<PAGE> 1
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------------
FORM 8-K
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15 (d) OF
THE SECURITIES EXCHANGE ACT OF 1934
Date of Report (Date of earliest event reported):
September 24, 1998
SERVICE EXPERTS, INC.
------------------------------------------------------
(Exact name of registrant as specified in its charter)
<TABLE>
<CAPTION>
Delaware 001-13037 62-1639453
- ---------------- ---------------- -----------------
<S> <C> <C>
(State or Other (Commission File (I.R.S. Employer
Jurisdiction of Number) Identification
Incorporation) Number)
</TABLE>
Six Cadillac Drive
Suite 400
Brentwood, Tennessee 37027
--------------------------------------------------
(Address of principal executive offices) (Zip Code)
(615) 371-9990
----------------------------------------------------
(Registrant's telephone number, including area code)
Not Applicable
-------------------------------------------------------------
(Former name or former address, if changed since last report)
================================================================================
<PAGE> 2
ITEM 5. OTHER EVENTS.
Service Experts, Inc., a Delaware corporation (the "Company"), operates
residential heating, ventilating and air conditioning ("HVAC") service and
replacement businesses. In connection with the acquisition of HVAC businesses,
the Company plans to offer shares of the Company's Common Stock, $.01 par value
per share (the "Common Stock"), warrants to purchase shares of Common Stock and
debt securities convertible into shares of Common Stock pursuant to its
Registration Statement on Form S-4. In order to comply with the disclosure
requirements of the Securities and Exchange Commission regarding the financial
statements of businesses acquired or to be acquired, the Company is filing this
Current Report containing the following audited and pro forma financial
statements:
(a) Financial Statements of Businesses Acquired
See Pages F-2 through F-27.
(b) Pro Forma Financial Information
See Pages F-28 through F-34.
2
<PAGE> 3
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
STEEL CITY HEATING AND AIR, INC. -- FINANCIAL STATEMENTS
FOR THE YEAR ENDED DECEMBER 31, 1997 AND THE THREE MONTHS
ENDED MARCH 31, 1998 (UNAUDITED)
Report of Independent Auditors............................... F-2
Balance Sheets............................................... F-3
Statements of Income......................................... F-5
Statement of Stockholder's Equity............................ F-6
Statements of Cash Flows..................................... F-7
Notes to Financial Statements................................ F-8
DAVIS THE PLUMBER, INC. -- FINANCIAL STATEMENTS FOR THE YEAR
ENDED DECEMBER 31, 1997
Report of Independent Auditors............................... F-15
Balance Sheet................................................ F-16
Statements of Income......................................... F-18
Statement of Stockholders' Equity............................ F-19
Statement of Cash Flows...................................... F-20
Notes to Financial Statements................................ F-21
SERVICE EXPERTS, INC. -- UNAUDITED PRO FORMA COMBINED
FINANCIAL STATEMENTS
Basis of Presentation....................................... F-28
Unaudited Pro Forma Combined Balance Sheet as of June 30,
1998...................................................... F-30
Unaudited Pro Forma Combined Statements of Income for the
Six Months ended June 30, 1998 and for the Twelve
Months ended December 31, 1997............................ F-31
Notes to Unaudited Pro Forma Combined Financial
Statements................................................ F-33
</TABLE>
F-1
<PAGE> 4
Report of Independent Auditors
The Stockholder of
Steel City Heating and Air, Inc.
We have audited the accompanying balance sheet of Steel City Heating and Air,
Inc. as of December 31, 1997, and the related statements of income,
stockholder's equity, and cash flows for the year ended December 31, 1997. These
financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Steel City Heating and Air,
Inc. at December 31, 1997, and the results of its operations and its cash flows
for the year ended December 31, 1997, in conformity with generally accepted
accounting principles.
/s/ Ernst & Young LLP
Nashville, Tennessee
May 22, 1998
F-2
<PAGE> 5
Steel City Heating and Air, Inc.
Balance Sheets
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
1997 1998
------------------------------
(Unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 1,090,402 $ 403,928
Accounts receivable:
Trade, net of allowance for doubtful accounts of $23,000
at December 31, 1997 and March 31, 1998 (unaudited) 508,025 543,811
Employee 9,014 13,605
Other 21,534 13,946
------------------------------
538,573 571,362
Inventories 246,134 172,638
Investments 100,000 100,000
Prepaid expenses and other current assets -- 33,194
------------------------------
Total current assets 1,975,109 1,281,122
Property and equipment:
Furniture and fixtures 64,212 64,212
Machinery and equipment 197,552 201,079
Vehicles 1,081,545 1,040,089
Leasehold improvements 20,238 20,238
------------------------------
1,363,547 1,325,618
Less accumulated depreciation and amortization (756,405) (777,925)
------------------------------
607,142 547,693
------------------------------
Total assets $ 2,582,251 $ 1,828,815
==============================
</TABLE>
F-3
<PAGE> 6
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
1997 1998
------------------------------
(Unaudited)
<S> <C> <C>
LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities:
Trade accounts payable and accrued liabilities $ 329,582 $ 327,314
Accrued compensation 103,664 73,479
Accrued warranties 152,456 152,456
Deferred revenue 194,000 189,762
Shareholder note payable 950,000 100,000
------------------------------
Total current liabilities 1,729,702 843,011
Stockholder's equity:
Common stock, $50 par value, 300 shares authorized, issued
and outstanding 15,000 15,000
Retained earnings 837,549 970,804
------------------------------
Total stockholder's equity 852,549 985,804
------------------------------
Total liabilities and stockholder's equity $ 2,582,251 $ 1,828,815
==============================
</TABLE>
See accompanying notes.
F-4
<PAGE> 7
Steel City Heating and Air, Inc.
Statements of Income
<TABLE>
<CAPTION>
THREE MONTHS
YEAR ENDED ENDED
DECEMBER 31, MARCH 31,
1997 1998
------------------------------
(Unaudited)
<S> <C> <C>
Net revenue $ 9,764,608 $ 1,972,510
Cost of goods sold 6,115,502 1,286,974
------------------------------
Gross margin 3,649,106 685,536
Selling, general and administrative expenses 1,229,322 345,865
------------------------------
Income from operations 2,419,784 339,671
Other income (expense):
Interest expense (76,000) (12,667)
Interest income 39,163 6,251
Other income 12,546 --
------------------------------
(24,291) (6,416)
------------------------------
Net income $ 2,395,493 $ 333,255
==============================
</TABLE>
See accompanying notes.
F-5
<PAGE> 8
Steel City Heating and Air, Inc.
Statement of Stockholder's Equity
<TABLE>
<CAPTION>
COMMON STOCK
$50 PAR VALUE RETAINED
SHARES AMOUNT EARNINGS TOTAL
------------------------------------------------------------------
<S> <C> <C> <C> <C>
Balance at January 1, 1997 300 $15,000 $ 492,056 $ 507,056
Capital distributions - - (2,050,000) (2,050,000)
Net income - - 2,395,493 2,395,493
------------------------------------------------------------------
Balance at December 31, 1997 300 15,000 837,549 852,549
Capital distributions (unaudited) - - (200,000) (200,000)
Net income (unaudited) - - 333,255 333,255
------------------------------------------------------------------
Balance at March 31, 1998 (unaudited) 300 $15,000 $ 970,804 $ 985,804
==================================================================
</TABLE>
See accompanying notes.
F-6
<PAGE> 9
Steel City Heating and Air, Inc.
Statements of Cash Flows
<TABLE>
<CAPTION>
THREE MONTHS
YEAR ENDED ENDED
DECEMBER 31, MARCH 31,
1997 1998
------------------------------
(Unaudited)
<S> <C> <C>
OPERATING ACTIVITIES
Net income $ 2,395,493 $ 333,255
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization 246,860 62,976
Provision for loss on accounts receivable 46,395 16,038
Gain on asset disposals (23,505) --
Changes in assets and liabilities:
Accounts receivable (63,768) (48,827)
Inventories (32,107) 73,496
Prepaid expenses and other current assets -- (33,194)
Trade accounts payable and accrued liabilities 57,463 (2,268)
Accrued compensation 41,169 (30,185)
Accrued warranties 1,856 --
Deferred revenue (86,400) (4,238)
------------------------------
Net cash flow provided by operating activities 2,583,456 367,053
INVESTING ACTIVITIES
Purchase of property, and equipment (216,028) (3,527)
Proceeds from sale of property, and equipment 46,563 --
------------------------------
Net cash used in investing activities (169,465) (3,527)
FINANCING ACTIVITIES
Payments on shareholder note payable -- (850,000)
Distribution to stockholders (2,050,000) (200,000)
------------------------------
Net cash used in financing activities (2,050,000) (1,050,000)
Increase (decrease) in cash and cash equivalents 363,991 (686,474)
Cash and cash equivalents at beginning of period 726,411 1,090,402
------------------------------
Cash and cash equivalents at end of period $ 1,090,402 $ 403,928
==============================
SUPPLEMENTAL CASH FLOW INFORMATION
Interest paid $ 76,000 $ --
==============================
</TABLE>
See accompanying notes.
F-7
<PAGE> 10
Steel City Heating and Air, Inc.
Notes to Financial Statements
December 31, 1997
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
REPORTING ENTITY
Steel City Heating and Air, Inc. (the Company) operates in one industry segment
and is primarily engaged in the installation and servicing of air conditioning
and heating systems for commercial and residential customers in the Birmingham,
Alabama area.
UNAUDITED INTERIM FINANCIAL STATEMENTS
The balance sheet as of March 31, 1998 and the related statements of income,
stockholder's equity, and cash flows for the three months then ended (interim
financial statements) have been prepared by the Company's management and are
unaudited. The interim financial statements include all adjustments, consisting
of only normal recurring adjustments, necessary for a fair presentation of the
interim results.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted from the interim financial statements. The
interim financial statements should be read in conjunction with the December 31,
1997 audited financial statements appearing herein. The results of the three
months ended March 31, 1998 may not be indicative of operating results for the
full year.
RECOGNITION OF REVENUE
Revenue on all of the Company's residential heating and air conditioning
installation and service and maintenance revenue are recognized upon completion
of the services, which is usually within one to two days.
FAIR VALUE OF FINANCIAL INSTRUMENTS
Cash and Cash Equivalents
The carrying amount reported in the balance sheet for cash and cash equivalents
approximates fair value.
F-8
<PAGE> 11
Steel City Heating and Air, Inc.
Notes to Financial Statements (continued)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)
Investments
The carrying amount reported in the balance sheet for investments approximates
fair value due to their nearness to maturity.
Accounts Receivable, Accounts Payable, Accrued Liabilities and Notes Payable
The carrying amounts reported in the balance sheet for accounts receivable,
accounts payable, accrued liabilities and notes payable approximate fair value.
CONCENTRATIONS OF CREDIT
At times, cash balances in the Company's accounts may exceed FDIC insurance
limits. The Company primarily purchases HVAC units and parts that are
manufactured or distributed by Air Engineer, L.C. Total purchases of equipment
and parts from this manufacturer during 1997 totaled approximately $1,304,000.
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.
CASH EQUIVALENTS
The Company considers all highly liquid investments with an original maturity of
three months or less to be cash equivalents.
ALLOWANCE FOR DOUBTFUL ACCOUNTS
During the year ended December 31, 1997, amounts charged to bad debt expense
totaled approximately $5,500. No accounts were written-off during the year
ended December 31, 1997.
F-9
<PAGE> 12
Steel City Heating and Air, Inc.
Notes to Financial Statements (continued)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
INVESTMENTS
Investments consist of municipal securities and are classified as held to
maturity and, accordingly are carried at their amortized cost.
INVENTORIES
Inventories are stated at cost, which is not in excess of market. Cost is
determined by the first-in, first-out (FIFO) method for all inventories.
PROPERTY AND EQUIPMENT
Property and equipment are stated on the basis of cost. Depreciation and
amortization are provided on the straight-line method over the following useful
lives:
<TABLE>
<CAPTION>
YEARS
--------------------
<S> <C>
Leasehold improvements 7-10
Furniture and fixtures 7
Machinery and equipment 5-7
Vehicles 5
</TABLE>
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 and equipment and has determined that
there were no indications of impairment as of December 31, 1997.
F-10
<PAGE> 13
Steel City Heating and Air, Inc.
Notes to Financial Statements (continued)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
DEFERRED REVENUE
The Company pre-sells maintenance contracts in the form of energy service
agreements ("ESA"). ESA revenue is recorded as deferred revenue and recognized
as income as services are performed.
WARRANTIES
The Company generally provides the retail customer with a five year warranty on
equipment, parts and labor from the date of installation of the heating and air
conditioning unit. This warranty runs concurrent with the manufacturer's one
year warranty on equipment. The Company provides an accrual for future warranty
costs based upon the relationship of prior years' sales to actual warranty
costs. It is the Company's practice to classify the entire warranty accrual as a
current liability.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the amounts reported in the financial statements and accompanying notes.
Actual results could differ from those estimates.
INCOME TAXES
The stockholder of the Company has elected under Subchapter S of the Internal
Revenue Code to include the respective company's income in his own income for
federal and state income tax purposes. Accordingly, the Company is not subject
to federal and state income tax.
ADVERTISING COSTS
The Company expenses advertising costs as incurred. During 1997, the Company
expensed approximately $69,000.
F-11
<PAGE> 14
Steel City Heating and Air, Inc.
Notes to Financial Statements (continued)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
NEWLY ISSUED ACCOUNTING STANDARDS
In June 1997, the FASB issued FAS No. 130, "Reporting Comprehensive Income."
Statement No. 130 establishes standards for reporting and displaying
comprehensive income and its components in a full set of general purpose
financial statements. Statement No. 130 is effective for interim and annual
periods beginning after December 15, 1997. Comprehensive income encompasses all
changes in stockholder's 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 FAS No. 130 to have a
material impact on the Company's financial statements.
2. EMPLOYEE BENEFIT PLAN
The Company has a defined-contribution employee benefit plan incorporating
provisions of Section 401(k) of the Internal Revenue Code. Substantially all
employees of the Company are eligible to participate in the plan. Under the
plan's provisions, a plan member may make contributions, on a tax deferred
basis, not to exceed the maximum established by the Internal Revenue Service.
The Company made discretionary profit sharing contributions which totaled
approximately $92,000 in 1997.
3. COMMITMENTS AND CONTINGENT LIABILITIES
The Company maintains general liability insurance coverage and umbrella policies
to insure itself against any liabilities occurring in the normal course of
business. The Company believes that its insurance coverage is adequate.
4. INCOME TAXES
PRO FORMA INCOME TAX INFORMATION (UNAUDITED)
The Company operates under Subchapter S of the Internal Revenue Code and is not
subject to corporate federal and state income tax. In connection with the sale
of the Company (See Note 7), the Subchapter S election will be terminated. As a
result, the Company will be subject to corporate income taxes subsequent to the
termination of S corporation status. The
F-12
<PAGE> 15
Steel City Heating and Air, Inc.
Notes to Financial Statements (continued)
4. INCOME TAXES (CONTINUED)
PRO FORMA INCOME TAX INFORMATION (UNAUDITED) (CONTINUED)
Company had taxable income for income tax purposes of $2,329,233 for 1997.
Had the Company filed federal and state income tax returns as a regular
corporation for 1997, income tax expense under the provisions of SFAS No. 109
would have been approximately $892,000.
At the date of termination of S corporation status, the Company will be required
to provide deferred taxes for cumulative temporary differences between financial
reporting and tax reporting basis of assets and liabilities. Such deferred taxes
will be based on the cumulative temporary differences at the date of termination
of S corporation status. The effect of recognizing the deferred taxes will be
recorded as an adjustment to goodwill in purchase accounting. If the termination
of S corporation status had occurred at March 31, 1998, the deferred tax asset
would have been approximately $108,000.
5. RELATED PARTY TRANSACTIONS
The Company had an 8% interest bearing note payable to the stockholder totaling
$950,000 at December 31, 1997 which matures in 1998.
The Company leases its office facility from its stockholder on a month-to-month
basis. Rental payments of $120,000 related to this lease were made during the
year ended December 31, 1997. The Company paid interest of $76,000 on this note
during the year ended December 31, 1997.
6. IMPACT OF YEAR 2000 (UNAUDITED)
The Year 2000 issue is the result of computer programs being written using two
digits rather than four to define the applicable year. Any of the Company's
computer programs that have time sensitive software may recognize a date using
"00" as the year 1900 rather
F-13
<PAGE> 16
Steel City Heating and Air, Inc.
Notes to Financial Statements (continued)
6. IMPACT OF YEAR 2000 (UNAUDITED) (CONTINUED)
than the year 2000. This could result in a system failure or miscalculations
causing disruptions of operations, including, among other things, a temporary
inability to process transactions, send invoices, or engage in similar normal
business activities.
The Company has completed an assessment and implemented a plan which will
include testing, modifying and replacing portions of its software so that its
computer systems will function properly with respect to dates in the Year 2000
and thereafter. According to management estimates, the total Year 2000 project
cost will not materially affect the operating results or the financial position
of the Company.
The planned project is estimated to be completed not later than June 30, 1999,
which is prior to any anticipated impact on its operating systems. The Company
believes that with modifications to existing software and conversions to new
software, the Year 2000 issue will not pose significant operational problems for
its computer systems. However, if such modifications and conversions are not
made or are not completed in a timely manner, the Year 2000 issue could have a
material effect on the operations of the Company.
7. SUBSEQUENT EVENT
Subsequent to year end the Company signed a Combination Agreement with Service
Experts, Inc. to sell all of the Company's stock. In accordance with the
Combination Agreement, the Company became a wholly-owned subsidiary of Service
Experts, Inc. effective April 1, 1998.
F-14
<PAGE> 17
Report of Independent Auditors
The Stockholders of
Davis the Plumber, Inc.
We have audited the accompanying balance sheet of Davis the Plumber, Inc. as of
December 31, 1997, and the related statements of income, stockholders' equity,
and cash flows for the year ended December 31, 1997. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Davis the Plumber, Inc. at
December 31, 1997, and the results of its operations and its cash flows for the
year ended December 31, 1997, in conformity with generally accepted accounting
principles.
/s/ Ernst & Young LLP
Nashville, Tennessee
July 30, 1998
F-15
<PAGE> 18
Davis the Plumber, Inc.
Balance Sheet
December 31, 1997
<TABLE>
<S> <C>
ASSETS
Current assets:
Cash and cash equivalents $144,776
Accounts receivable:
Trade, net of allowance for doubtful accounts of $2,165 10,620
Employee 434
--------
11,054
Inventories 201,260
Prepaid expenses and other current assets 7,351
Deferred income taxes 10,113
--------
Total current assets 374,554
Property and equipment:
Furniture and fixtures 109,258
Machinery and equipment 126,375
Vehicles 425,703
Leasehold improvements 44,977
--------
706,313
Less accumulated depreciation and amortization (444,162)
--------
262,151
--------
Total assets $636,705
========
</TABLE>
F-16
<PAGE> 19
<TABLE>
<S> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Trade accounts payable and accrued liabilities $ 51,837
Accrued taxes other than income 20,830
Accrued compensation 16,886
Accrued warranties 7,030
Income taxes payable 9,512
Deferred revenue 11,523
--------
Total current liabilities 117,618
Deferred income taxes 12,395
Stockholders' equity:
Common stock, $1 par value, 250,000 shares authorized, 5,429 shares issued and
outstanding 5,429
Additional paid-in capital 126,568
Retained earnings 374,695
--------
Total stockholders' equity 506,692
========
Total liabilities and stockholders' equity $636,705
========
</TABLE>
See accompanying notes.
F-17
<PAGE> 20
Davis the Plumber, Inc.
Statement of Income
Year ended December 31, 1997
<TABLE>
<S> <C>
Net revenue $1,607,870
Cost of goods sold 852,085
----------
Gross margin 755,785
Selling, general and administrative expenses 673,850
----------
Income from operations 81,935
Other income (expense):
Interest expense (2,520)
Interest income 3,137
Other income 3,749
----------
4,366
----------
Income before taxes 86,301
Provision (benefit) for income tax:
Current 20,663
Deferred (215)
----------
Total income taxes 20,448
Net income $ 65,853
==========
</TABLE>
See accompanying notes.
F-18
<PAGE> 21
Davis the Plumber, Inc.
Statement of Stockholders' Equity
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL
$1.00 PAR VALUE PAID-IN RETAINED
SHARES AMOUNT CAPITAL EARNINGS TOTAL
----------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance at January 1, 1997 5,000 $5,000 $ 27,898 $308,842 $341,740
Stock purchase 429 429 98,670 - 99,099
Net income - - - 65,853 65,853
----------------------------------------------------------------------
Balance at December 31, 1997 5,429 $5,429 $126,568 $374,695 $506,692
======================================================================
</TABLE>
See accompanying notes.
F-19
<PAGE> 22
Davis the Plumber, Inc.
Statement of Cash Flows
Year ended December 31, 1997
<TABLE>
<S> <C>
OPERATING ACTIVITIES
Net income $ 65,853
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization 76,389
Benefit for deferred income taxes (215)
Provision for loss on accounts receivable 2,165
Gain on asset disposals
Changes in assets and liabilities:
Accounts receivable (1,899)
Inventories (37,640)
Prepaid expenses and other current assets 8,058
Trade accounts payable and accrued liabilities 7,119
Accrued compensation (52,785)
Accrued taxes, other than income 9,167
Accrued warranties 1,161
Deferred revenue 7,769
Income taxes payable 322
---------
Net cash flow provided by operating activities 85,464
INVESTING ACTIVITIES
Purchase of property, and equipment (121,802)
---------
Net cash used in investing activities (121,802)
FINANCING ACTIVITIES
Payments on long-term debt (49,788)
Stock purchase 99,099
---------
Net cash provided by financing activities 49,311
Increase in cash and cash equivalents 12,973
Cash and cash equivalents at beginning of period 131,803
---------
Cash and cash equivalents at end of period $ 144,776
=========
SUPPLEMENTAL CASH FLOW INFORMATION
Interest paid $ 2,520
=========
Income taxes paid $ 11,150
=========
</TABLE>
See accompanying notes.
F-20
<PAGE> 23
Davis the Plumber, Inc.
Notes to Financial Statements
December 31, 1997
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
REPORTING ENTITY
Davis the Plumber, Inc. ("the Company") operates in one industry segment and is
primarily engaged in the repair, maintenance, service, and replacement of air
conditioning, heating systems, and plumbing systems for commercial and
residential customers in the Albuquerque, New Mexico area.
REVENUE RECOGNITION
Revenue on all of the Company's heating and air conditioning and plumbing
installations for residential and commercial installation and service and
maintenance jobs are recognized upon completion of the services, which is
usually within one to two days.
FAIR VALUE OF FINANCIAL INSTRUMENTS
Cash
The carrying amounts reported in the balance sheet for cash and cash equivalents
approximate fair value.
Accounts Receivable, Accounts Payable and Accrued Liabilities
The carrying amount reported in the balance sheet for accounts receivable,
accounts payable and accrued liabilities approximates fair value.
CONCENTRATIONS OF CREDIT
At times, cash balances in the Company's accounts may exceed FDIC insurance
limits. The Company primarily purchases HVAC units, parts and plumbing supplies
that are distributed by Sigler & Reeves and Western Plumbing. Total purchases
from these distributors during 1997 totaled approximately $112,000.
F-21
<PAGE> 24
Davis the Plumber, Inc.
Notes to Financial Statements (continued)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
CASH EQUIVALENTS
The Company considers all highly liquid investments with an original maturity of
three months or less to be cash equivalents.
ALLOWANCE FOR DOUBTFUL ACCOUNTS
During the year ended December 31, 1997, amounts charged to bad debt expense
totaled $2,165. No accounts were written off during the year ended December 31,
1997.
INVENTORIES
Inventories are stated at cost, which is not in excess of market. Cost is
determined by the first-in, first-out (FIFO) method for all inventories.
PROPERTY AND EQUIPMENT
Property and equipment are stated on the basis of cost. Depreciation and
amortization are provided on the straight-line method and declining-balance
methods over the following useful lives:
<TABLE>
<CAPTION>
YEARS
-----
<S> <C>
Leasehold improvements 5
Furniture and fixtures 5
Machinery and equipment 7
Vehicles 5
</TABLE>
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
F-22
<PAGE> 25
Davis the Plumber, Inc.
Notes to Financial Statements (continued)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
LONG-LIVED ASSETS (CONTINUED)
carrying amount, and if so, companies recognize an impairment loss based on the
excess of the carrying amount of the assets over their fair value. Accordingly,
management periodically evaluates the ongoing value of property and equipment
and has determined that there were no indications of impairment as of December
31, 1997.
DEFERRED REVENUE
The Company pre-sells maintenance contracts in the form of energy service
agreements ("ESA"). ESA revenue is recorded as deferred revenue and recognized
as income when the service is performed.
WARRANTIES
The Company provides the retail customer with a one year warranty on parts and
labor from the date of installation of the heating and air conditioning unit.
This warranty runs concurrent with the manufacturer's warranty on parts. The
Company provides an accrual for future warranty costs based upon the
relationship of prior years' sales to actual warranty costs. It is the Company's
practice to classify the entire warranty accrual as a current liability.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the amounts reported in the financial statements and accompanying notes.
Actual results could differ from those estimates.
INCOME TAXES
The Company uses the liability method of accounting for federal and state income
taxes as provided by SFAS No. 109, "Accounting for Income Taxes." Under the
liability method, the deferred tax liability or asset is based on temporary
differences between the financial statement and income tax bases of assets and
liabilities, measured at tax rates that will be in effect when the differences
reverse.
F-23
<PAGE> 26
Davis the Plumber, Inc.
Notes to Financial Statements (continued)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
ADVERTISING COSTS
The Company expenses advertising costs as incurred. During 1997, the Company
expensed approximately $103,000.
NEWLY ISSUED ACCOUNTING STANDARDS
In June 1997, the FASB issued FAS No. 130, "Reporting Comprehensive Income."
Statement No. 130 establishes standards for reporting and displaying
comprehensive income and its components in a full set of general purpose
financial statements. Statement No. 130 is effective for interim and annual
periods beginning after December 15, 1997. Comprehensive income encompasses all
changes in stockholders' equity (except those arising from transactions from
owners) and includes net income, net unrealized capital gains or losses on
available for sale securities and foreign currency translation adjustments.
Management of the Company does not expect the adoption of FAS No. 130 to have a
material impact on the Company's financial statements.
2. DEBT
The Company had a line of credit with a financial institution with a total
borrowing limit of $50,000. As of December 31, 1997, there were no amounts
outstanding under this line of credit. The line of credit bears interest 1.0%
above the index rate which is the corporate base rate of Sunwest Bank of
Albuquerque.
F-24
<PAGE> 27
Davis the Plumber, Inc.
Notes to Financial Statements (continued)
3. LEASES
Total rental expense for all operating leases was $ 30,218 for 1997. The Company
leases its office facilities from a majority stockholder of the Company, under
the terms of a noncancelable operating lease agreement that expires on April 30,
2006. Minimum rental commitments at December 31, 1997 under the operating lease
are as follows:
<TABLE>
<CAPTION>
OPERATING
LEASES
--------
<S> <C>
1998 $ 29,664
1999 29,664
2000 29,664
2001 29,664
2002 29,664
Thereafter 98,880
========
$247,200
========
</TABLE>
4. COMMITMENTS AND CONTINGENT LIABILITIES
The Company maintains general liability insurance coverage and umbrella policies
to insure itself against any liabilities occurring in the normal course of
business. The Company believes that its insurance coverage is adequate.
5. INCOME TAXES
Income tax expense consists of the following at December 31, 1997:
<TABLE>
<S> <C>
Current:
Federal $ 16,477
State 4,186
Deferred benefit (215)
--------
$ 20,448
========
</TABLE>
F-25
<PAGE> 28
Davis the Plumber, Inc.
Notes to Financial Statements (continued)
5. INCOME TAXES (CONTINUED)
Significant components of the deferred tax assets and liabilities as of December
31, 1997, are as follows:
<TABLE>
<S> <C>
Deferred tax liabilities:
Depreciation and amortization $13,113
Deferred tax assets:
Inventory reserves 5,923
Accounts receivable 513
Compensation and warranty reserves 1,665
Deferred revenue 2,730
-------
Total gross deferred tax assets 10,831
Valuation allowance --
-------
Deferred tax assets 10,831
-------
Net deferred tax liabilities $ 2,282
=======
</TABLE>
Management has evaluated the need for a valuation allowance for the deferred tax
assets and has concluded that no valuation allowance is necessary.
The provision for income taxes differs from the amounts computed by applying the
statutory federal income tax rate of 34% to income before income taxes. The
differences are summarized as follows:
<TABLE>
<S> <C>
Tax provision at statutory rate $ 29,342
State income tax less applicable federal tax benefit 2,734
Effect of graduated tax rates (11,627)
--------
$ 20,448
========
</TABLE>
6. IMPACT OF YEAR 2000 (UNAUDITED)
The Year 2000 issue is the result of computer programs being written using two
digits rather than four to define the applicable year. Any of the Company's
computer programs that have time sensitive software may recognize a date using
"00" as the year 1900 rather than the year 2000. This could result in a system
failure or miscalculations causing disruptions of operations, including, among
other things, a temporary inability to process transactions, send invoices, or
engage in similar normal business activities.
The Company has completed an assessment and implemented a plan which will
include testing, modifying and replacing a portion of its software so that its
computer systems will function properly with respect to dates in the Year 2000
and thereafter. According to management estimates, the total Year 2000 project
cost will not materially affect the operating results or the financial position
of the Company.
The planned project is estimated to be completed not later than June 30, 1999,
which is prior to any anticipated impact on its operating systems. The Company
believes that with modifications to existing software and conversations to new
software, the Year 2000 issue will not pose significant operations problems for
its computer systems. However, if such modifications and conversions are not
made or are not completed in a timely manner, the Year 2000 issue could have a
material effect on the operations of the Company.
F-26
<PAGE> 29
Davis the Plumber, Inc.
Notes to Financial Statements (continued)
7. SUBSEQUENT EVENT
Subsequent to year end the Company signed a Combination Agreement with Service
Experts, Inc. to sell all of the Company's stock. In accordance with the
Combination Agreement, the Company became a wholly-owned subsidiary of Service
Experts, Inc. effective January 28, 1998.
F-27
<PAGE> 30
PRO FORMA COMBINED FINANCIAL STATEMENTS OF
SERVICE EXPERTS, INC.
Service Experts, Inc. (the "Company") was incorporated on March 27, 1996.
The Company operates in one industry segment and is primarily engaged in the
replacement and servicing of HVAC units for residential and commercial
customers. The Company has Service Centers located in cities across the United
States. The operations of the Company's subsidiaries other than Pooled Companies
have been included in the Company's financial statements from their respective
effective dates of acquisition. The Company's historical financial statements
have been restated for all periods presented by including the historical results
of the 1997 Pooled Companies (see Table I).
The following unaudited pro forma combined financial statements give effect
to the acquisition by the Company of 26 Acquired Companies (as defined below)
and to PTM Enterprises, Inc. (see Table I), an HVAC company with which the
Company has entered into an agreement in principle (the "Pending Acquisition")
in exchange for shares of the Company's Common Stock, cash, warrants to purchase
shares of Common Stock and the assumption of certain debt.
The unaudited pro forma combined balance sheet as of June 30, 1998 gives
effect to the acquisition of seven Acquired Companies closed effective after
June 30, 1998 (see Table I) and the Pending Acquisition. The unaudited pro forma
combined statement of income for the six months ended June 30, 1998 gives effect
to the acquisition of 19 Acquired Companies closed effective during the six
month period ended June 30, 1998 (see Table I), the seven Acquired Companies
which were closed effective after June 30, 1998 and the Pending Acquisition as
if such transactions had occurred as of January 1, 1998. The unaudited pro forma
combined statement of income for the 12 months ended December 31, 1997 gives
effect to the acquisition of the 1997 Pooled Companies as described below, 32
Acquired Companies closed during 1997 (see Table I), the 19 Acquired Companies
closed effective during the six month period ended June 30, 1998, the seven
Acquired Companies closed effective after June 30, 1998 and the Pending
Acquisition as if such transactions had occurred on January 1, 1997.
TABLE I
The 1997 Pooled Companies
*1. C. Iapaluccio, Company, Inc.
2. Hawk Heating & Air Conditioning, Inc.
*3. TML, Inc.
*4. Parrott Mechanical, Inc.
5. McAlister Heat & Air, Inc.
One Pending Acquisition
* PTM Enterprises, Inc.
Seven Acquired Companies closed effective after June 30, 1998
1. Andros Refrigeration, Inc.
2. Epperson, Inc.
3. Midland Heating & Air Conditioning, Inc.
4. Economy Heating and Air Conditioning, Inc.
5. Mathews Heating and Air Conditioning, Inc.
6. Matz Sheet Metal Works, Inc.
7. Warshaw Energy Savings Design, Inc.
19 Acquired Companies closed effective during the six month period ended
June 30, 1998
1. Gulf Coast Cooling, Inc.
2. Jack Nelson Co., Inc.
3. Dan Jacobs Heating & Cooling, Inc.
4. Becht Heating & Cooling, Inc.
*5. Davis the Plumber, Inc.
6. Lee Voisard Plumbing & Heating, Inc.
7. Climate Control, Inc.
8. Triton Mechanical, Inc.
9. Strand Brothers, Inc.
10. Astron Residential, Inc.
11. Doler Plumbing & Heating, Inc.
12. Atlantic Air Conditioning and Heating, Inc.
*13. Steel City Heating & Air, Inc.
14. Deland Heating & Air Conditioning Company
15. Kozon, Inc.
16. Royden Commercial Services, Inc.
17. Albritten Plumbing Heating and Air Conditioning, Inc.
18. Alert Heating Service, Inc.
19. Russell Mechanical, Inc.
32 Acquired Companies closed during 1997
*1. B.W. Heating & Cooling, Inc.
*2. Chief/Bauer Heating & Air Conditioning, Inc.
*3. Gaddis Co.
*4. Dial One Raymond Plumbing, Heating & Cooling, Inc.
*5. Parker Heating & Air Conditioning Incorporated
*6. Sylvester Corp.
*7. Roland J. Down, Inc.
*8. Stark Services Company, Inc.
*9. Claire's Air Conditioning and Refrigeration, Inc.
*10. Claire & Sanders, Inc.
*11. Piedmont Air Conditioning Company
12. Royden, Inc.
13. Superior Air Conditioning, Inc.
*14. ProAir Services, Inc.
*15. Arctic Aire of Chico, Inc.
16. A-1 Air Conditioning, Inc.
*17. Mid Fla Heating & Air, Inc.
18. All American Air Conditioning & Heating, Inc.
19. The McElroy Service Company
20. Bill Ingraham Service Company, Inc.
*21. S & W Conditioning, Inc.
*22. Berkshire Air Conditioning Company
*23. J.M. Jenks Incorporated
*24. Teays Valley Heating and Cooling, Inc.
25. Ainsley & Son Heating, Inc.
26. Knochelmann, Inc.
27. Stanley Heating and Air Conditioning, Inc.
28. George B. Givens Company, Inc.
*29. Holmes Sales & Service, Inc.
*30. Getzschman Heating & Sheet Metal Contractors
31. Thompson and Sons Heating and Air Conditioning Company
32. Air Experts, Inc.
* Indicates that audited financial statements for the Acquired Companies
previously have been filed in a Form 8-K or Form S-4 and these Acquired
Companies have been included in the pro forma financial statements of the
Company.
F-28
<PAGE> 31
The unaudited pro forma combined financial statements have been prepared by the
Company based on the historical financial statements of the Company and of the
companies referred to in Table I and certain preliminary estimates and
assumptions deemed appropriate by management of the Company. The pro forma
combined financial statements presented herein have been prepared based on
certain assumptions and include certain pro forma adjustments. The Company has
not completed all the evaluations necessary for the final purchase price
allocations related to certain of the acquired businesses; accordingly, actual
adjustments that reflect final evaluations of the purchased assets and assumed
liabilities may differ from the pro forma adjustments reflected herein.
These pro forma combined financial statements may not be indicative of
results that would have been achieved had these acquisitions occurred on the
dates indicated or of results which may be realized in the future.
The pro forma combined financial statements should be read in conjunction
with the historical financial statements of the Company.
F-29
<PAGE> 32
PRO FORMA COMBINED FINANCIAL STATEMENTS OF SERVICE EXPERTS, INC.
UNAUDITED PRO FORMA COMBINED BALANCE SHEET
JUNE 30, 1998
<TABLE>
<CAPTION>
ACQUIRED PENDING PRO FORMA
COMPANY COMPANIES ACQUISITION ADJUSTMENTS PRO FORMA
-------- --------- ----------- ----------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Current assets:
Cash and cash equivalents............................ $ 5,962 $1,091 $ 883 $(10,632)(a) $ 36
(768)(b)
Receivables: 3,500 (c)
Trade receivables, net............................... 42,407 2,142 363 44,912
Related party........................................ 370 101 -- 471
Employee............................................. 495 16 8 519
Other................................................ 4,325 -- -- 4,325
-------- ------ ------ ------- --------
47,597 2,259 371 50,227
Inventories............................................ 22,035 1,106 303 23,444
Cost and estimated earnings in excess of billings...... 2,348 29 -- 2,377
Prepaid expenses and other current assets.............. 4,595 77 -- 4,672
Current portion of notes receivable -- related
parties.............................................. 14 -- -- 14
Current portion of notes receivable.................... 277 -- -- 277
Deferred income taxes.................................. 3,945 2 -- 3,947
-------- ------ ------ ------- --------
Total current assets........................... 86,773 4,564 1,557 (7,900) 84,994
Property, buildings and equipment, net................. 31,461 1,153 496 33,110
Notes receivable -- related parties.................... 334 -- -- 334
Notes receivable -- other.............................. 610 -- -- 610
Unallocated purchase price............................. 5,383 -- -- 5,383
Goodwill............................................... 148,695 -- -- 17,215(a) 165,910
Other assets........................................... 2,000 10 26 2,036
-------- ------ ------ ------- --------
Total assets................................... $275,256 $5,727 $2,079 $ 9,315 $292,377
======== ====== ====== ======= ========
Current liabilities:
Trade accounts payable and accrued liabilities....... $ 15,271 $1,763 $ 344 $ $ 17,378
Accrued compensation................................. 5,546 60 24 5,630
Accrued warranties................................... 2,993 121 -- 3,114
Income taxes payable................................. -- 119 360 479
Deferred revenue..................................... 8,697 569 183 9,449
Billings in excess of costs and estimated earnings... 1,640 486 -- 2,126
Current portion of long-term debt and capital lease (58)(b)
obligations........................................ 274 58 -- 3,500 (c) 3,774
-------- ------ ------ ------- --------
Total current liabilities...................... 34,421 3,176 911 3,442 41,950
Long-term debt and capital lease obligations, net of
current.............................................. 61,606 710 -- (710)(b) 61,606
Deferred income taxes.................................. 1,785 -- -- 1,785
Common stock........................................... 164 177 580 (754)(a) 167
Additional paid-in-capital............................. 147,852 370 -- 9,219 (a) 157,441
Retained earnings...................................... 29,428 1,294 588 (1,882)(a) 29,428
-------- ------ ------ ------- --------
$275,256 $5,727 $2,079 $ 9,315 $292,377
======== ====== ====== ======= ========
</TABLE>
See accompanying notes to Unaudited Pro Forma Combined Financial Statements.
F-30
<PAGE> 33
PRO FORMA COMBINED FINANCIAL STATEMENTS OF SERVICE EXPERTS, INC.
UNAUDITED PRO FORMA COMBINED STATEMENT OF INCOME
FOR THE SIX MONTHS ENDED JUNE 30, 1998
<TABLE>
<CAPTION>
ACQUIRED PENDING PRO FORMA
COMPANY COMPANIES ACQUISITION ADJUSTMENTS PRO FORMA
-------- --------- ----------- ----------- ---------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
Net revenues............................. $168,761 $21,305 $2,728 $ -- $192,794
Cost of goods sold....................... 109,447 12,466 982 -- 122,895
-------- ------- ------ ------ --------
Gross margin............................. 59,314 8,839 1,746 -- 69,899
Selling, general and administrative
expenses............................... 42,121 6,778 1,333 (184)(d) 50,048
-------- ------- ------ ------ --------
Income from operations................... 17,193 2,061 413 184 19,851
Other income (expense):
Interest expense....................... (1,180) -- -- (13)(e) (1,193)
Interest income........................ 285 18 11 -- 314
Other income (expense)................. 285 138 -- -- 423
-------- ------- ------ ------ --------
(610) 156 11 (13) (456)
-------- ------- ------ ------ --------
Income (loss) before tax................. 16,583 2,217 424 171 19,395
Provision for income taxes............... 6,730 1,048 168 88(f) 8,034
-------- ------- ------ ------ --------
Net income (loss)........................ $ 9,853 $ 1,169 $ 256 $ 83 $ 11,361
======== ======= ====== ====== ========
Pro forma net income per share:
Basic.................................. $ 0.62 $ 0.68
Diluted................................ $ 0.61 $ 0.67
Pro forma weighted average shares
outstanding:
Basic.................................. 16,003 628(g) 16,631
Diluted................................ 16,258 628(g) 16,886
</TABLE>
See accompanying notes to Unaudited Pro Forma Combined Financial Statements.
F-31
<PAGE> 34
PRO FORMA COMBINED FINANCIAL STATEMENTS OF SERVICE EXPERTS, INC.
UNAUDITED PRO FORMA COMBINED STATEMENT OF INCOME
FOR THE TWELVE MONTHS ENDED DECEMBER 31, 1997
<TABLE>
<CAPTION>
ACQUIRED PENDING PRO FORMA
COMPANY COMPANIES ACQUISITION ADJUSTMENTS PRO FORMA
------- --------- ----------- ----------- ---------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
Net revenues.............................. $238,692 $126,229 $ 5,505 $ -- $370,426
Cost of goods sold........................ 154,598 77,959 3,310 -- 235,867
-------- -------- ------- -------- --------
Gross margin.............................. 84,094 48,270 2,195 -- 134,559
Selling, general and administrative
expenses................................ 60,219 35,869 1,154 (49)(d) 97,193
-------- -------- ------- -------- --------
Income from operations.................... 23,875 12,401 1,041 49 37,366
Other income (expense):
Interest expense........................ (688) (619) -- 619(e) (688)
Interest income......................... 775 110 9 -- 894
Other income (expense).................. 493 382 3 -- 878
-------- -------- ------- -------- --------
580 (127) 12 619 1,084
-------- -------- ------- -------- --------
Income before tax......................... 24,455 12,274 1,053 668 38,450
Provision for income taxes................ 9,189 496 383 4,833(f) 14,901
-------- -------- ------- -------- --------
Net income................................ $ 15,266 $ 11,778 $ 670 $ (4,165) $ 23,549
======== ======== ======= ======== ========
Pro forma net income per share:
Basic.................................. $ 1.07 $ 1.46
Diluted................................ $ 1.06 $ 1.45
Pro forma weighted average shares
outstanding:
Basic.................................. 14,305 1,807(h) 16,112
Diluted................................ 14,453 1,815(i) 16,268
</TABLE>
See accompanying notes to Unaudited Pro Forma Combined Financial Statements.
F-32
<PAGE> 35
SERVICE EXPERTS, INC.
PRO FORMA COMBINED FINANCIAL STATEMENTS
NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS
PRO FORMA BALANCE SHEET ADJUSTMENTS
(a) Reflects the payments to owners of seven Acquired Companies and one
Pending Acquisition of $10,632,000 in cash and 3,000,000 shares of common stock
resulting in an increase in Goodwill of $17,215,000 which is amortized over 40
years. The allocation of the purchase price associated with the acquisitions has
been determined by the Company based on available information and is subject to
further refinement.
(b) Reflects the assumed payment of all outstanding debt.
(c) Reflects borrowings on line-of-credit
<TABLE>
<CAPTION>
TWELVE MONTHS SIX MONTHS
ENDED ENDED
DECEMBER 31, JUNE 30,
1997 1998
------------- -------------
(IN THOUSANDS)
<C> <S> <C> <C>
PRO FORMA STATEMENTS OF INCOME ADJUSTMENTS
(d) REFLECTS THE FOLLOWING ADJUSTMENTS TO SELLING, GENERAL, AND
ADMINISTRATIVE:
(i) Elimination of historical owners' compensation.............. $ (5,452) $(1,540)
(ii) Additional compensation relating to new agreements with
previous owners............................................. 3,483 949
(iii) Adjust rent expense per new leases.......................... (94) 24
(iv) Corporate office overhead expenses.......................... 1,317 240
(v) Goodwill amortization....................................... 1,618 426
(vi) Elimination of general and administrative expenses.......... (921) (283)
-------- -------
$ (49) $ (184)
======== =======
</TABLE>
F-33
<PAGE> 36
SERVICE EXPERTS, INC.
PRO FORMA COMBINED FINANCIAL STATEMENTS
NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
TWELVE MONTHS SIX MONTHS
ENDED ENDED
DECEMBER 31, JUNE 30,
1997 1998
------------- -------------
(IN THOUSANDS)
<C> <S> <C> <C>
(e) REFLECTS THE FOLLOWING ADJUSTMENTS TO INTEREST EXPENSE RELATED TO:
(i) Elimination of all other debt assumed in the transaction to
be paid at closing.......................................... $ 619 $ 110
(ii) Additional interest on debt incurred associated with the
transaction................................................. -- (123)
-------- --------
$ 619 $ (13)
======== ========
(f) REFLECTS THE FOLLOWING ADJUSTMENTS TO INCOME TAXES:
(i) Additional income tax provision for state and federal taxes
at a combined effective rate of 40% as certain Acquired
Companies and the Pending Acquisition previously which were
taxed as Subchapter S corporations.......................... $ 4,414 $ (161)
(ii) Additional income taxes on adjustments (d) and (e).......... (228) 79
(iii) Additional income tax provision for state and federal taxes
due to the non-deductibility of goodwill.................... 647 170
-------- --------
$ 4,833 $ 88
======== ========
(g) Reflects adjustments to weighted average shares outstanding as
follows:
(i) 570,000 shares issued to the owners of the Acquired
Companies.
(ii) 58,000 shares issued to the owner of the Pending
Acquisition.
(h) Reflects adjustments to weighted average shares outstanding as
follows:
(i) 1,749,000 shares issued to the owners of the Acquired
Companies.
(ii) 58,000 shares issued to the owner of the Pending
Acquisition.
(i) Reflects adjustments to weighted average shares outstanding as
follows:
(i) 1,749,000 shares issued to the owners of the Acquired
Companies.
(ii) 8,000 shares representing dilutive effect of warrants
issued to the owners of the Acquired Companies.
(iii) 58,000 shares issued to the owner of the Pending
Acquisition.
</TABLE>
F-34
<PAGE> 37
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
SERVICE EXPERTS, INC.
By: /s/ Anthony M. Schofield
----------------------------------
Anthony M. Schofield
Chief Financial Officer, Secretary
and Treasurer
Date: September 24, 1998
<PAGE> 38
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBITS
- ------- -----------------------
<S> <C>
23 Consent of Ernst & Young LLP
</TABLE>
<PAGE> 1
EXHIBIT 23
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Post-Effective Amendment No.
6 to the Registration Statement (Form S-4 No. 333-12319) and related Prospectus
of Service Experts, Inc. related to $50,000,000 aggregate amount of shares of
its $.01 par value common stock, warrants to purchase its common stock ("Common
Stock Warrants") and the shares of its common stock issued thereunder upon the
exercise of such Common Stock Warrants or debt securities ("Debt Securities"),
and the shares of common stock issued thereunder upon the conversion thereof, in
the Shelf Registration Statement on Form S-3 (No. 333-43917) and related
Prospectus pertaining to the resale of up to 500,000 shares of the Company's
Common Stock issued without registration under the Securities Act of 1993; in
the Registration Statement (Form S-8 No. 333-11791) pertaining to the Service
Experts, Inc.'s 1996 Incentive Stock Plan, 1996 Non-Employee Director Stock
Option Plan, and 1996 Employee Stock Purchase Plan; in the Registration
Statement (Form S-8 No. 333-59711) pertaining to the Service Experts, Inc.'s
Amended 1996 Incentive Stock Plan, Amended 1996 Employee Stock Purchase Plan,
1997 Nonqualified Stock Option Plan, Amended 1997 Nonqualified Stock Purchase
Plan and Amended Service Center Stock Option Plan; of our report dated May 22,
1998 with respect to the financial statements of Steel City Heating & Air,
Inc.; and of our report dated July 30, 1998 with respect to financial
statements of Davis the Plumber, Inc. included in this Current Report on Form
8-K dated September 24, 1998, filed with the Securities and Exchange Commission.
/s/ Ernst & Young LLP
Nashville, Tennessee
September 23, 1998
