the Conditions
Precedent;
(G) postpone any date fixed for the payment in respect
of principal of, or interest on the indebtedness described
herein, or any fees hereunder;
(H) modify the definition of Majority Lenders; or
(I) modify this Section 12.02(b)(iii).
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(iv) The Agent shall use its best efforts to distribute to
Lenders copies of Financial Statements and other material writings
and documents delivered to Agent by Borrower within three (3)
Business Days after receipt thereof; provided, however, the Agent
shall have no liability for failure to comply with this provision.
(c) The Agent, upon its receipt of actual notice thereof, shall
notify the Lenders of: (i) each proposed action that would require the
consent of the Lenders as set forth herein, or (ii) any action proposed
to be taken by the Agent in the administration of the Loans and Loan
Documents not in the ordinary course of business; provided that any
failure of the Agent to give the Lenders any such notice shall not
alone be the basis for any liability of the Agent to the Lenders except
for the Agent's gross negligence or willful misconduct.
(d) The Lenders agree that the Agent shall incur no liability
under or in respect of this Agreement with respect to anything which it
may do or refrain from doing in the reasonable exercise of its judgment
or which may seem to it to be necessary or desirable in the
circumstances, except for its gross negligence or willful misconduct.
Agent shall incur no liability to any of the Lenders for giving consent
on behalf of the Lenders when under the terms of this Agreement consent
may not be unreasonably withheld.
(e) The Agent shall not be liable to the Lenders or to any Lender
in acting or refraining from acting under this Agreement or any other
Loan Document in accordance with the instructions of the Majority
Lenders or all of the Lenders, where expressly required by this
Agreement, and any action taken or failure to act pursuant to such
instructions shall be binding on all Lenders. In each circumstance
where any consent of or direction from the Majority Lenders or all of
the Lenders is required or requested by Agent, the Agent shall send to
the Lenders a notice setting forth a description in reasonable detail
of the matter as to which consent or direction is requested and the
Agent's proposed course of action with respect thereto. In the event
the Agent shall not have received a response from any Lender within
five (5) Business Days after Agent sends such notice, such Lender shall
be deemed to have agreed to the course of action proposed by the Agent.
Section 12.03 Agent's Duties Limited; No Fiduciary Duty. The Lenders
agree that the Agent shall have no duties or responsibilities except those
expressly set forth in this Agreement and the other Loan Documents. The Lenders
agree that none of the Agent nor any of its respective officers, directors,
employees or agents shall be liable for any action taken or omitted by it as
such hereunder or in connection herewith, unless caused by its or their gross
negligence or willful misconduct. The Agent shall not have by reason of this
Agreement a fiduciary relationship to or in respect of any Lender, and nothing
in this Agreement, express or implied, is intended to or shall be so construed
as to impose upon the Agent any obligations in respect of this Agreement or the
other Loan Documents except as expressly set forth herein.
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Section 12.04 NO RELIANCE ON THE AGENT. (A) EACH LENDER REPRESENTS AND
WARRANTS TO THE AGENT AND THE OTHER LENDERS THAT INDEPENDENTLY AND WITHOUT
RELIANCE UPON THE AGENT, EACH LENDER, TO THE EXTENT IT DEEMS APPROPRIATE, HAS
MADE AND SHALL CONTINUE TO MAKE (I) ITS OWN INDEPENDENT INVESTIGATION OF THE
FINANCIAL CONDITION AND AFFAIRS OF THE BORROWER, THE GUARANTORS, AND THE
CONSOLIDATED ENTITIES IN CONNECTION WITH THE TAKING OR NOT TAKING OF ANY ACTION
IN CONNECTION HEREWITH, AND (II) ITS OWN APPRAISAL OF THE CREDIT WORTHINESS OF
THE BORROWER, THE GUARANTORS, AND THE CONSOLIDATED ENTITIES, AND, EACH LENDER
FURTHER AGREES THAT, EXCEPT AS EXPRESSLY PROVIDED IN THIS AGREEMENT, THE AGENT
SHALL HAVE NO DUTY OR RESPONSIBILITY, EITHER INITIALLY OR ON A CONTINUING BASIS,
TO PROVIDE ANY LENDER WITH ANY CREDIT OR OTHER INFORMATION WITH RESPECT THERETO,
WHETHER COMING INTO ITS POSSESSION BEFORE THE MAKING OF THE LOANS OR AT ANY TIME
OR TIMES THEREAFTER. AS LONG AS ANY OF THE LOANS ARE OUTSTANDING AND/OR ANY
AMOUNT IS AVAILABLE TO BE REQUESTED OR BORROWED HEREUNDER, OR THIS AGREEMENT AND
THE LOAN DOCUMENTS HAVE NOT BEEN CANCELLED AND TERMINATED, EACH LENDER SHALL
CONTINUE TO MAKE ITS OWN INDEPENDENT EVALUATION OF THE FINANCIAL CONDITION AND
AFFAIRS OF THE BORROWER, THE GUARANTORS, AND THE CONSOLIDATED ENTITIES.
(b) The Agent shall not be responsible to any Lender (including
the Swing Line Lender) for any recitals, statements, information,
representations or warranties herein or in any document, certificate or
other writing delivered in connection herewith or for the execution,
effectiveness, genuineness, validity, enforceability, collectability,
priority or sufficiency of this Agreement, the Revolving Credit Notes,
the Swing Line Note, the Guaranties, the other Loan Documents, or any
other documents contemplated hereby or thereby, or the financial
condition of the Borrower, the Guarantors, or any of the Consolidated
Entities, or be required to make any inquiry concerning either the
performance or observance of any of the terms, provisions or conditions
of this Agreement, the Revolving Credit Notes, the Swing Line Note, the
Guaranties, the other Loan Documents or the other documents
contemplated hereby or thereby, or the financial condition of the
Borrower, the Guarantors, or any of the Consolidated Entities or the
existence or possible existence of any Default Condition or Event of
Default.
Section 12.05 Certain Rights of Agent. The Lenders agree that if the
Agent shall request instructions from the Majority Lenders (or all of the
Lenders where unanimity is expressly required under the terms of this Agreement)
with respect to any action or actions (including the failure to act) in
connection with this Agreement, the Agent shall be entitled to refrain from such
act or taking such act, unless and until the Agent shall have received
instructions from the Majority Lenders (or all of the Lenders where unanimity is
expressly required under the terms of this Agreement); and the Agent shall not
incur liability to any Person by reason of so refraining.
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Without limiting the foregoing, no Lender shall have any right of action
whatsoever against the Agent as a result of the Agent's acting or refraining
from acting hereunder in accordance with the instructions of the Majority
Lenders (or, with regard to acts for which the consent of all of the Lenders is
expressly required under the terms of this Agreement, in accordance with the
instructions of all of the Lenders).
Section 12.06 Reliance by Agent. The Lenders agree that the Agent shall
be entitled to rely, and shall be fully protected in relying, upon any note,
writing, resolution, notice, statement, certificate, telex, teletype or
telecopier message, cablegram, radiogram, order or other documentary,
teletransmission or telephone message reasonably believed by it to be genuine
and correct and to have been signed, sent or made by the proper Person. The
Lenders agree that the Agent may consult with legal counsel (including counsel
for any Lender), independent public accountants and other experts selected by it
and shall not be liable for any action taken or omitted to be taken by it in
good faith in accordance with the advice of such counsel, accountants or
experts.
Section 12.07 Indemnification of Agent. To the extent the Agent is not
reimbursed and indemnified by the Borrower, each Lender will reimburse and
indemnify the Agent, ratably according to their respective Pro Rata Share, for,
from and against any and all liabilities, obligations, losses, damages,
penalties, actions, judgments, suits, costs, expenses (including fees of
experts, consultants and counsel and disbursements) or disbursements of any kind
or nature whatsoever that may be imposed on, incurred by or asserted against the
Agent in performing its duties hereunder, in any way relating to or arising out
of this Agreement or the other Loan Documents; provided that no Lender shall be
liable to the Agent for any portion of such liabilities, obligations, losses,
damages, penalties, actions, judgments, suits, costs, expenses or disbursements
resulting from the Agent's gross negligence or willful misconduct. The
obligations and indemnifications arising under this Section 12.07 shall survive
termination of this Agreement, repayment of the Loans and indebtedness arising
in connection with the Letters of Credit and expiration of the Letters of
Credit.
Section 12.08 The Agent in its Individual Capacity. With respect to its
obligation to lend under this Agreement, the Loan made by it and the Revolving
Credit Note issued to it, the Agent shall have the same rights and powers
hereunder as any other Lender or holder of a Revolving Credit Note and may
exercise the same as though it were not performing the duties of Agent specified
herein; and the terms "Lenders," "Majority Lenders," "holders of Revolving
Credit Notes," or any similar terms shall, unless the context clearly otherwise
indicates, include the Agent in its individual capacity. The Agent may also
exercise rights and remedies of the Swing Line Lender. The Agent and its
Affiliates may accept deposits from, lend money to, and generally engage in any
kind of banking, trust, financial advisory or other business with the Borrower,
the Guarantors, the Consolidated Entities, or any Affiliate of the Borrower as
if it were not performing the duties specified herein as Agent, and may accept
fees and other consideration from the Borrower for services in connection with
this Agreement and otherwise without having to account for the same to the
Lenders.
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Section 12.09 Holders of Notes. The Agent and the Borrower may deem and
treat the payee of any Revolving Credit Note as the owner thereof for all
purposes hereof unless and until a written notice of the assignment or transfer
thereof shall have been filed with the Agent and the Borrower. Any request,
authority or consent of any Person who, at the time of making such request or
giving such authority or consent, is the holder of any Revolving Credit Note
shall be conclusive and binding on any subsequent holder, transferee or assignee
of such Revolving Credit Note.
Section 12.10 Successor Agent. (a) The Agent may resign at any time by
giving written notice thereof to the Lenders and the Borrower and may be removed
at any time with cause by the Majority Lenders; provided, however, the Agent may
not resign or be removed until (i) a successor Agent has been appointed and
shall have accepted such appointment, and (ii) the successor Agent has assumed
all responsibility for issuance of the Letters of Credit and the successor Agent
has assumed in the place and stead of the Agent all existing liability under
outstanding Letters of Credit, and (iii) the successor agent has assumed all
responsibility for Advances under the Swing Line Loan (including outstanding
Advances thereunder) and the successor Agent has assumed in the place and stead
of the Agent all existing liability under the Swing Line Loan. The transactions
described in the immediately preceding sentence shall be accomplished pursuant
to written agreements reasonably satisfactory to the Agent and the successor
Agent. Upon any such resignation or removal, the Majority Lenders shall have the
right to appoint a successor Agent. If no successor Agent shall have been so
appointed by the Majority Lenders, and shall have accepted such appointment,
within thirty (30) days after the retiring Agent's giving of notice of
resignation or the Majority Lenders' removal of the retiring Agent, then the
retiring Agent may, on behalf of the Lenders, appoint a successor Agent, which
shall be a bank that maintains an office in the United States, or a commercial
bank organized under the laws of the United States of America or any State
thereof, or any Affiliate of such bank, having a combined capital and surplus of
at least $100,000,000.
(b) Upon the acceptance of any appointment as the Agent hereunder
by a successor Agent, such successor Agent shall thereupon succeed to
and become vested with all the rights, powers, privileges and duties of
the retiring Agent, and the retiring Agent shall be discharged from its
duties and obligations under this Agreement. After any retiring Agent's
resignation or removal hereunder as Agent, the provisions of this
Article XII shall inure to its benefit as to any actions taken or
omitted to be taken by it while it was an Agent under this Agreement.
Section 12.11 Notice of Default or Event of Default. In the event that
the Agent or any Lender shall acquire actual knowledge, or shall have been
notified, of any Default Condition or Event of Default (other than through a
notice by one party hereto to all other parties), the Agent or such Lender shall
promptly notify the Agent, and the Agent shall take such action and assert such
rights under this Agreement as the Majority Lenders shall request in writing,
and the Agent shall not be subject to any liability by reason of its acting
pursuant to any such request. If, following notification by Agent to Lenders,
the Majority Lenders (or all of the Lenders if required hereunder) shall fail to
request the Agent to take action or to assert rights under this
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Agreement in respect of any Default Condition or Event of Default within five
(5) Business Days after their receipt of the notice of any Default Condition or
Event of Default from the Agent or any Lender, or shall request inconsistent
action with respect to such Default Condition or Event of Default, the Agent
may, but shall not be required to, take such action and assert such rights
(other than rights under Article VIII hereof) as it deems in its discretion to
be advisable for the protection of the Lenders.
Section 12.12 Benefit of Agreement.
(a) Any Lender may make, carry or transfer Loans at, to or for the
account of, any of its branch offices or the office of an Affiliate of
such Lender, provided that no such action shall increase the cost of
the Loans to the Borrower.
(b) Each Lender may assign a portion of its interests, rights and
obligations under this Agreement, including all or a portion of any of
its Revolving Credit Loan Commitment (including without limitation its
commitment to participate in Letters of Credit) to any Eligible
Assignee; provided, however, that (i) the amount of the Revolving
Credit Loan Commitment of the assigning Lender subject to each
assignment (determined as of the date the assignment and acceptance
with respect to such assignment is delivered to the Agent) shall not be
less than an amount equal to $5,000,000 or greater integral multiples
thereof, (ii) the assigning Lender may not assign to an Eligible
Assignee more than an amount equal to $10,000,000; (iii) the parties to
each such assignment shall execute and deliver to the Agent an
Assignment and Acceptance, (iv) the Borrower shall execute a Revolving
Credit Note or Revolving Credit Notes subject to such assignment, and
(v) the Eligible Assignee shall pay to the Agent a processing and
recordation fee of $3,000. From and after the effective date specified
in each Assignment and Acceptance, the assignee thereunder shall be a
party hereto and to the extent of the interest assigned by such
Assignment and Acceptance, have the rights and obligations of a Lender
under this Agreement. Notwithstanding the foregoing, the assigning
Lender must retain after the consummation of such Assignment and
Acceptance, a minimum aggregate amount of Revolving Credit Loan
Commitment of $5,000,000; provided, however, no such minimum amount
shall be required with respect to any such assignment made at any time
there exists an Event of Default hereunder. Within five (5) Business
Days after receipt of the notice and the Assignment and Acceptance, the
Borrower, at its own expense, shall execute and deliver to the Agent,
in exchange for the surrendered Revolving Credit Note or Revolving
Credit Notes, a new Revolving Credit Note or Revolving Credit Notes to
the order of the Eligible Assignee in a principal amount equal to the
applicable Revolving Credit Loan Commitment assumed by it pursuant to
such Assignment and Acceptance, as well as a new Revolving Credit Note
or Revolving Credit Notes to the assigning Lender in the amount of its
retained Revolving Credit Loan Commitment. Such new Revolving Credit
Notes to the Eligible Assignee and to the assigning Lender shall be in
an aggregate principal amount equal to the aggregate principal amount
of such surrendered Revolving Credit Note or Revolving Credit Notes,
shall be dated the date of the surrendered Revolving Credit Note or
Revolving Credit Notes that they replace, and shall otherwise
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be in substantially the form attached hereto as Exhibit E.
(c) No assignment of all or any portion of this Agreement by any
Lender shall be permitted without compliance with the provisions of
Section 12.12(b) hereof, or if such assignment would violate any
applicable securities law. In connection with its execution and
delivery hereof each Lender represents that it is acquiring its
interest herein for its own account for investment purposes and not
with a view to further distribution thereof, and shall require any
proposed assignee to furnish similar representations to the Agent and
the Borrower.
(d) Each Lender may, without the consent of the Borrower or the
Agent, but subject to the provisions of Section 2.06, sell
participations in its respective Revolving Credit Loan Commitment and
Letter of Credit commitments to such Lender's Affiliate(s), but sales
of participations to Persons other than such Lender's Affiliates shall
be made only with the prior consent of the Agent and in all events
subject to said section. Provided, however, that (i) no Lender may sell
a participation in its aggregate Revolving Credit Loan Commitment and
Letter of Credit commitments (after giving effect to any permitted
assignment hereof) unless it retains an aggregate exposure of at least
$5,000,000 (except that no such limitation shall be applicable to any
such participation sold at any time there exists an Event of Default
hereunder), (ii) such Lender's obligations under this Agreement shall
remain unchanged, (iii) such Lender shall remain solely responsible to
the other parties hereto for the performance of such obligations, and
(iv) the Borrower and the Agent and other Lenders shall continue to
deal solely and directly with each Lender in connection with such
Lender's rights and obligations as provided in this Agreement and the
other Loan Documents. Each Lender shall promptly notify in writing the
Agent of any sale of a participation hereunder.
(e) Any Lender or participant may, in connection with the
assignment or participation or proposed assignment or participation,
pursuant to this Section 12.12, disclose to the assignee or participant
or proposed assignee or participant any information relating to the
Borrower, any of the Guarantors, or the Consolidated Entities furnished
to such Lender by or on behalf of the Borrower, any of the Guarantors,
or any of the Consolidated Entities. With respect to any disclosure of
confidential, non-public, proprietary information, such proposed
assignee or participant shall agree to use the information only for the
purpose of making any necessary credit judgments with respect to this
credit facility and not to use the information in any manner prohibited
by any law, including without limitation, the securities laws of the
United States. The proposed participant or assignee shall agree in
writing not to disclose any of such information except (i) to
directors, employees, auditors or counsel to whom it is necessary to
show such information, each of whom shall be informed of the
confidential nature of the information and agree to maintain the
confidentiality thereof as described herein, (ii) in any statement or
testimony pursuant to a subpoena or order by any court, governmental
body or other agency asserting jurisdiction over such entity, or as
otherwise required by law (provided prior notice is given to the
Borrower and the Agent unless otherwise
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<PAGE> 59
prohibited by the subpoena, order or law), and (iii) upon the request
or demand of any regulatory agency or authority with proper
jurisdiction. The proposed participant or assignee, and such
representatives, shall further agree to return to the Borrower all
documents or other written material and copies thereof received from
any Lender, the Agent, or the Borrower relating to such confidential
information.
(f) Any Lender may at any time assign all or any portion of its
rights in this Agreement and the Revolving Credit Notes issued to it to
a Federal Reserve Bank; provided that no such assignment shall release
the assigning Lender from any of its obligations hereunder.
ENTERED INTO the date first above written.
BORROWER:
SERVICE EXPERTS, INC.
By: /s/ Alan R. Sielbeck
--------------------------------------
Title: President
-----------------------------------
AGENT:
SUNTRUST BANK, NASHVILLE, N.A., Agent
By: /s/ Tracy L. Elliott
--------------------------------------
Title: Commercial Officer
-----------------------------------
Address: 201 Fourth Avenue North
Nashville, Tennessee 37219
[Signatures Continued on Next Page]
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<PAGE> 60
LENDERS:
SUNTRUST BANK, NASHVILLE, N.A.
By: /s/ Tracy L. Elliott
--------------------------------------
Title: Commercial Officer
-----------------------------------
Address: 201 Fourth Avenue North
Nashville, Tennessee 37219
Pro Rata Share: 30%
[Signatures Continued on Next Page]
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<PAGE> 61
BANK OF AMERICA, FSB
By: /s/ John Yankoslas
-----------------------------------------
Title: Vice President
--------------------------------------
Address: 1230 Peachtree Street, Suite 3600
Atlanta, Georgia 30309
Pro Rata Share: 20%
[Signatures Continued on Next Page]
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<PAGE> 62
SOUTHTRUST BANK, NATIONAL
ASSOCIATION
By: /s/ David S. Hugh
-------------------------------------------
Title: Vice President
----------------------------------------
Address: 230 Fourth Avenue North, 8th Floor
Nashville, Tennessee 37219
Pro Rata Share: 25%
[Signatures Continued on Next Page]
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<PAGE> 63
NATIONSBANK OF TENNESSEE, N.A.
By: /s/ Joe D. Mylam
----------------------------------------
Title: Vice President
-------------------------------------
Address: One NationsBank Plaza, 2nd Floor
Nashville, Tennessee 37239-1697
Pro Rata Share: 25%
-57-
<PAGE> 1
Exhibit 10.13
FIRST AMENDMENT TO AMENDED AND RESTATED CREDIT AGREEMENT
ENTERED INTO by and among SERVICE EXPERTS, INC., a Delaware corporation
(the "Borrower"), SUNTRUST BANK, NASHVILLE, N.A., AGENT ("Agent"), SUNTRUST
BANK, NASHVILLE, N.A. ("STB"), BANK OF AMERICA, FSB ("BA"), SOUTHTRUST BANK,
NATIONAL ASSOCIATION ("SBNA"), and NATIONSBANK OF TENNESSEE, N.A. ("NBT")
(herein STB, BA, SBNA, and NBT shall be collectively referred to as "Lenders")
as of this 16th day of December, 1997.
RECITALS:
1. The Borrower, Agent, and the Lenders entered into an Amended and
Restated Credit Agreement dated as of September 18, 1997 (the "Credit
Agreement").
2. The Borrower, Agent, and the Lenders desire to amend the Credit
Agreement as set forth herein.
NOW, THEREFORE, in consideration of the premises and for other good and
valuable consideration, the receipt and adequacy of which is hereby
acknowledged, the parties hereto agree as follows:
1. The definition of "Fixed Charges" as set forth in Article I of the
Credit Agreement shall be amended and restated as follows:
"Fixed Charges" means the sum of Consolidated Interest
Expense, plus long-term Debt paid by Consolidated Entities on
a consolidated basis (excluding any amounts paid under this
Agreement and excluding Debt of a Consolidated Entity acquired
in an Acquisition which is paid simultaneously with the
Acquisition or within sixty (60) days of such Acquisition and
which Debt repayment is part of the consideration exchanged in
connection with the Acquisition), and plus cash dividends
paid, as determined on a consolidated basis for the
Consolidated Entities in accordance with GAAP.
2. Section 7.01 of the Credit Agreement is amended to include new
subsection (h) to read as follows:
(h) Debt of a Consolidated Entity acquired in an
Acquisition that is paid simultaneously with the Acquisition
or within sixty (60) days of such Acquisition and which Debt
repayment is part of the consideration exchanged in connection
with the Acquisition.
<PAGE> 2
3. Section 7.12 of the Credit Agreement shall be amended and restated
as follows:
Section 7.12 Acquisitions. Make any Acquisition in
which: (A) less than fifty percent (50%) of the consideration
paid or given in such Acquisition consists of stock, and (B)
the cash paid (including Debt permitted by Section 7.01(h)
above) exceeds $5,000,000.
4. The Credit Agreement is not amended in any other respect.
5. The Borrower reaffirms its obligations under the Credit Agreement
and agrees that such obligations are its valid and binding obligations,
enforceable in accordance with its terms, subject to no defense, counterclaim,
or objection.
ENTERED INTO the date first written above.
BORROWER:
SERVICE EXPERTS, INC.
By: /s/ Anthony M. Schofield
---------------------------------
Title: Chief Financial Officer
------------------------------
AGENT:
SUNTRUST BANK, NASHVILLE, N.A.
By: /s/ Tracy L. Elliott
---------------------------------
Title: Commercial Officer
------------------------------
- 2 -
<PAGE> 3
LENDERS:
SUNTRUST BANK, NASHVILLE, N.A.
By: /s/ Tracy L. Elliott
---------------------------------
Title: Commercial Officer
------------------------------
BANK OF AMERICA, FSB
By: /s/ John Yankoslas
---------------------------------
Title: Vice President
------------------------------
SOUTHTRUST BANK, NATIONAL
ASSOCIATION
By: /s/ David S. Hugh
---------------------------------
Title: Vice President
------------------------------
NATIONSBANK OF TENNESSEE, N.A.
By: /s/ Joe D. Mylan
---------------------------------
Title: Vice President
------------------------------
- 3 -
<PAGE> 1
EXHIBIT 10.17
[FORM OF STOCK PURCHASE AGREEMENT]
This STOCK PURCHASE AGREEMENT (this "Agreement"), dated as of
__________, 1998, is by and among Service Experts, Inc., a Delaware corporation
("SEI"), and each of the shareholders (each, a "Shareholder" and collectively,
the "Shareholders") of _____________________, Inc., a ___________ corporation
(the "Company").
W I T N E S S E T H :
WHEREAS, the Company operates a heating, ventilating and air
conditioning ("HVAC") service and replacement business;
WHEREAS, the Shareholders own all of the issued and outstanding shares
of capital stock of the Company (the "Shares"); and
WHEREAS, the Shareholders desire to transfer to SEI, and SEI desires to
purchase, all of the Shares in a transaction (the "Transfer") intended to
qualify as a reorganization within the meaning of Section 368 of the Internal
Revenue Code of 1986, as amended (the "Code"), and to be accounted for as a
pooling of interests for financial accounting purposes.
NOW, THEREFORE, in consideration of the premises, the mutual covenants
set forth herein and other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the parties agree as follows:
Section 1. Transfer of Shares. In accordance with the terms and
conditions set forth herein, on the Closing Date (as hereinafter defined), the
Shareholders will transfer, convey, assign and deliver, and SEI will purchase,
all of the Shares free and clear of any and all liens, claims and encumbrances
whatsoever.
Section 2. Purchase Price; Exchange of Certificates.
(a) Purchase Price. As of the Closing Date (as hereinafter
defined) and subject to the provisions of this Section 2, in exchange for
certificates representing all of the Shares, the Shareholders will receive from
SEI aggregate consideration of $____________ (the "Purchase Price"), consisting
of (i) the assumption by SEI of certain indebtedness of the Company in the
amount of $________ and described on Schedule 2(a) hereto (the "Assumed Debt")
and (ii) certificates representing that number of shares of Common Stock, par
value $.01 per share, of SEI (the "SEI Common Stock") which is equal to the
quotient of the Purchase Price (subject to the adjustments set forth in this
Section 2) less the Assumed Debt, divided by the Closing Price. The "Closing
Price" shall equal the average closing sales price of a share of SEI Common
Stock as reported on the New York Stock Exchange for the five (5) trading days
ending on the second trading day immediately preceding the Closing Date.
(b) Escrow Agreement. Certificates representing shares of SEI
Common Stock equal to, in the aggregate, ten percent (10%) of the Purchase
Price, as adjusted pursuant to this Section 2, shall be held in escrow pursuant
to the terms and conditions of the escrow agreement attached hereto as Schedule
2(b) (the "Escrow Agreement").
(c) Fractional Shares. No fractional shares of SEI Common
Stock shall be issued pursuant hereto. In lieu of the issuance of any fractional
share of SEI Common Stock, each Shareholder shall be entitled to receive a cash
payment equal to such fractional proportion of the Closing Price of a share of
SEI Common Stock.
(d) Adjustment of Shares of Stock. In the event that,
subsequent to the date of this Agreement but prior to the Closing Date, the
outstanding shares of SEI Common Stock shall have been changed into a different
number of shares or a different class as a result of a stock split, reverse
stock split, stock dividend, subdivision, reclassification, split, combination,
exchange,
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<PAGE> 2
recapitalization or other similar transaction, the number of shares of SEI
Common Stock to be delivered pursuant to this Agreement shall be appropriately
adjusted.
Section 3. The Closing. The closing of the transactions contemplated by
this Agreement (the "Closing") shall take place, following the satisfaction of
all of the conditions set forth in Sections 8, 9 and 10 hereof, or the waiver
thereof, on a date (the "Closing Date") and at a place to be specified by the
parties.
Section 4. Deliveries at Closing. At the Closing, the Shareholders
shall deliver to SEI the various certificates, instruments and documents
referenced in Section 10 below, including without limitation stock certificates
representing the Shares, together with accompanying stock transfer powers or
instruments of assignment, duly endorsed in blank. At the Closing, SEI shall
deliver to the Shareholders the various certificates, instruments and documents
referenced in Section 9 below.
Section 5. Representations and Warranties of the Shareholders. Each of
the Shareholders, jointly and severally, represents and warrants to SEI as
follows as of the date hereof and also as of the Closing Date:
(a) Corporate Organization; Governing Documents of the
Company.
(i) The Company is a corporation duly organized,
validly existing and in good standing under the laws of its state of
incorporation. The Company has all requisite corporate power and authority to
own or lease all of its properties or assets and to carry on its business as it
is now being conducted. The Company has in effect and holds all licenses,
permits and other required authorizations from governmental authorities
necessary for it to own or lease its properties and to conduct its business as
it is now being conducted. The Company is duly qualified to do business and is
in good standing in the jurisdictions set forth in Schedule 5(a), which includes
every jurisdiction in which the failure to be so qualified or in good standing
would have a material adverse effect on (A) the Company's ability to perform its
obligations under the Transaction Documents (as hereinafter defined) to be
executed and delivered by the Company or (B) the assets, results of operations
or prospects of the Company. As used in this Agreement, "Transaction Documents"
shall mean all documents to be executed and delivered by the Company or by a
Shareholder in connection with the Transfer.
(ii) True and complete copies of the Company's
Articles of Incorporation and Bylaws, as amended to the date hereof, the books
of account, minute books, stock record books and other records of the Company
have been delivered to SEI. All of such records are complete and correct and
have been maintained in accordance with sound business practices, including the
maintenance of an adequate system of internal controls. The minute books of the
Company contain accurate and complete records of all meetings of, and corporate
action taken by, the Shareholders, the Board of Directors and committees of the
Board of Directors of the Company, and no meeting of any such Shareholders,
Board of Directors or committee has been held for which minutes have not been
prepared and are not contained in such minute books.
(b) Capitalization.
(i) The authorized capital stock of the Company
consists of _______________ shares of Common Stock, par value $___________ per
share (the "Company Common Stock"), ___________ shares of which are issued and
outstanding as of the date hereof and constitute the Shares. All of the Shares
are owned by the Shareholders as set forth on Schedule 5(b) hereto. There are no
other classes of securities of the Company outstanding. All of the shares of
Company Common Stock have been duly authorized, validly issued and are fully
paid, nonassessable and free of preemptive rights. Other than this Agreement,
there are no contracts, commitments, understandings or arrangements relating to
the issuance, sale, transfer or registration of the Company Common Stock or any
other securities of the Company. Other than this Agreement, there are no
options, warrants, preemptive rights, calls, subscriptions, convertible
securities or other rights, agreements or commitments that obligate the Company
or a Shareholder to issue, transfer or sell any shares of Company Common Stock
or any other securities of the Company.
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<PAGE> 3
(ii) All offers and sales of Company Common Stock,
and any other securities issued by the Company, prior to the date hereof were at
all relevant times exempt from the registration requirements of the Securities
Act of 1933, as amended (the "1933 Act"), and were duly registered or the
subject of an available exemption from the registration requirements of the
applicable state securities or Blue Sky laws.
(iii) Each Shareholder is the legal and beneficial
owner of and has good and marketable title to the shares of Company Common Stock
set forth opposite its name on Schedule 5(b), free and clear of any and all
liens, claims, pledges, encumbrances, charges, options and contractual
restrictions whatsoever. Each Shareholder has full, absolute and unrestricted
right, power, capacity and authority to sell, transfer, assign and deliver its
Shares to SEI and the delivery of such Shares to SEI will convey to SEI valid,
marketable and indefeasible title to such Shares, free and clear of any and all
liens, claims, pledges, encumbrances, charges, options or contractual
restrictions whatsoever.
(iv) There is no plan or intention by any of the
Shareholders to sell, exchange or otherwise dispose of any of the shares of SEI
Common Stock to be received by such Shareholders in the Transfer.
(c) Authorization and Validity. Each Shareholder is a natural
person and has the full authority and legal capacity to execute and deliver this
Agreement and all other Transaction Documents to be executed and delivered by
such Shareholder and to consummate the transactions contemplated hereby or
thereby. No corporate proceedings on the part of the Company are necessary to
consummate the transactions contemplated hereby. This Agreement, when executed,
will constitute the legal, valid and binding obligation of each Shareholder,
enforceable against each Shareholder in accordance with its terms, except as
enforceability may be limited by applicable bankruptcy, insolvency,
reorganization, moratorium or similar laws and subject to general principles of
equity (regardless of whether such enforceability is considered in a proceeding
in equity or at law).
(d) No Defaults; Absence of Conflicts. The Company is not in
default under, nor has any event occurred which, with or without notice or the
lapse of time or action by a third party, could result in a default under, any
outstanding indenture, mortgage, contract, lease, insurance policy or agreement
to which the Company is a party or by which its assets, business or operation
may be bound or affected. The execution, delivery and performance of this
Agreement and the consummation of the transactions contemplated by this
Agreement will not (i) violate any provision of, or result in the breach of, or
constitute a default under, or conflict with, (A) any terms or provisions of the
Articles of Incorporation or Bylaws of the Company, any resolution of the
shareholders or Board of Directors of the Company or any agreements between or
among the Shareholders and the Company or between the Company and any current or
former owner of the Company Common Stock, (B) any law the violation of which
would result in a material liability to the Company, or (C) any order, writ,
injunction or decree of any court, governmental agency or arbitration tribunal;
(ii) constitute a violation of or a (or an event that with or without notice or
lapse of time or both would constitute a) default under, termination of or a
conflict with, any term or provision of any contract, commitment, indenture,
lease or other agreement, or any other restriction of any kind to which the
Company or a Shareholder is a party or by which the Company or a Shareholder is
bound; (iii) cause, or give any party grounds to cause (with or without notice,
the passage of time or both) the maturity of any liability or obligation of the
Company to be accelerated, or increase any such liability or obligation; or (iv)
create any lien, security interest, charge, encumbrance or restriction upon any
of the assets or properties of the Company or upon any share of Company Common
Stock.
(e) Subsidiaries and Investments. Except as set forth on
Schedule 5(e), neither the Company nor the Shareholders currently own, directly
or indirectly, beneficially or equitably, any capital stock or other equity,
ownership or proprietary interest in any corporation, partnership, limited
liability company, association, trust, joint venture or other entity. Neither
the Company nor the Shareholders own any shares of SEI Common Stock or other
securities convertible into SEI Common Stock.
3
<PAGE> 4
(f) Financial Statements. Schedule 5(f) contains the financial
statements of the Company for the fiscal years ended __________ 1995, 1996 and
1997, and the audit report thereon of ________, independent auditors (the
"Financial Statements"). The Financial Statements have been prepared from the
books and records of the Company which accurately and fairly reflect in all
material respects the transactions of the Company. The Financial Statements are
true, correct and complete, have been prepared in accordance with generally
accepted accounting principles, consistently applied, and fairly and accurately
present the financial and business condition of the Company as of the dates
thereof and the results of the operations of the Company for the periods covered
thereby. The Financial Statements accurately reflect or adequately provide for
all claims against, and all debts and liabilities of, the Company, fixed or
contingent, existing at the dates thereof. The Company has adequately funded all
accrued employee benefit costs and such funding is reflected on the Financial
Statements.
(g) Accounts Receivable and Payable. The accounts receivable
reflected on the Financial Statements arose in the ordinary course of business
and, except as reserved against on the Financial Statements, are collectible in
the ordinary course of business and consistent with past practices, free of any
claims, rights or defenses of any account debtor. No accounts payable of the
Company are over forty-five (45) days old.
(h) Absence of Certain Changes. Except as disclosed on
Schedule 5(h), the Company has not since _______________, 19___:
(i) changed the Company's authorized or issued
capital stock; granted any stock option or right to purchase shares of capital
stock of the Company; issued any security convertible into such capital stock;
granted any registration rights; purchased, redeemed, retired, or otherwise
acquired any shares of any such capital stock; or declared or paid any dividend
or other distribution or payment in respect of shares of capital stock;
(ii) amended the Articles of Incorporation, Bylaws
or other organizational documents of the Company;
(iii) incurred any indebtedness or other liabilities
(whether accrued, absolute, contingent or otherwise), guaranteed any
indebtedness or sold any assets, except in the ordinary course of business
consistent with past practice;
(iv) suffered any damage, destruction or loss to
any of the tangible assets of the Company, whether or not covered by insurance;
(v) increased the regular rate of compensation
payable by it to any employee or increased such compensation by bonus,
percentage, compensation service award or similar arrangement theretofore in
effect for the benefit of any of its employees, and no such increase is
required;
(vi) hired, committed to hire or terminated any
employee;
(vii) established or agreed to establish any
pension, retirement or welfare plan for the benefit of its employees not
theretofore in effect;
(viii) experienced any labor organizational efforts,
strikes or formal complaints or entered into any collective bargaining
agreements with any union;
(ix) suffered any change in its financial
condition, assets, liabilities, business or prospects or suffered any other
event or condition of any character which individually or in the aggregate has
or might reasonably be expected to have a material adverse effect on its
business or prospects;
(x) entered into any commitments or transactions
or made any capital expenditures involving aggregate amount or value in excess
of Twenty-Five Thousand and No/100 Dollars ($25,000.00) or made any single
capital expenditure which exceeded Ten Thousand and No/100 Dollars ($10,000.00);
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<PAGE> 5
(xi) disposed of any of its assets, written down
the value of any assets, written off as uncollectible any accounts receivable or
revalued any of its assets, except in the ordinary course of business consistent
with past practice;
(xii) subjected any of its assets, tangible or
intangible, to any lien, encumbrance or restriction whatsoever, except for liens
for current property taxes not yet due and payable;
(xiii) paid, discharged or satisfied any claims,
liabilities or obligations (absolute, accrued, contingent or otherwise), except
in the ordinary course of business consistent with past practice;
(xiv) entered into, terminated or received notice
of termination of (A) any license, distributorship, dealer, sales
representative, joint venture, credit, or similar agreement, or (B) any contract
or transaction involving a total remaining commitment by or to the Company of at
least Ten Thousand and No/100 Dollars ($10,000.00);
(xv) canceled or waived any claims or rights with
a value to the Company in excess of Ten Thousand and No/100 Dollars
($10,000.00);
(xvi) made any change in any method of accounting
or accounting practice;
(xvii) canceled, or failed to continue, insurance
coverage; or
(xviii) agreed, whether in writing or otherwise, to
take any action described in this Section 5(h).
(i) Ownership of Properties. The Company owns the assets (the
"Assets") reflected on the ____________, 19___, balance sheet which constitute
all of the operating assets of the Company necessary or appropriate for the
continued operation of the business of the Company. The Company has sufficient
title in and to the Assets necessary or advisable to operate and conduct the
business of the Company in the same fashion as the Company is currently
conducting such business. Except as set forth on Schedule 5(i), the Company has
good and marketable title to all of the Assets owned by it including furniture,
fixtures and equipment, fixed assets and inventory, and all contract rights and
intangible assets, and good and valid leasehold estates in all of the Assets
leased by it, free and clear of mortgages, security interests, liens, defects,
charges, encumbrances, restrictions and rights of third parties (excluding
accounts payable in the ordinary course of business). All equipment and other
personal property constituting a portion of the Assets are in good operating
condition and repair, ordinary wear and tear excepted. The inventory of the
Company consists of supplies and purchased parts, all of which are merchantable
and fit for the purpose for which it was procured, and none of which is
obsolete, damaged or defective, subject only to the reserve for inventory
writedown as set forth on the balance sheet of the Company dated
_______________, 19__. Following the Transfer, the Company will have all of its
rights under the leases for the premises now leased by the Company free and
clear of any claims, liens and encumbrances, except to the extent expressly set
forth in said leases, and the Transfer will not result in any increase in rents
or charges under such leases.
(j) Taxes. The Company has timely filed all federal, state and
local tax returns or information returns required to be filed by it and has
delivered to SEI true and correct copies of such returns for the fiscal years 19
through 19 . All of such returns have been prepared accurately and filed in
accordance with applicable laws and regulations. The Company has paid all taxes
and assessments (including, without limitation, income, excise, unemployment,
social security, occupation, franchise, property, sales and use taxes, import
duties or charges, and all penalties and interest in respect thereof) due and
payable by it and the reserves for taxes contained on the most recent Financial
Statements (other than any reserve for deferred taxes established to reflect
timing differences between book and tax income) are adequate to cover all tax
liabilities as of the date of this Agreement. The Company and any predecessors
in interest have withheld or collected from each payment made to each of their
employees the amount of all taxes required to be withheld or collected
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<PAGE> 6
therefrom, and the Company and any predecessors in interest have paid the same
to the proper tax depositories or collecting authorities. The Company has not
(i) been audited by any taxing authority, (ii) received notice that any taxing
authority contemplates such an audit, (iii) signed any extension agreement with
any taxing authority, (iv) received notice of any deficiencies, adjustments,
assessments or other charges with respect to taxes paid or payable or (v) made
any payment, or provided any benefit, to any officer, employee, former officer
or former employee that is not allowable as a deduction under the Code or the
regulations thereunder.
(k) Insurance. True and correct copies of all insurance
policies maintained by the Company, and all endorsements thereto, have been
delivered to SEI. All such policies are valid, outstanding and enforceable and
taken together, provide adequate insurance coverage for the Assets and
operations of the Company. All such policies are in full force and effect, with
no premium arrearages, and will continue in full force and effect following the
completion of the Transfer. Except as set forth on Schedule 5(k), there are no
pending claims against such insurance by the Company as to which insurers are
defending under reservation of rights or have denied liability, and except as
set forth on Schedule 5(k), there exists no claim under such insurance that has
not been properly filed by the Company.
(l) Environmental Conditions.
(i) The Company is currently in compliance with
all Environmental Laws (as defined below), which compliance includes, without
limitation, the possession by the Company of all permits and other governmental
authorization required under applicable Environmental Laws to operate the
business as currently operated, and is in compliance with the terms and
conditions thereof.
(ii) Neither the Company nor any Shareholder has
stored any Hazardous Substances (as defined below) on any of the real property
owned or leased by the Company (the "Real Property"), except in compliance with
applicable Environmental Laws.
(iii) Neither the Company nor any Shareholder has
disposed of or released any Hazardous Substances on any of the Real Property.
(iv) The Company has not arranged for disposal or
utilized any transporters or disposal facilities for the transport or disposal
of Hazardous Substances except as indicated on Schedule 5(l)(iv).
(v) The Company has not received any communication
(written or oral), whether from a governmental authority, citizen's group,
employee or otherwise, that alleges that the Company is not in full compliance
with Environmental Laws, and there are no circumstances that may prevent,
interfere with, or make more expensive such full compliance in the future. There
is no Environmental Claim (as defined below) pending or threatened against the
Company.
(vi) There have been no actions, activities,
circumstances, conditions, events or incidents, including, without limitation,
the generation, handling, transportation, treatment, storage, release, emission,
discharge, presence or disposal of any Hazardous Substances that could form the
basis of any Environmental Claim against the Company, and neither the Company
nor any Shareholder knows of any such actions, activities, circumstances,
conditions, events or incidents.
(vii) The Real Property and, to the best knowledge
of the Company and the Shareholders, adjoining properties, have never been
utilized for any industrial or commercial operation involving any Hazardous
Substance.
(viii) Without in any way limiting the generality of
the foregoing, (A) all underground storage tanks, and the capacity, uses, date
of installation, and contents of such tanks, located on the Real Property, are
identified on Schedule 5(l)(viii); (B) there are no, nor have there ever been,
collection dumps, pits, and disposal facilities or surface impoundments located
on the Real Property, except as identified on Schedule 5(l)(viii); (C) all
underground storage tanks are in
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full compliance with the Environmental Laws; (D) there is no asbestos contained
in or forming part of the Real Property; and (E) no polychlorinated biphenyls
("PCBs") have been used or stored on the Real Property.
The following terms shall have the following
meanings:
"Environmental Claim" means any claim, action, cause
of action, investigation or notice (written or oral) by any person or entity
alleging potential liability (including, without limitation, potential liability
for investigatory costs, cleanup costs, governmental response costs, natural
resources damages, property damages, personal injuries, or penalties) arising
out of, based on or resulting from (a) the presence, or release into the
environment, of Hazardous Substances at any location which is or has been owned,
leased, operated or utilized by the Company or (b) circumstances forming the
basis of any violation, or alleged violation, of any Environmental Law.
"Environmental Laws" means the federal, state,
regional, county or local environmental, health or safety laws, regulations,
ordinances, rules and policies and common law in effect on the date hereof and
the Closing Date relating to the use, refinement, handling, treatment, removal,
storage, production, manufacture, transportation or disposal, emissions,
discharges, releases or threatened releases of Hazardous Substances, or
otherwise relating to protection of human health or the environment (including,
without limitation, ambient air, surface water, ground water, land surface or
subsurface strata), as the same may be amended or modified to the date hereof
and the Closing Date.
"Hazardous Substances" means any toxic or hazardous
waste, pollutants or substances, including, without limitations, asbestos
containing materials ("ACMs"), polychlorinated biphenyls ("PCBs"), petroleum
products, byproducts, or other hydrocarbon substances, substances defined or
listed as a "hazardous waste", "hazardous substance", "toxic substance", "toxic
pollutant", or similarly identified substance or mixture, in or pursuant to any
Environmental Law and medical or infectious waste.
(m) Contracts and Commitments. Except as described on Schedule
5(m) hereto, the Company is not a party or subject to any agreement, commitment,
contract or obligation, whether written or oral, express or implied:
(i) that limits the right of the Company to engage
in or to compete with any person or entity in any business;
(ii) for the purchase or sale of supplies, services
or other items in excess of Ten Thousand and No/100 Dollars ($10,000.00) in any
one instance;
(iii) for the purchase or sale of any equipment or
machinery in excess of Ten Thousand and No/100 Dollars ($10,000.00);
(iv) for the performance of services for others in
excess of Ten Thousand and No/100 Dollars ($10,000.00) in any one instance;
(v) for the performance of services for others in
excess of Ten Thousand and No/100 Dollars ($10,000.00) for a period of more than
ninety (90) days;
(vi) for the lease of any property, tangible or
intangible;
(vii) with any shareholder, partner, officer or
director of the Company or any affiliate of such persons;
(viii) not in the ordinary course of business;
(ix) for any power of attorney, whether limited or
general, granted by or to the Company; or
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(x) otherwise material to the assets, business or
operations of the Company.
The Company has delivered to SEI true and complete copies of all of the
contracts, leases and agreements described on Schedule 5(m) (the "Company
Agreements"). Except as noted in Schedule 5(m), the Company Agreements are valid
and in full force and effect; each is a legal, valid and binding contract; there
has been no threatened cancellation thereof and there are no outstanding
disputes thereunder; each is with unrelated third parties and was entered into
on an arms-length basis in the ordinary course of business; all will continue to
be binding in accordance with their terms after consummation of the transactions
contemplated herein; there is no material default (or an event which, with the
giving of notice or lapse of time or both would be a material default) by the
Company; and to the knowledge of the Company and the Shareholders, there is no
pending or threatened bankruptcy, insolvency or similar proceeding with respect
to any other party to the Company Agreements. There are no contracts, leases,
agreements or other instruments to which the Company is a party or is bound
(other than insurance policies) which could either singularly or in the
aggregate have an adverse effect on the value of the Company.
(n) No Undisclosed Liabilities. With the exception of the
liabilities set forth on Schedule 5(n) or as reflected on the Financial
Statements, the Company does not have any material liabilities or obligations of
any nature, whether absolute, accrued, asserted or unasserted, contingent or
otherwise or whether due or to become due, relating to or arising out of any
act, omission, transaction, circumstance, sale of goods or services or other
condition which occurred or existed on or before the date hereof, and neither
the Company nor any Shareholder knows or has reason to know of any basis for the
assertion against the Company of any such liability or obligation of any nature
not described in Schedule 5(n).
(o) Employees and Labor Matters.
(i) Schedule 5(o) contains a complete and accurate
list of the following information for each employee or director of the Company:
name; job title; current compensation paid or payable and any change in
compensation since __________, 19___; vacation accrued; and service credited for
purposes of vesting and eligibility to participate under any pension,
retirement, profit-sharing, thrift-savings, deferred compensation, stock bonus,
stock option, cash bonus, employee stock ownership (including investment credit
or payroll stock ownership), severance pay, insurance, medical, welfare, or
vacation plan, or any other employee benefit plan or any director plan.
(ii) No employee or director of the Company is a
party to, or is otherwise bound by, any agreement or arrangement, including any
confidentiality, noncompetition, or proprietary rights agreement, between such
employee or director and any other person or entity that in any way adversely
affects or will affect (A) the performance of his duties as an employee or
director of the Company, or (B) the ability of the Company to conduct its
business. To the knowledge of the Company and each Shareholder, no director,
officer, or other key employee of the Company intends to terminate his
employment with the Company.
(iii) The Company is in compliance in all material
respects with all applicable laws respecting employment and employment
practices, terms and conditions of employment, wages and hours, occupational
safety and health, including laws concerning unfair labor practices within the
meaning of Section 8 of the National Labor Relations Act, and the employment of
non-residents under the Immigration Reform and Control Act of 1986.
(iv) Except as disclosed on Schedule 5(o),
(A) there are no charges, governmental
audits, investigations, administrative proceedings or complaints concerning the
Company's employment practices pending or, to the knowledge of the Company and
each Shareholder, threatened before any federal, state or local agency or court,
and, to the knowledge of the Company and each Shareholder, no basis for any such
matter exists;
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(B) the Company is not a party to any union
or collective bargaining agreement, and, to the knowledge of the Company and
each Shareholder, no union attempts to organize the employees of the Company
have been made, nor are any such attempts now threatened; and
(C) the Company has not experienced any
organized slowdown, work interruption, strike or work stoppage by its employees
during the last three (3) years.
(p) Employee Benefit Plans.
(i) Set forth on Schedule 5(p)(i) is a list of all
"employee benefit plans" as defined by Section 3(3) of the Employment Retirement
Income Security Act of 1974, as amended, and the rules and regulations
promulgated thereunder (collectively, "ERISA"), all specified fringe benefit
plans as defined in Section 6039D of the Code, and all other bonus, incentive
compensation, deferred compensation, profit sharing, stock option, stock
appreciation right, stock bonus, stock purchase, employee stock ownership,
savings, severance, supplemental unemployment, layoff, salary continuation,
retirement, pension, health, life insurance, disability, group insurance,
vacation, holiday, sick leave, fringe benefit or welfare plan, or any other
similar plan, agreement, policy or understanding (whether written or oral,
qualified or nonqualified), and any trust, escrow or other agreement related
thereto, which (i) is maintained or contributed to by the Company, or (ii) with
respect to which the Company has any officer, employee, service provider, former
officer or former employee, or the dependents of any thereof, regardless of
whether funded that maintain or contribute to such plans (the "Employee Plans").
The Company has delivered or made available to SEI true, accurate and complete
copies of the documents comprising each Employee Plan and any related trust
agreements, annuity contracts or any other funding instruments ("Funding
Arrangements").
(ii) There have been no prohibited transactions,
breaches of fiduciary duty or other breaches or violations of any law applicable
to the Employee Plans and related Funding Arrangements that could subject the
Company or SEI to any liability. Each Employee Plan intended to be qualified
under Section 401(a) of the Code has a current favorable determination letter
and no event has occurred which, to the knowledge of the Company, could cause
any Employee Plan to become disqualified for purposes of section 401(a) of the
Code. Each Employee Plan has been operated in compliance with applicable law,
including Section 401(a) of the Code as applicable, and in accordance with its
terms.
(iii) All required reports and descriptions of the
Employee Plans (including Internal Revenue Service Form 5500 annual reports,
summary annual reports and summary plan descriptions) have been timely filed
with the Internal Revenue Service, the United States Labor Department (the
"DOL"), and the Pension Benefit Guaranty Corporation (the "PBGC") and, as
appropriate, provided to participants in the Employee Plans.
(iv) There are no pending claims, lawsuits or
actions relating to any Employee Plan (other than ordinary course claims for
benefits) and, to the best knowledge of the Company, none are threatened.
(v) No written or oral representations have been
made to any employee or former employee of the Company promising or guaranteeing
any employer payment or funding, and no Employee Plans provide, for the
continuation of medical, dental, life or disability insurance coverage for any
former employee of the Company for any period of time beyond the end of the
current plan year (except to the extent of coverage required under Title I, Part
6, of ERISA). The consummation of the transactions contemplated by this
Agreement will not accelerate the time of vesting, of payment, or increase the
amount, of compensation to any employee, officer, former employee or former
officer of the Company. No Employee Plans or other contracts or arrangements
provide for payments that would be triggered by the consummation of the
transactions contemplated by this Agreement that would subject any person to
excise tax under Section 4999 of the Code (i.e., "golden parachute" taxes). All
compensation amounts that have been paid or are payable are or will become
deductible by SEI pursuant to Section 162 of the Code.
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(vi) The Company and its affiliates have complied
with the continuation coverage provisions of Title I, Part 6, of ERISA ("COBRA")
with respect to all current employees and former employees. Schedule 5(p)(vi)
lists all of the former employees of the Company and their beneficiaries who
have elected or are eligible to elect COBRA continuation of health insurance
coverage under the Company's group health plans and who are so covered as of the
date hereof, and as of the Closing Date.
(vii) Neither the Company nor any other employer who
has participated or is participating in any Employer Plan (a "Sponsor") has
incurred any liability to the DOL, the PBGC or the Internal Revenue Service in
connection with any of the Employee Plans, and no condition exists that presents
a risk to the Company or any Sponsor of incurring any liability to the DOL, the
PBGC or Internal Revenue Service.
(viii) The Company has not been liable at any time
for contributions to a plan that is subject to Title IV of ERISA.
(ix) Full payment has been made of all amounts
which are required under the terms of each Employee Plan or Funding Arrangement
to have been paid as of the due date for such payments that have occurred on or
before the date of this Agreement, and no accumulated funding deficiency (as
defined in Section 302 of ERISA and Section 412 of the Code) has been incurred
with respect to such Employee Plan, whether or not waived.
(x) Neither the Company nor any other Sponsor has
any liability, nor will the transactions contemplated under this Agreement
result in any liability (i) for the termination of or withdrawal from any plan
under Sections 4062, 4063, or 4064 of ERISA, (ii) for any lien imposed under
Section 302(f) of ERISA or Section 412(n) of the Code, (iii) for any interest
payments required under Section 302(e) of ERISA or Section 412(m) of the Code,
(iv) for any excise tax imposed by Section 4971 of the Code, (v) for any minimum
funding contributions under Section 302(c)(11) of ERISA or Section 412(c)(11) of
the Code, or (vi) for withdrawal from any multi-employer plan under Section 4201
of ERISA.
(xi) Any Employee Plan that provides for severance
payments to employees after termination of employment is in writing, has been
operated in compliance with ERISA, and expressly provides that no severance
benefits are payable as the result of a termination of employment to an employee
who is hired by a successor entity, or who otherwise continues employment with a
successor, in connection with a merger or acquisition transaction.
(q) Trademarks, Trade Names, Etc. The Company owns or has the
right to use each trademark, trade name, service mark, patent, copyright or
other intellectual property (the "Intellectual Property") necessary or desirable
for the operation of the business of the Company as presently conducted, and
following the Transfer, the Company will own or be able to use the Intellectual
Property on the identical terms and conditions. The Company is not currently in
receipt of any notice of any violation of, and has no reason to believe that the
Company's operations are violating, the rights of others with respect to the
Intellectual Property, and the Company has taken reasonable measures to protect
its rights with respect to Intellectual Property that is proprietary to the
Company.
(r) Litigation. Except as set forth in Schedule 5(r), there is
no litigation, arbitration, governmental claim, investigation or proceeding
pending or threatened to which the Company or a Shareholder is a party, at law
or in equity, before any court, arbitration tribunal or governmental agency. No
such proceeding set forth in Schedule 5(r) concerns the ownership or other
rights with respect to the Company Common Stock. Neither the Company nor any
Shareholder knows of any facts on which material claims may be hereafter made
against the Company. All claims and litigation against the Company are fully
covered by insurance, except as otherwise indicated on Schedule 5(r).
(s) Compliance with Laws, Regulations and Court Orders. There
is not outstanding or threatened any order, writ, injunction or decree of any
court, governmental agency or arbitration tribunal against or affecting the
Company or the Company Common Stock. The Company is in compliance with all
applicable federal, state and local laws, regulations and
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administrative orders and has received no notices of alleged violations thereof
except as disclosed in Schedule 5(s) hereof. Except as disclosed in Schedule
5(s), no warranty provided pursuant to the Company's service and maintenance
agreements is subject to any federal, state or local laws or regulations
concerning the sale of insurance. Neither the Company, nor, to the knowledge of
the Company, any licensed technician or other individual affiliated with the
Company has, during the past three (3) years, been the subject of any
inspection, investigation, survey, audit, monitoring or other form of review by
any governmental regulatory entity, trade association, professional review
organization, accrediting organization or certifying agency for the purpose of
any alleged improper activity on the part of such individual, nor has the
Company received any notice of deficiency in connection with its operation. No
governmental authorities are currently conducting proceedings against the
Company and no such investigation or proceeding is pending or being threatened.
(t) Certain Payments. Neither the Company nor any Shareholder,
director, officer, agent, or employee of the Company, or any other person
associated with or acting for or on behalf of the Company, has directly or
indirectly (i) made any contribution, gift, bribe, rebate, payoff, influence
payment, kickback or other payment to any person, private or public, regardless
of form, whether in money, property, or services (A) to obtain favorable
treatment in securing business, (B) to pay for favorable treatment for business
secured, (C) to obtain special concessions or for special concessions already
obtained, for or in respect of the Company or any affiliate of the Company, or
(D) in violation of any law, or (ii) established or maintained any fund or asset
that has not been recorded in the books and records of the Company.
(u) Consents and Approvals. Except as set forth on Schedule
5(u), no consents, approvals, authorizations or orders of third parties,
including governmental authorities, are necessary for the authorization,
execution and performance by each Shareholder of this Agreement and the
Transaction Documents.
(v) No Broker's Fees. The Shareholders and the Company have no
liability or obligation to pay any fees or commissions to any broker, finder or
agent with respect to the transactions contemplated by this Agreement.
(w) Disclosure.
(i) No representation or warranty made herein by any
Shareholder, nor in any statement, certificate or instrument to be furnished to
SEI by the Company or any Shareholder pursuant to any Transaction Document,
contains or will contain any untrue statement of material fact or omits or will
omit to state a material fact necessary to make these statements contained
herein and therein not misleading.
(ii) There is no fact known to the Company or any
Shareholder that has specific application to the Company (other than general
economic or industry conditions) and that materially adversely affects the
Company Common Stock, the Assets or the business, prospects, financial
condition, or results of operations of the Company that has not been set forth
in this Agreement.
(x) Reliance on Representations. Each Shareholder understands
and intends that SEI and its management will rely upon the representations of
the Company and each Shareholder made in this Agreement, and they are entitled
to rely upon each and all of the same without further inquiry.
(y) No Conflict of Interest. None of the Shareholders or any
of their respective affiliates owns, directly or indirectly (except in the
capacity as a shareholder), in whole or in part, any real or personal property,
tangible or intangible, which the Company is presently using or the use of which
is necessary for the business of the Company as presently conducted. The Company
is not indebted to any of its officers, directors or shareholders or to their
respective spouses, children or other family members, and none of such officers,
directors or shareholders has any claim of any nature against the Company,
except for accrued compensation. No officer, director or shareholder of the
Company, or any person in the family of or who is a partner of any officer,
director or shareholder of the Company, (i) is indebted to the Company, or (ii)
has any direct or indirect ownership interest in (A) any entity that sells goods
or services to the Company, (B) any
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other entity with which the Company is affiliated or with which it has a
business relationship or (C) in any entity that competes with the Company.
(z) Pooling Matters. To the best knowledge of the
Shareholders, neither the Company nor any of its affiliates has taken or agreed
to take any action that (without giving effect to any actions taken or agreed to
be taken by SEI or any of its affiliates) would prevent SEI from accounting for
the business combination to be effected by the Transfer as a
pooling-of-interests for financial reporting purposes in accordance with
Accounting Principles Board Opinion No. 16, the interpretative releases issued
pursuant thereto, and the pronouncements of the Securities and Exchange
Commission (the "SEC") thereon.
Section 6. Representations and Warranties of SEI. SEI hereby represents
and warrants to each Shareholder as follows as of the date hereof and as of the
Closing Date:
(a) Corporate Organization. SEI is a corporation duly
organized, validly existing and in good standing under the laws of its state of
incorporation, has all requisite corporate power and authority to execute and
deliver this Agreement and holds all licenses, permits and other required
authorizations from governmental authorities necessary to conduct its business
as it is now being conducted.
(b) Capitalization. As of the date hereof, SEI's authorized
capital stock consists of (i) 30,000,000 shares of SEI Common Stock, par value
$.01 per share, and (ii) 10,000,000 shares of Preferred Stock, par value $.01
per share, none of which are issued and outstanding. All issued and outstanding
shares of SEI Common Stock have been duly and validly authorized, issued, fully
paid and nonassessable. No shareholder of SEI has any preemptive rights with
respect to the issuance of shares of SEI Common Stock.
(c) Authorization and Validity. The execution, delivery and
performance of this Agreement and the consummation of the transactions
contemplated hereby have been duly authorized and approved by all necessary
corporate action. This Agreement, when executed, will constitute the legal,
valid and binding obligation of SEI, enforceable against it in accordance with
its terms, except as enforceability may be limited by applicable bankruptcy,
insolvency, reorganization, moratorium or similar laws and subject to general
principles of equity (regardless of whether such enforceability is considered in
a proceeding in equity or at law).
(d) Absence of Conflicting Agreements or Required Consents.
The execution, delivery and performance by SEI of the Transaction Documents to
be executed and delivered by it (i) do not require the consent of or notice to
any governmental or regulatory authority or any other third party; (ii) will not
conflict with any provision of SEI's Restated Certificate of Incorporation or
Bylaws; (iii) will not conflict with or result in a violation of any law,
ordinance regulation, ruling, judgment, order or injunction of any court or
governmental instrumentality to which SEI is a party or by which SEI or any of
its properties are bound; (iv) will not conflict with, constitute grounds for
termination of, result in a breach of, constitute a default under, require any
notice under, or accelerate or permit the acceleration of any performance
required by the terms of any agreement, instrument, license or permit to which
SEI is a party or by which any of its properties are bound; and (v) will not
create any lien, encumbrance or restriction upon any of the assets or properties
of SEI.
(e) Litigation and Claims. There are no claims, lawsuits,
actions, arbitrations, administrative or other proceedings, governmental
investigations or inquiries pending or threatened against SEI affecting the
performance by SEI of the Transaction Documents.
(f) No Broker's Fees. SEI does not have any liability or
obligation to pay any fees or commissions to any broker, finder or agent with
respect to the transactions contemplated by this Agreement.
(g) Statements True and Correct. No representation or warranty
made herein by SEI, nor in any statement, certificate or instrument to be
furnished to the Shareholders by SEI pursuant to any Transaction Document,
contains or will contain any untrue statement of
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material fact or omits or will omit to state a material fact necessary to make
these statements contained herein and therein not misleading.
(h) Ownership of Company Common Stock. SEI does not own any
shares of Company Common Stock or other securities convertible into Company
Common Stock.
Section 7. Additional Covenants and Agreements.
(a) Access to Information. From the date hereof to the Closing
Date, the Shareholders shall cause the Company to accord to SEI, its counsel,
accountants and other representatives full access to all of the properties,
books, records, contracts, commitments and records of the Company and furnish
SEI during such period with all such information concerning the business and
properties of the Company as SEI and its representatives reasonably may request.
Such parties shall also be allowed access, upon reasonable notice, to consult
with the officers, employees, accountants, counsel and agents of the Company in
connection with such investigation of the properties and business of the
Company. No such investigation shall diminish or otherwise affect any of the
representations, warranties, covenants or agreements of any party under the
Agreement.
(b) Affirmative Covenants of the Shareholders. During the
period from the date of this Agreement to the Closing Date, the Shareholders
shall cause the Company to (i) continue to operate its business in the usual,
regular, and ordinary course of business, consistent with past practices, (ii)
obtain the written approval of SEI prior to making any capital expenditure in
excess of Twenty-Five Thousand and No/100 Dollars ($25,000.00) in the aggregate,
(iii) maintain in effect adequate casualty, public liability, professional
malpractice and workers' compensation insurance coverage, (iv) maintain the
Assets in their present condition, ordinary wear and tear excepted, (v) comply
with all laws and regulations of governmental agencies or authorities, including
applicable tax laws and regulations, (vi) operate its business in the manner
necessary to maintain its reputation and the goodwill of its customers, vendors,
lessors and others having business relations with the Company, and (vii) keep in
force all licenses, permits and approvals necessary to the operation of its
business as now conducted.
(c) Negative Covenants of the Shareholders. Without the prior
written consent of SEI or unless otherwise expressly permitted herein, from the
date of this Agreement to the Closing Date, the Shareholders shall cause the
Company not to:
(i) enter into, renew, amend, breach or terminate
any contract or agreement to which it is a party other than in the ordinary
course of business;
(ii) increase the salary of or declare or pay any
bonus to any employee;
(iii) incur any additional debt obligation or other
obligation for borrowed money in excess of an aggregate of Twenty-Five Thousand
and No/100 Dollars ($25,000.00), or impose, or suffer the imposition, on any
Asset of the Company of any lien or permit any such lien to exist;
(iv) issue, sell, repurchase, redeem, or otherwise
acquire or exchange, directly or indirectly, any share of Company Common Stock
or any securities convertible into any share of Company Common Stock, or declare
or pay any dividend or make any other distribution in respect of the share of
Company Common Stock;
(v) purchase or acquire any of the Assets, whether
real or personal, tangible or intangible, or sell or dispose of any of the
Assets, whether real or personal, tangible or intangible, except in the ordinary
course of business and consistent with past practices;
(vi) purchase any securities or make any material
investment, either by purchase of stock or other securities, contributions to
capital, asset transfers, or purchase of any assets, in any entity, or otherwise
acquire direct or indirect control over any other entity;
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(vii) except in the ordinary course of business
(and, even if in the ordinary course of business, then not in an amount to
exceed Twenty-Five Thousand and No/100 Dollars ($25,000.00) in the aggregate),
make or commit to make any capital expenditure, or enter into any lease of
capital equipment as lessee or lessor;
(viii) make any loan to any person or increase the
aggregate amount of any loan currently outstanding to any person;
(ix) engage in any transaction other than in the
ordinary course of business and consistent with past practice;
(x) adopt any new employee benefit plan or make
any material change in or to any Benefit Plan other than any such change that is
required by law or that, in the opinion of counsel, is necessary or advisable to
maintain the tax qualified status of any such Benefit Plan;
(xi) commence any litigation other than in
accordance with past practice, settle any litigation involving any liability of
the Company for material money damages or restrictions upon the operations of
the Company;
(xii) fail to deliver to SEI any notice or other
information regarding pending or threatened litigation in respect of it or its
operations;
(xiii) take, fail to take, or permit any action, the
result of which would be to make any representation or warranty of Section 5
untrue, or prevent the satisfaction of any condition set forth in Sections 8 and
10;
(xiv) change or alter any method of accounting; or
(xv) change any provision of its Articles of
Incorporation or Bylaws.
(d) Notice of Adverse Change. The Shareholders shall cause the
Company to advise SEI in writing of any material adverse change in the Assets,
the business, financial condition or prospects of the Company from the date of
this Agreement to the Closing Date.
(e) Best Efforts. Each Shareholder will use its best efforts
to take all action and to do all things necessary, proper or advisable to
consummate the transactions contemplated by this Agreement. Each Shareholder
will use its best efforts to secure all consents and approvals required to carry
out the transactions contemplated by this Agreement and to satisfy all other
conditions to the obligations of the parties hereunder.
(f) Licenses; Permits. The Shareholders will cause the Company
to cooperate in all reasonable respects with SEI in its applications to obtain
such licenses and permits, if any, as may be necessary in order for SEI to
operate the business of the Company as it is currently operated.
(g) No Solicitation of Other Offers. The Shareholders shall
cause the Company (acting through any director, officer or other agent including
any investment banker, attorney, accountant or other representative retained by
it) not to, and the Shareholders (acting through any agent including any
investment banker, attorney, accountant or other representative retained by it)
shall not (i) solicit or encourage, including by way of furnishing information,
any inquiries or the making of any proposal which may reasonably be expected to
lead to the acquisition of any of the shares of Company Common Stock or a
substantial portion of the Assets; (ii) enter into or conduct any discussions
with any other prospective purchaser of any or all of the Company Common Stock
or the Assets regarding such a purchase or enter into any agreement or
negotiations with respect to the disposition of any or all of the Company Common
Stock or the Assets, regardless of the form of the transaction, without the
consent of SEI, other than in the ordinary course of
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business. Each Shareholder shall promptly advise SEI in writing of any such
inquiries, proposals or discussions received by the Shareholder or the Company
after the date hereof.
(h) Confidentiality and Public Announcements. Each Shareholder
shall cause the Company to, and each Shareholder shall, keep confidential all
information concerning the Transfer, this Agreement or provided to it by SEI
and, in the event of termination of the Transfer pursuant to Section 11, shall
deliver to SEI all documents and other materials previously delivered concerning
the transactions contemplated hereby. The Shareholders shall cause the Company
to, and each Shareholder shall, refrain from making, any public announcement
with respect to this Agreement without the prior written consent of SEI. SEI and
the Company will consult with each other before issuing any press release or
otherwise making any public statement with respect to the transaction
contemplated by this Agreement, and shall not issue any such press release or
make any such public statement prior to such consultation except as may be
required by applicable law or the requirements of the New York Stock Exchange
(i) Risk of Loss. The Shareholders and the Company shall
retain all risk of condemnation, destruction, loss or damage due to fire or
other casualty from the date of this Agreement until the Closing. If the
condemnation, destruction, loss or damage is such that the operation of the
Company is materially interrupted or curtailed or any of the Assets are
materially affected, then SEI shall have the right to terminate this Agreement.
If SEI nonetheless elects to close the transactions contemplated hereby, the
Shareholders shall cause the Company to remit all net condemnation proceeds or
third party insurance proceeds to SEI, and the Purchase Price shall be adjusted
at the Closing to reflect such condemnation, destruction, loss or damage to the
extent that insurance or condemnation proceeds are not sufficient to cover such
destruction, loss or damage.
(j) Subchapter S Matters. If the Company is an "S"
corporation, the Shareholders shall prepare, at their expense, the short period
tax returns of the Company ending on the Closing Date. Such returns shall be
provided for SEI's prior review and approval, which approval shall not be
unreasonably withheld or delayed. The Shareholders shall file such returns on
behalf of the Company as an "S" corporation for that short period. SEI shall
make available any information in its or the Company's possession which is
reasonably required by the Shareholders to complete such returns.
(k) Resale of SEI Common Stock. Each Shareholder hereby
acknowledges and agrees to the following: (i) the shares of Common Stock
issuable to such Shareholder will be held by such Shareholder pursuant to the
provisions of the Securities Act of 1933, as amended (the "Act"), and the rules
and regulations thereunder; (ii) no sale or disposition of such shares of Common
Stock will be made except pursuant to the terms of SEI's "shelf" Registration
Statement on Form S-4 (the "Registration Statement"), the post-effective
amendment and the prospectus contained therein, the Act and the rules and
regulations thereunder; and (iii) each such certificate representing the shares
of Common Stock issued to a Shareholder will bear a restrictive legend setting
forth the restrictions on transfer referred to above.
(l) Prohibited Activities. From and after the date hereof and
until the Effective Time, each party hereto agrees that it shall not (i)
knowingly take any action or knowingly fail to take any action that would
jeopardize the treatment of the Transfer as a "pooling of interests" for
financial accounting purposes; (ii) knowingly take any action or knowingly fail
to take any action that would jeopardize qualification of the Transfer as a
reorganization within the meaning of Section 368 of the Code; or (iii) enter
into any contract, agreement, commitment or other arrangement with respect to
either of the foregoing.
(m) Closing Date Balance Sheet.
(i) The Company's shareholders' equity at the Closing
Date will be not less than $___________. If the Company's shareholders' equity
at the Closing Date is more than $__________, SEI will increase the Purchase
Price by the over-equity amount. However, such increase in the Purchase Price
for the over-equity shall not exceed the increase in the net working capital,
excluding any increase in inventory between the last day of the Valuation Period
and the Closing Date.
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<PAGE> 16
(ii) None of the Shareholders will be indebted to
the Company as of the Closing Date.
(iii) As of the Closing Date, the Company will not
have any indebtedness, other than (i) accounts payable less than forty-five (45)
days old as of the Closing Date and (ii) the Assumed Debt.
(n) Right of First Refusal. The Shareholders agree that if,
during the twelve (12) month period commencing with the execution of this
Agreement, the Company receives and desires to accept a bona fide offer (an
"Offer") relating to a merger or other business combination of the Company or
for the acquisition of a substantial equity interest in the Company or the
acquisition of a substantial portion of the Company's assets (other than the
transactions contemplated by this Agreement), the Shareholders shall promptly
notify SEI in writing of each such Offer. This notice shall contain a copy of
the Offer and all other terms and conditions applicable to the Offer. SEI shall
have the right to consummate the transaction set forth in the Offer on
substantially the same terms and conditions as set forth in the Offer. SEI shall
exercise its right of first refusal, if at all, by giving written notice to the
Shareholders within thirty (30) days of receipt of the Shareholders' notice of
the Offer. Notwithstanding the foregoing, nothing contained in this Section 7(n)
shall in any way limit or relieve the Shareholders of their obligations under
Section 7(g) hereof.
(O) TITLE COMMITMENTS AND SURVEYS. THE SHAREHOLDERS SHALL
CAUSE THE COMPANY TO OBTAIN AS SOON AS REASONABLY POSSIBLE, AT THE EXPENSE OF
THE COMPANY, A TITLE COMMITMENT FROM _________________ (THE "TITLE COMPANY") FOR
AN OWNER'S TITLE POLICY/ALTA FORM 1987 (REVISED 10-17-92) TITLE INSURANCE POLICY
FOR THE REAL PROPERTY (THE "OWNED PROPERTY") OWNED BY THE COMPANY (THE "TITLE
COMMITMENT"), ALONG WITH COPIES OF ALL RECORDED DOCUMENTS AFFECTING OR RELATING
TO THE OWNED PROPERTY. THE COMPANY SHALL OBTAIN AS SOON AS REASONABLY POSSIBLE,
AT THE EXPENSE OF THE COMPANY, AN ALTA/ACSM SURVEY OF THE OWNED PROPERTY (THE
"SURVEY"), SHOWING, INTER ALIA, THE PERIMETER BOUNDARIES OF THE OWNED PROPERTY,
ALL IMPROVEMENTS THEREON, AND ALL TITLE EXCEPTIONS NOTED ON THE TITLE
COMMITMENT. THE COMPANY WILL PROVIDE SEI WITH COPIES OF THE TITLE COMMITMENT AND
SURVEY.
Section 8. Conditions to the Parties' Obligations to Effect the
Transfer. The respective obligations of the parties to effect the Transfer shall
be subject to the fulfillment at or prior to the Closing Date of the following
conditions:
(a) This Agreement and the transactions contemplated hereby
shall have been approved in the manner required by applicable law, by the
applicable regulations of the New York Stock Exchange and by any applicable
regulatory body.
(b) Any waiting period applicable to the consummation of the
Transfer under the Hart-Scott-Rodino Antitrust Improvements Act of 1976 shall
have expired or been terminated.
(c) None of the parties hereto shall be subject to any order
or injunction of a court of competent jurisdiction which prohibits the
consummation of the transactions contemplated by this Agreement. In the event
any such order or injunction shall have been issued, each party agrees to use
its reasonable efforts to have any such injunction lifted.
(d) SEI's Registration Statement shall remain effective at the
Closing, and no stop order suspending the effectiveness of the Registration
Statement shall have been issued; no action, suit, proceeding or investigation
by the SEC to suspend the effectiveness thereof shall have been initiated and be
continuing; and all necessary approvals under state securities laws relating to
the issuance or trading of the SEI Common Stock to be issued in connection with
the Transfer shall have been received.
(e) All consents, authorizations, orders and approvals of (or
filings or registrations with) any governmental commission, board or other
regulatory body required in connection with the execution, delivery and
performance of this Agreement shall have been obtained or made, except where the
failure to have obtained or made any such consent, authorization, order,
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<PAGE> 17
approval, filing or registration would not have a material adverse effect on the
business of SEI and the Company (and their respective subsidiaries), taken as a
whole, following the Closing.
(f) The SEI Common Stock to be issued in connection with the
Transfer shall have been approved for listing on the New York Stock Exchange,
subject only to official notice of issuance.
Section 9. Conditions to the Obligations of the Shareholders to Effect
the Transfer. The obligations of the Shareholders to effect the Transfer shall
be subject to the fulfillment at or prior to the Closing Date of the following
conditions:
(a) Representations and Warranties. The representations and
warranties of SEI set forth herein in Section 6 above shall be true and correct
in all material respects as of the Closing Date with the same effect as though
made on and as of such date.
(b) Performance; Document Delivery. SEI shall have performed
in all material respects, at or prior to the Closing Date, all acts in
accordance with its covenants set forth herein, including, but not limited to,
delivery to the Shareholders of the following documents:
(i) A good standing certificate regarding SEI
certified by the Secretary of State of the State of Delaware dated within five
(5) business days prior to Closing;
(ii) A certificate dated as of the Closing Date
signed by a duly authorized officer of SEI certifying that the representations
and warranties of SEI set forth herein are true and correct in all material
respects as of the Closing Date and that SEI has fulfilled all of the conditions
of this Section 9;
(iii) Resolutions adopted by the Board of Directors
of SEI approving the execution, delivery and performance of this Agreement and
the consummation of the transactions contemplated hereby, certified by the
Secretary of SEI; and
(iv) An incumbency certificate certifying the
identity of the officers of SEI.
(c) Opinion of Counsel. SEI shall have delivered to the
Shareholders an opinion of Waller Lansden Dortch & Davis, A Professional Limited
Liability Company, counsel to SEI, dated the Closing Date, substantially in the
form attached hereto as Schedule 9(c).
(d) No Injunction, Etc. No action proceeding, investigation or
legislation shall have been instituted, threatened or proposed before any court,
governmental agency or legislative body to enjoin, restrain, prohibit or obtain
substantial damages in respect of, or which is related to or arises out of, this
Agreement or the consummation of the transactions contemplated hereby, or which
is related to or arises out of the business or operations of SEI, if such
action, proceeding, investigation or legislation, in the reasonable judgment of
the Shareholders or their counsel, would make it inadvisable to consummate such
transactions.
Section 10. Conditions to the Obligations of SEI to Effect the
Transfer. The obligations of SEI to effect the Transfer shall be subject to the
fulfillment at or prior to the Closing Date of the following conditions:
(a) Due Diligence Review; Delivery of Schedules. SEI shall
have completed, and in its sole discretion be satisfied with the results of, its
due diligence review of the operations and financial condition of the Company,
including, without limitation, the Financial Statements. The Shareholders shall
have delivered to SEI the Schedules called for by this Agreement, and such
Schedules shall be satisfactory to SEI in its sole discretion.
(b) Representations and Warranties. The representations and
warranties of each Shareholder contained in this Agreement, or any document or
instrument
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<PAGE> 18
delivered to SEI hereunder, shall be true and correct as of the Closing Date
with the same effect as though made on and as of such date.
(c) Performance; Document Delivery. Each Shareholder shall
have performed, at or prior to the Closing Date, all acts in accordance with
their covenants herein, including, but not limited to, delivery to SEI of the
following documents:
(i) A good standing certificate regarding the
Company and any Shareholder that is not a natural person, certified by the
Secretary of State of such party's state of organization dated within five (5)
business days prior to Closing;
(ii) A certificate dated as of the Closing Date
signed by each Shareholder certifying that the representations and warranties of
each Shareholder set forth herein are true and correct as of the Closing Date
and that each Shareholder has fulfilled all of the conditions of this Section
10;
(iii) Certificates representing the Shares, together
with accompanying stock transfer powers or instruments of assignment, duly
endorsed in blank by the applicable Shareholder;
(iv) Resignations of each of the officers and
directors of the Company effective as of the Closing Date;
(v) Releases of each Shareholder and each officer
and director of the Company concerning any claim against the Company (other than
current accrued wages and benefits), including any claims for indemnification,
contribution or otherwise arising with respect to this Agreement, the
representations, warranties and agreements contained herein and the transactions
contemplated hereby;
(vi) All books and records of the Company, including
all corporate and other records, minute books, stock record books, stock
registers, books of accounts, contracts, agreements and such other documents or
certificates as shall be reasonably requested by SEI; and
(vii) Evidence that all agreements or arrangements,
whether written or oral, among the Shareholders and/or the Company that relate
in any manner to the Company Common Stock have been terminated.
(d) No Adverse Change. There shall not have been any change
between the date of the latest Financial Statements and the Closing Date which
has had or will have a material adverse effect on the business, operations,
financial condition, Assets or prospects of the Company, and a certificate shall
have been delivered to SEI to such effect signed by each of the Shareholders and
such executive officers of the Company as SEI may request.
(e) Opinion of Counsel. SEI shall have been furnished with a
favorable opinion of counsel to the Shareholders, dated the Closing Date,
substantially in the form attached hereto as Schedule 10(e).
(f) Consents and Approvals. The Shareholders shall have
obtained all necessary consents and approvals, in form and substance
satisfactory to SEI, required under all leases and other material contracts
pertaining to the Assets or the business of the Company and satisfying any
approval or permit or licensing requirements for consummation of this
transaction and necessary to carry on the business of the Company as it is
currently being conducted.
(g) No Injunction, Etc. No action, proceeding, investigation
or legislation shall have been instituted, threatened or proposed before any
court, governmental agency or legislative body to enjoin, restrain, prohibit or
obtain substantial damages in respect of, or which is related to or arises out
of, this Agreement or the consummation of the transactions contemplated hereby,
or which is related to or arises out of the business or operations of the
Company, if such action, proceeding, investigation or legislation, in the
reasonable judgment of SEI or its counsel, would make it inadvisable to
consummate such transactions.
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<PAGE> 19
(h) Lock-up Agreements. Each Shareholder shall have entered
into an agreement with SEI restricting the resale of shares of SEI Common Stock
substantially in the form attached hereto as Schedule 10(h).
(i) Non-Compete Agreements. Each Shareholder shall have
entered into a non-compete agreement substantially in the form attached hereto
as Schedule 10(i).
(j) Employment Agreements. The Company and certain employees
of the Company shall have entered into employment agreements substantially in
the form attached hereto as Schedule 10(j).
(k) Escrow Agreement. SEI and each of the Shareholders shall
have entered into the Escrow Agreement, and each Shareholder who is a party to
the Escrow Agreement shall have executed and delivered to SEI a stock power with
respect to the shares of SEI Common Stock to be held in escrow.
(l) Pension Plan Liability. SEI shall be satisfied that it
will incur no liability with respect to pension or other post-retirement
benefits, except pursuant to SEI's pension plan in which all full-time Company
employees, who will remain employed by the Company after the Closing, are
eligible to participate.
(m) Environmental Audit. SEI shall have received a
satisfactory phase one environmental audit of the Real Property conducted by an
entity or individual acceptable to SEI at the Shareholders' sole expense.
(n) UCC Lien Search. SEI shall have received a satisfactory
UCC lien search on the Company from the office of the Secretary of State of the
Company's state of incorporation and each state listed in Schedule 5(a), and
from the appropriate office in each county in which the Company has business
operations. Such lien searches will be conducted by an entity or individual
acceptable to SEI at the Shareholders' sole expense.
(o) Lease. The Company shall have entered into a lease
substantially in the form of Schedule 10(o) attached hereto with the owners of
the building and land in and upon which the Company operates as of the date
hereof. The lease of such land and building in effect immediately prior to the
Closing shall be terminated.
(p) Board Approval. This Agreement and the Transfer shall have
been approved and authorized by the Board of Directors of SEI.
(q) Pooling Accounting Treatment. SEI shall be satisfied that
the Transfer will qualify for as a pooling of interests for financial accounting
purposes under generally accepted accounting principles and under applicable
rules and regulations of the SEC.
(R) TITLE COMMITMENT. SEI SHALL HAVE BEEN ISSUED A TITLE
COMMITMENT IN THE AMOUNT OF $__________ INSURING AS OF THE DATE AND TIME OF THE
RECORDING OF THE WARRANTY DEED SEI'S GOOD, INDEFEASIBLE AND MARKETABLE TITLE TO
THE OWNED PROPERTY WHICH SHALL CONTAIN NO LIENS OR OTHER TITLE EXCEPTIONS OR
ENCUMBRANCES EXCEPT FOR THOSE LIENS OR OTHER TITLE EXCEPTIONS OR ENCUMBRANCES
APPROVED IN WRITING BY SEI. SUCH TITLE COMMITMENT SHALL BE ACCEPTABLE TO SEI AND
SHALL PROVIDE FULL COVERAGE AGAINST MECHANIC'S OR MATERIALMAN'S LIENS ARISING
OUT OF ANY WORK, LABOR, MATERIALS OR SERVICES FURNISHED OR CLAIMED TO HAVE BEEN
FURNISHED TO THE OWNED PROPERTY OR ANY PORTION THEREOF PRIOR TO THE CLOSING
DATE, AND SHALL CONTAIN SUCH ENDORSEMENTS AS SPECIFIED HEREIN OR AS MAY BE
REASONABLY REQUIRED BY SEI.
Section 11. Termination.
(a) Means of Termination. This Agreement may be terminated at
any time prior to the Closing in the following ways:
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<PAGE> 20
(i) by the mutual consent in writing of the
Shareholders and SEI;
(ii) by SEI if (A) there has been a material
violation or breach by the Shareholders of any of the agreements,
representations or warranties contained in this Agreement which has not been
waived by SEI in writing, (B) any of the conditions set forth in Sections 8 and
10 hereof have not been satisfied within six (6) months of the date hereof or
have not been waived by SEI in writing, or (C) the Transfer will not qualify for
accounting by SEI as a "pooling of interests" under generally accepted
accounting principles and under the applicable rules and regulations of the SEC;
or
(iii) by the Shareholders if there has been a
material violation or breach by SEI of any of the agreements, representations or
warranties contained in this Agreement which has not been waived by the
Shareholders in writing, or if any of the conditions set forth in Sections 8 and
9 hereof have not been satisfied within six (6) months of the date hereof or
have not been waived by the Shareholders in writing.
(b) Effect of Termination. In the event this Agreement is
terminated in accordance with this Section 11, this Agreement shall become void
and of no further force or effect, except for the following agreements and
obligations of the parties, which shall survive the termination of this
Agreement: (i) the obligations of each party to preserve the confidentiality of
documents, certificates and information furnished to such party pursuant hereto,
(ii) any obligation or liability of any party based on or arising from any
breach or default by such party with respect to its representations, warranties,
covenants or agreements contained in the Transaction Documents, (iii) the right
of first refusal provided for in Section 7(n) hereof and (iv) the obligation of
each party to bear its own expenses as set forth in Section 12 hereof.
Section 12. Expenses. Each of the parties hereto shall bear and pay all
costs and expenses incurred by it or on its behalf in connection with the
Transfer, including its own legal, accounting and audit fees.
Section 13. Indemnification.
(a) Indemnification of SEI. The Shareholders, jointly and
severally, agree to indemnify and hold harmless SEI, each officer, director,
employee or agent thereof, their respective controlling persons, and their
respective estates, successors, and assigns (each an "Indemnified Party"), from
and against any and all claims, losses, damages, liabilities and expenses
(including, without limitation, settlement costs and any legal or other expenses
for investigating or defending any actions or threatened actions) (the "Losses")
reasonably incurred by such Indemnified Party as a result of:
(i) the untruth, inaccuracy or breach of any
representation or warranty made by the Shareholders pursuant to Section 5 of
this Agreement or any other Transaction Document;
(ii) the nonfulfillment or breach of any covenant,
agreement or obligation of the Shareholders contained in this Agreement or any
other Transaction Document;
(iii) any untrue statement of a material fact
relating to the Company and/or Shareholders that was made in reliance upon and
in conformity with information furnished by the Company and/or the Shareholders
to SEI and is contained in any preliminary prospectus, the Registration
Statement or any prospectus forming a part thereof, or any amendment thereof or
supplement thereto, or any omission by the Company and/or Shareholders to state
therein a material fact relating to the Company and/or Shareholders required to
be stated therein or necessary to make such statements therein not misleading,
and which is not provided in writing to SEI by the Shareholders or the Company;
(iv) any and all amounts of federal, state, and/or
local income, franchise, property, and/or sales and use taxes that may be
assessed against SEI with respect to any taxable period(s) ending on or before
the date of this Agreement for which adequate provisions therefor have not been
made through the Closing Date, as reflected on the Company's books of
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<PAGE> 21
account and in the Company's financial statements as of the Closing Date; and
the amount(s) of any interest and/or penalties that may be assessed with respect
to said tax assessments;
(v) any matter on any Schedule hereto as may be
specifically identified for indemnification in this Agreement or any other
Transaction Document; and
(vi) any claim or demand by any person asserting any
interest in any share of Company Common Stock or seeking dissenters' or
appraisal rights or any other claim in respect to the Transfer.
(b) Limitations on the Shareholders' Indemnity. The
Shareholders shall be obligated to indemnify and hold harmless SEI pursuant to
Section 13(a) only in the event that the aggregate of all indemnifiable Losses
exceeds one percent (1%) of the Purchase Price; provided, however, that in the
event the aggregate of all indemnifiable Losses exceeds one percent (1%) of the
Purchase Price, the Shareholders shall be obligated to indemnify SEI for all
indemnifiable Losses beginning with the first dollar. Notwithstanding the
foregoing sentence, the Shareholders shall be obligated to indemnify and hold
harmless SEI pursuant to Section 13(a) for all Losses arising from or relating
to a breach of Section 7(m) hereof.
(c) Indemnification of the Shareholders. SEI shall indemnify
and hold harmless the Shareholders pro rata in accordance with their holdings of
shares of Company Common Stock as of the Closing (each an "Indemnified Party")
from and against any and all Losses reasonably incurred by such Indemnified
Party as a result of:
(i) the untruth, inaccuracy or breach of any
representation or warranty made by SEI in this Agreement or in any other
Transaction Document;
(ii) the nonfulfillment or breach of any covenant,
agreement or obligation of SEI contained in this Agreement or in any other
Transaction Document; or
(iii) any untrue statement or alleged untrue
statement of a material fact relating to SEI (other than those that relate to
the Company) contained in any preliminary prospectus, the Registration Statement
or any prospectus forming a part thereof, or any amendment thereof or supplement
thereto, or arising out of or based on any omission or alleged omission to state
therein a material fact relating to SEI (other than the Company) required to be
stated therein or necessary to make the statements therein not misleading.
(d) Notification. Whenever any claim shall arise for
indemnification hereunder, the Indemnified Party shall notify the indemnifying
party promptly after such Indemnified Party has actual knowledge of the facts
constituting the basis for such claim, except that, in the event of any claim
for indemnification hereunder resulting from or in connection with any claim or
legal proceedings by a third party, such Indemnified Party shall give prompt
notice to the indemnifying party of such claim or the commencement of legal
proceedings in respect of which recovery may be sought against the indemnifying
party pursuant to the provisions of this Section 13. The notice to the
indemnifying party shall specify, if known, the amount or an estimate of the
amount of the liability arising therefrom. The Indemnified Party shall not
settle or compromise any such claim without the prior written consent of the
indemnifying party unless suit shall have been instituted against the
Indemnified Party and the indemnifying party shall have failed, within fifteen
(15) days after notice of institution of the suit, to take control of such suit
as provided in Section 13(e) below.
(e) Defense of Actions. In connection with any claim giving
rise to indemnity hereunder resulting from or arising out of any claim or legal
proceeding by a person who is not a party to this Agreement, the indemnifying
party, at its sole cost and expense, may, upon written notice to the Indemnified
Party, assume the defense of such claim or legal proceeding, to the extent that
the indemnifying party admits in writing its liability to the Indemnified Party
with respect to all material elements thereof. If the indemnifying party assumes
the defense of any such claim or legal proceeding, the obligations of the
indemnifying party hereunder as to such claim or legal proceeding shall be
limited to taking all steps necessary in the defense or settlement thereof and
to holding the Indemnified Party harmless from and against any losses, damages,
expenses, or
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liability caused by or arising out of any settlement approved by the
indemnifying party or any judgment in connection with such claim or legal
proceeding; provided that (i) the indemnifying party shall permit the
Indemnified Party to participate in such settlement or defense through counsel
chosen by the Indemnified Party, provided that the fees and expenses of such
counsel shall not be borne by the indemnifying party, and (ii) the indemnifying
party shall not settle any indemnifiable claim without the Indemnified Party's
consent. Each Indemnified Party agrees that it will cooperate with the
indemnifying party in the defense of any such action, the defense of which is
assumed by the indemnifying party. Except with the consent of the Indemnified
Party, the indemnifying party shall not consent to the entry of any judgment
arising from any such claim or legal proceeding which, in each case, does not
include as an unconditional term thereof the delivering by the claimant or the
plaintiff to the Indemnified Party of a release from all liability in respect
thereof, unless the indemnifying party has actually paid to the Indemnified
Party the full amount of such judgment or settlement. If the indemnifying party
does not assume the defense of any claim or litigation, any Indemnified Party
may defend against such claim or litigation in such manner as it may deem
appropriate, including, but not limited to, settling such claim or litigation,
after giving notice of the same to the indemnifying party, on such terms as the
Indemnified Party may deem appropriate. The indemnifying party will promptly
reimburse the Indemnified Party in accordance with the provisions hereof.
(f) Payment. All indemnification hereunder shall be effected
by payment of cash or delivery of a certified or official bank check in the
amount of the indemnification liability or by set-off against (i) any amounts
otherwise owed by SEI to the Shareholders or by the Shareholders to SEI, as the
case may be, or (ii) the shares of SEI Common Stock held pursuant to the Escrow
Agreement.
Section 14. Notices. All notices, requests, consents and other
communications hereunder shall be in writing and shall be personally delivered,
mailed by first-class registered or certified mail, postage prepaid, return
receipt requested or delivered by an overnight courier service, delivery charge
prepaid:
(a) If to the Shareholders, to:
----------------------------------
----------------------------------
----------------------------------
or at such other address as may be furnished to SEI by the Shareholders
in writing.
(b) If to SEI, to:
Service Experts, Inc.
111 Westwood Place
Suite 420
Brentwood, Tennessee 37027
Attention: Alan R. Sielbeck
with a copy to:
Waller Lansden Dortch & Davis,
A Professional Limited Liability Company
511 Union Street, Suite 2100
Nashville, Tennessee 37219
Attention: J. Chase Cole, Esq.
or at such other address as may be furnished to the Shareholders by SEI
in writing.
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Section 15. Miscellaneous.
(a) Entire Agreement. This Agreement and the Schedules,
certificates and other documents delivered pursuant hereto contain and
constitute the entire agreement and understanding between the Company,
Shareholders and SEI and supersede and cancel all prior agreements and
understandings relating to the subject matter hereof, whether written or oral,
which shall remain in effect. Neither this Agreement nor any term hereof may be
changed, waived, discharged or terminated, except in writing signed by the
parties hereto.
(b) Severability. Should any one or more of the provisions of
this Agreement or any agreement entered into pursuant hereto be determined to be
illegal or unenforceable, all other provisions of this Agreement and such other
agreements shall be given effect separately from the provision or provisions
determined to be illegal or unenforceable and shall not be affected thereby.
(c) Governing Law. This Agreement shall be construed and
enforced in accordance with the laws of the State of Tennessee without regard to
its principles of conflicts of laws.
(d) Further Assurances. Each party covenants that at any time,
and from time to time, after the Closing, it will execute such additional
instruments and take such actions as may be reasonably requested by the other
parties to confirm or perfect or otherwise to carry out the intent and purposes
of this Agreement.
(e) Waiver. Any failure on the part of any party to comply
with any of its obligations, agreements or conditions hereunder may be waived by
any other party to whom such compliance is owed. No waiver of any provision of
this Agreement shall be deemed, or shall constitute, a waiver of any other
provision, whether or not similar, nor shall any waiver constitute a continuing
waiver.
(f) Assignment. SEI may assign its rights under this Agreement
to any affiliated entity, but otherwise this Agreement shall not be assignable
by any of the parties hereto, by operation of law or otherwise, without the
written consent of all other parties.
(g) Binding Effect. All of the terms of this Agreement,
whether so expressed or not, shall be binding upon the respective personal
representatives, successors and assigns of the parties hereto and shall inure to
the benefit of and be enforceable by the respective personal representatives,
successors and assigns of the parties hereto. This Agreement shall survive the
Closing and not be merged therein.
(h) Headings. The headings in this Agreement are for
convenience of reference only and shall not limit or otherwise affect the
meaning hereof.
(i) Counterparts. This Agreement may be executed in two or
more counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
(j) Survival. The representations, warranties and covenants of
the parties contained in this Agreement, including without limitation the
provisions of Section 13 hereof, or in any other Transaction Document shall
survive the Closing and shall not be extinguished thereby notwithstanding any
investigation or other examination by any party.
(k) Construction of Terms. The language used in the Agreement
shall be construed, in all cases, according to its fair meaning, and not for or
against any party hereto. The parties acknowledge that each party has reviewed
this Agreement and that normal rules of construction to the effect that any
ambiguities are to be resolved against the drafting party shall not be employed
in the interpretation of this Agreement. Whenever the masculine gender is used
herein, it shall be deemed to include the feminine and the neuter.
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IN WITNESS WHEREOF, the undersigned have executed this Agreement as of
the day and date first above written.
SERVICE EXPERTS, INC.
By:
-----------------------------------
Title:
--------------------------------
SHAREHOLDERS
--------------------------------------
Signature
--------------------------------------
Name (please print)
--------------------------------------
Signature
--------------------------------------
Name (please print)
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LIST OF SCHEDULES TO BE PROVIDED BY THE SHAREHOLDERS
Schedule 2(a) Assumed Debt
Schedule 5(a) Jurisdictions Where Qualified
Schedule 5(b) Stock Ownership
Schedule 5(e) Subsidiaries and Investments
Schedule 5(f) Financial Statements
Schedule 5(h) Absence of Certain Changes
Schedule 5(i) Exceptions to Ownership of Assets
Schedule 5(k) Insurance
Schedule 5(l)(iv) Environmental Disposal
Schedule 5(l)(viii) Underground Storage Tanks
Schedule 5(m) Contracts and Commitments
Schedule 5(n) Liabilities
Schedule 5(o) Employees and Labor Matters
Schedule 5(p)(i) Employee Benefit Plans and Agreements
Schedule 5(p)(vi) COBRA
Schedule 5(r) Litigation
Schedule 5(s) Compliance with Laws, Regulations and Court Orders
Schedule 5(u) Consents and Approvals
25
<PAGE> 26
LIST OF SCHEDULES TO BE PROVIDED BY SEI
Schedule 2(b) Form of Escrow Agreement
Schedule 9(c) Form of Opinion of Counsel to SEI
Schedule 10(e) Form of Opinion of Counsel to the Shareholders
Schedule 10(h) Form of Lock-up Agreement
Schedule 10(i) Form of Non-Compete Agreement
Schedule 10(j) Form of Employment Agreement
Schedule 10(o) Form of Lease Agreement
26
<PAGE> 1
EXHIBIT 21
LIST OF SUBSIDIARIES OF THE REGISTRANT
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------
COMPANY NAME STATE OF INCORPORATION
- -------------------------------------------------------------------------------------------------------------------------
<S> <C>
- -------------------------------------------------------------------------------------------------------------------------
A-1 Air Conditioning, Inc. Tennessee
- -------------------------------------------------------------------------------------------------------------------------
A/C Service & Installation Co., Inc. Tennessee
- -------------------------------------------------------------------------------------------------------------------------
Ainsley & Son Heating, Inc. Tennessee
- -------------------------------------------------------------------------------------------------------------------------
Air-Conditioning and Heating Unlimited, Inc. Tennessee
- -------------------------------------------------------------------------------------------------------------------------
All American Air Conditioning & Heating, Inc. Tennessee
- -------------------------------------------------------------------------------------------------------------------------
Alpine Air Conditioning Company Tennessee
- -------------------------------------------------------------------------------------------------------------------------
Arrow Heating & Air Conditioning, Inc. Wisconsin
- -------------------------------------------------------------------------------------------------------------------------
Artic Aire of Chico, Inc. California
- -------------------------------------------------------------------------------------------------------------------------
B & B Air Conditioning, Inc. Tennessee
- -------------------------------------------------------------------------------------------------------------------------
B.W. Heating & Cooling, Inc. Tennessee
- -------------------------------------------------------------------------------------------------------------------------
Becht Heating & Cooling, Inc. Tennessee
- -------------------------------------------------------------------------------------------------------------------------
Berkshire Air Conditioning Company Tennessee
- -------------------------------------------------------------------------------------------------------------------------
Bill Ingraham Service Company, Inc. California
- -------------------------------------------------------------------------------------------------------------------------
Brand Heating & Air Conditioning, Inc. Indiana
- -------------------------------------------------------------------------------------------------------------------------
C. Iapaluccio Company, Inc. Connecticut
- -------------------------------------------------------------------------------------------------------------------------
Chief/Bauer Heating & Air Conditioning, Inc. Tennessee
- -------------------------------------------------------------------------------------------------------------------------
Claire's Air Conditioning and Refrigeration, Inc. Tennessee
- -------------------------------------------------------------------------------------------------------------------------
Climate Control, Inc. Tennessee
- -------------------------------------------------------------------------------------------------------------------------
Coastal Air Conditioning Service, Inc. Georgia
- -------------------------------------------------------------------------------------------------------------------------
Comerford's Heating & Air Conditioning, Inc. California
- -------------------------------------------------------------------------------------------------------------------------
Comfortech, Inc. Tennessee
- -------------------------------------------------------------------------------------------------------------------------
Contractor Success Group, Inc. Missouri
- -------------------------------------------------------------------------------------------------------------------------
Custom Air Conditioning, Inc. d/b/a Service Experts of Palm Beach Tennessee
- -------------------------------------------------------------------------------------------------------------------------
Dan Jacobs Heating & Cooling, Inc. Tennessee
- -------------------------------------------------------------------------------------------------------------------------
Davis the Plumber, Inc. Tennessee
- -------------------------------------------------------------------------------------------------------------------------
Dial One Raymond Plumbing, Heating & Cooling, Inc. d/b/a Dial One Service Tennessee
Champions
- -------------------------------------------------------------------------------------------------------------------------
Donelson Air Conditioning Company, Inc. Tennessee
- -------------------------------------------------------------------------------------------------------------------------
Eisenbach Enterprises, Inc. Texas
- -------------------------------------------------------------------------------------------------------------------------
Falso Service Experts, Inc. d/b/a Falso Heating and Sheet Metal Co., Inc. New York
- -------------------------------------------------------------------------------------------------------------------------
Frees Service Experts, Inc. Texas
- -------------------------------------------------------------------------------------------------------------------------
Freschi Air Systems, Inc. Tennessee
- -------------------------------------------------------------------------------------------------------------------------
Gaddis Co. d/b/a Desert Air Conditioning Tennessee
- -------------------------------------------------------------------------------------------------------------------------
George B. Givens Company, Inc. Tennessee
- -------------------------------------------------------------------------------------------------------------------------
Getzschman Heating & Sheet Metal Contractors, Inc. Tennessee
- -------------------------------------------------------------------------------------------------------------------------
Gilley's Quality Heating & Cooling, Inc. Tennessee
- -------------------------------------------------------------------------------------------------------------------------
Gordon's Specialty Company Tennessee
- -------------------------------------------------------------------------------------------------------------------------
Gulf Coast Cooling, Inc. Tennessee
- -------------------------------------------------------------------------------------------------------------------------
Holmes Sales & Service, Inc. Tennessee
- -------------------------------------------------------------------------------------------------------------------------
Island Air Conditioning, Inc. Tennessee
- -------------------------------------------------------------------------------------------------------------------------
J.M. Jenks Incorporated Utah
- -------------------------------------------------------------------------------------------------------------------------
Knochelmann, Inc. Tennessee
- -------------------------------------------------------------------------------------------------------------------------
Lee Voisard Plumbing & Heating, Inc. Tennessee
- -------------------------------------------------------------------------------------------------------------------------
Mid Fla Heating & Air, Inc. Tennessee
- -------------------------------------------------------------------------------------------------------------------------
Norrell Heating and Air Conditioning Company, Inc. Alabama
- -------------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE> 2
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------
COMPANY NAME STATE OF INCORPORATION
- -------------------------------------------------------------------------------------------------------------------------
<S> <C>
- -------------------------------------------------------------------------------------------------------------------------
Pardee Refrigeration Company Incorporated d/b/a Pardee Heating & Air Tennessee
Conditioning
- -------------------------------------------------------------------------------------------------------------------------
Parker Heating & Air Conditioning, Incorporated Tennessee
- -------------------------------------------------------------------------------------------------------------------------
Parrott Mechanical, Inc. Idaho
- -------------------------------------------------------------------------------------------------------------------------
ProAir Services, Inc. Tennessee
- -------------------------------------------------------------------------------------------------------------------------
Roland J. Down, Inc. New York
- -------------------------------------------------------------------------------------------------------------------------
Rolf Coal and Fuel Corp. Indiana
- -------------------------------------------------------------------------------------------------------------------------
S & W Air Conditioning, Inc. Tennessee
- -------------------------------------------------------------------------------------------------------------------------
Sanders Indoor Comfort, Inc. Tennessee
- -------------------------------------------------------------------------------------------------------------------------
SEI Management Company, LLC Tennessee
- -------------------------------------------------------------------------------------------------------------------------
SEI Management Subsidiary, Inc. Tennessee
- -------------------------------------------------------------------------------------------------------------------------
SEI Newco, Inc. Tennessee
- -------------------------------------------------------------------------------------------------------------------------
Service Experts of Arkansas, Inc. Arkansas
- -------------------------------------------------------------------------------------------------------------------------
Service Experts of Indianapolis, Inc. Indiana
- -------------------------------------------------------------------------------------------------------------------------
Service Experts of Palm Springs, Inc. California
- -------------------------------------------------------------------------------------------------------------------------
Service Experts of Raleigh, Inc. d/b/a Piedmont Air Conditioning Co. Tennessee
- -------------------------------------------------------------------------------------------------------------------------
Service Experts of St. Louis, Inc. Missouri
- -------------------------------------------------------------------------------------------------------------------------
Service Experts of Utah, Inc. Utah
- -------------------------------------------------------------------------------------------------------------------------
Stanley Heating and Air Conditioning, Inc. Tennessee
- -------------------------------------------------------------------------------------------------------------------------
Stark Services Company, Inc. d/b/a Air Experts Tennessee
- -------------------------------------------------------------------------------------------------------------------------
Strand Brothers, Inc. Tennessee
- -------------------------------------------------------------------------------------------------------------------------
Sunbeam Service Experts, Inc. New York
- -------------------------------------------------------------------------------------------------------------------------
Superior Air Conditioning, Inc. Tennessee
- -------------------------------------------------------------------------------------------------------------------------
Sylvester's Corp. Indiana
- -------------------------------------------------------------------------------------------------------------------------
Teays Valley Heating and Cooling, Inc. West Virginia
- -------------------------------------------------------------------------------------------------------------------------
The McElroy Service Company Nebraska
- -------------------------------------------------------------------------------------------------------------------------
Thompson and Sons Heating and Air Conditioning Company Tennessee
- -------------------------------------------------------------------------------------------------------------------------
TML, Inc. Idaho
- -------------------------------------------------------------------------------------------------------------------------
Triton Mechanical, Inc. Tennessee
- -------------------------------------------------------------------------------------------------------------------------
Venture International, Inc. Tennessee
- -------------------------------------------------------------------------------------------------------------------------
Vision Holding Company, Inc. Missouri
- -------------------------------------------------------------------------------------------------------------------------
</TABLE>
2
<PAGE> 1
EXHIBIT 23
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Post Effective
Amendment No. 6 to the Shelf Registration Statement on Form S-4 (No. 333-12319),
in the Shelf Registration Statement on Form S-3 (No. 333-43917) and in the
Registration Statement on Form S-8 (No. 333-11791) pertaining to the 1996
Incentive Stock Plan, 1996 Non-Employee Director Stock Option Plan and 1996
Employee Stock Purchase Plan of Service Experts, Inc. of our report dated
February 23, 1998, with respect to the consolidated financial statements of
Service Experts, Inc. included in the Annual Report (Form 10-K) for the year
ended December 31, 1997.
Nashville, Tennessee
March 13, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF SERVICE EXPERTS, INC. FOR THE TWELVE MONTHS ENDED
DECEMBER 31, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<RESTATED>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-1-1997
<PERIOD-END> DEC-31-1997
<CASH> 11,192
<SECURITIES> 0
<RECEIVABLES> 31,795
<ALLOWANCES> 1,550
<INVENTORY> 11,570
<CURRENT-ASSETS> 63,014
<PP&E> 33,466
<DEPRECIATION> 8,986
<TOTAL-ASSETS> 194,810
<CURRENT-LIABILITIES> 35,069
<BONDS> 0
0
0
<COMMON> 154
<OTHER-SE> 142,248
<TOTAL-LIABILITY-AND-EQUITY> 194,810
<SALES> 0
<TOTAL-REVENUES> 238,692
<CGS> 154,598
<TOTAL-COSTS> 214,817
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 688
<INCOME-PRETAX> 24,455
<INCOME-TAX> 9,189
<INCOME-CONTINUING> 15,266
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 15,266
<EPS-PRIMARY> 1.07
<EPS-DILUTED> 1.06
</TABLE>
