AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JULY 31, 1997
REGISTRATION NO. 333-
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------
COMFORT SYSTEMS USA, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN CHARTER)
<TABLE>
<S> <C> <C>
DELAWARE 1711 76-0526487
(STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NUMBER)
</TABLE>
FRED M. FERREIRA
CHIEF EXECUTIVE OFFICER
4801 WOODWAY DRIVE
SUITE 300E
HOUSTON, TEXAS 77056
(800) 723-8430
(NAME AND ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING
AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES AND AGENT FOR SERVICE)
------------------
COPIES TO:
WILLIAM D. GUTERMUTH WILLIAM GEORGE
BRACEWELL & PATTERSON, L.L.P. COMFORT SYSTEMS USA, INC.
SOUTH TOWER PENNZOIL PLACE 4801 WOODWAY DRIVE
711 LOUISIANA STREET, SUITE 2900 SUITE 300E
HOUSTON, TEXAS 77002-2781 HOUSTON, TEXAS 77056
------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon
as practicable after this Registration Statement becomes effective.
------------------
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [X]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
------------------
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
===============================================================================================================================
PROPOSED MAXIMUM PROPOSED MAXIMUM
TITLE OF EACH CLASS OF AMOUNT TO BE OFFERING PRICE AGGREGATE OFFERING AMOUNT OF
SECURITIES TO BE REGISTERED REGISTERED PER SHARE(1) PRICE(1) REGISTRATION FEE
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock, $.01 par value
per share................................... 8,000,000 $17.8125 $142,500,000 $43,182
===============================================================================================================================
</TABLE>
(1) Estimated solely for the purpose of calculating the registration fee
pursuant to Rule 457(c).
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THIS REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
================================================================================
<PAGE>
SUBJECT TO COMPLETION
, 1997
8,000,000 SHARES
[LOGO]
COMFORT SYSTEMS USA, INC.
COMMON STOCK
------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
This Prospectus covers 8,000,000 shares of common stock, $.01 par value
(the "Common Stock"), which may be offered and issued by Comfort Systems USA,
Inc. (the "Company", or "Comfort") from time to time in connection with
merger or acquisition transactions entered into by the Company. It is expected
that the terms of acquisitions involving the issuance of securities covered by
this Prospectus will be determined by direct negotiations with the owners or
controlling persons of the businesses or assets to be merged with or acquired by
the Company, and that the shares of Common Stock issued will be valued at prices
reasonably related to the market prices of Common Stock either at the time the
terms of a merger or acquisition are agreed upon or at or about the time shares
are delivered. No underwriting discounts or commissions will be paid, although
finder's fees may be paid from time to time with respect to specific mergers or
acquisitions. Any person receiving any such fees may be deemed to be an
underwriter within the meaning of the Securities Act of 1933, as amended (the
"Securities Act").
The Company currently has 20,975,774 shares of its Common Stock listed on
the New York Stock Exchange, of which 7,015,000 are registered and available for
unrestricted trading in the public markets unless owned by affiliates of the
Company. Application will be made to list the shares of Common Stock offered
hereby on the New York Stock Exchange. On July 29, 1997, the closing price of
the Common Stock on the New York Stock Exchange was $17.625 per share as
published in THE WALL STREET JOURNAL on July 30, 1997. The Company is subject to
the informational requirements of the Exchange Act of 1934 and in accordance
therewith files reports and other information with the Securities and Exchange
Commission.
All expenses of this offering will be paid by the Company. The Company is a
Delaware corporation and all references herein to the Company refer to the
Company and its subsidiaries. The executive offices of the Company are located
at 4801 Woodway, 300E, Houston, Texas 77056, and its telephone number is (800)
723-8431.
SEE "RISK FACTORS" ON PAGE 9 FOR A DISCUSSION OF CERTAIN RISK FACTORS
THAT SHOULD BE CONSIDERED BEFORE ACQUIRING THE COMMON STOCK OFFERED HEREBY.
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
THE COMPANY INTENDS TO FURNISH ITS STOCKHOLDERS WITH ANNUAL REPORTS
CONTAINING FINANCIAL STATEMENTS AUDITED BY INDEPENDENT CERTIFIED PUBLIC
ACCOUNTANTS AND WITH QUARTERLY REPORTS CONTAINING UNAUDITED SUMMARY FINANCIAL
INFORMATION FOR EACH OF THE FIRST THREE QUARTERS OF EACH FISCAL YEAR.
------------------
THE DATE OF THIS PROSPECTUS IS , 1997
<PAGE>
PROSPECTUS SUMMARY
IN CONNECTION WITH ITS INITIAL PUBLIC OFFERING ON JULY 2, 1997 (THE
"IPO"), COMFORT SYSTEMS USA, INC. ACQUIRED, IN SEPARATE MERGER OR SHARE
EXCHANGE TRANSACTIONS (THE "MERGERS") IN EXCHANGE FOR CASH AND SHARES OF ITS
COMMON STOCK, 12 COMPANIES ENGAGED PRINCIPALLY IN THE HEATING, VENTILATION AND
AIR CONDITIONING ("HVAC") BUSINESS (EACH A "FOUNDING COMPANY" AND,
COLLECTIVELY, THE "FOUNDING COMPANIES"). UNLESS OTHERWISE INDICATED, ALL
REFERENCES TO THE "COMPANY" HEREIN INCLUDE THE FOUNDING COMPANIES, AND
REFERENCES HEREIN TO "COMFORT SYSTEMS" MEAN COMFORT SYSTEMS USA, INC. PRIOR TO
THE CONSUMMATION OF THE MERGERS.
THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY, AND SHOULD BE READ
IN CONJUNCTION WITH, THE MORE DETAILED INFORMATION AND THE COMBINED, PRO FORMA
COMBINED AND INDIVIDUAL HISTORICAL FINANCIAL STATEMENTS, INCLUDING THE NOTES
THERETO, APPEARING ELSEWHERE IN THIS PROSPECTUS.
UNLESS OTHERWISE INDICATED, ALL REFERENCES HEREIN TO COMMON STOCK INCLUDE
BOTH COMMON STOCK, $0.01 PAR VALUE, AND RESTRICTED VOTING COMMON STOCK, $0.01
PAR VALUE (THE "RESTRICTED COMMON STOCK") OF COMFORT SYSTEMS.(1)
THE COMPANY
Comfort Systems was founded in 1996 to become a leading national provider
of comprehensive HVAC installation services and maintenance, repair and
replacement of HVAC systems, focusing primarily on the commercial and industrial
markets. On July 2, 1997, the Company acquired in separate, concurrent
transactions twelve companies engaged principally in the HVAC business. These
Founding Companies are: Accurate Air Systems, Inc., located in Houston, Texas;
Atlas Air Conditioning Co., located in Houston, Texas; C.S.I. / Bonneville,
located in Salt Lake City, Utah; Eastern Heating and Cooling Inc., located in
Albany, New York; Freeway Heating and Air Conditioning, Inc., located in
Bountiful, Utah; Quality Air Heating and Cooling, Inc., located in Grand Rapids,
Michigan; Seasonair, Inc., located in Rockville, Maryland; S. M. Lawrence Co.,
Inc., located in Jackson, Tennessee; Standard Heating and Air Conditioning Co.,
located in Birmingham, Alabama; Tech Heating and Air Conditioning, Inc., located
in Solon, Ohio; Tri-City Mechanical, Inc., located in Phoenix, Arizona; and
Western Building Services, Inc., located in Denver, Colorado. The Company's
commercial and industrial applications include office buildings, retail centers,
apartment complexes, hotels, manufacturing plants and government facilities. The
Company also provides specialized HVAC applications such as process cooling,
control systems, electronic monitoring and process piping. Approximately 90% of
the Company's pro forma combined 1996 revenues of $167.5 million was derived
from commercial and industrial customers, with approximately 53% of combined
revenues attributable to installation services and 47% attributable to
maintenance, repair and replacement services. Combined revenues of the Founding
Companies, which have been in business an average of 39 years, increased at a
compound annual growth rate of approximately 16% from 1994 through 1996.
Based on available industry data, the Company believes that the HVAC
industry is highly fragmented with over 40,000 companies, most of which are
small, owner-operated businesses with limited access to capital for
modernization and expansion. The overall HVAC industry, including the
commercial, industrial and residential markets, is estimated to generate annual
revenues in excess of $75 billion, over $35 billion of which is in the
commercial and industrial markets. The Company believes there is a significant
opportunity for a well-capitalized national company to provide comprehensive
HVAC services and that the fragmented nature of the HVAC industry will provide
it with significant opportunities to consolidate commercial, industrial and
residential HVAC businesses.
- ------------
(1) Notre Capital Ventures II, L.L.C. ("Notre") holds 2,742,912 shares of
Restricted Common Stock, which are entitled to elect one member of the
Company's Board of Directors and to 0.55 of one vote for each share held on
all other matters on which they are entitled to vote. Restricted Common
Stock is convertible into one share of Common Stock under certain
circumstances. See "Description of Capital Stock -- Common Stock and
Restricted Common Stock."
3
<PAGE>
The Company's commercial and industrial installation business targets
"design and build" projects where the Company is responsible for designing,
engineering and installing a cost-effective, energy-efficient system, customized
to meet the specific needs of the building owner. Management believes that the
"design and build" segment represents a faster growing and more profitable
segment of the HVAC business than traditional "plan and spec" installation,
which is generally awarded based on a bid process. In recent years, the Company
has undertaken a shift from "plan and spec" to "design and build" projects
with "design and build" revenues increasing from approximately 65% of
installation revenues in 1994 to approximately 80% in 1996.
The Company also provides maintenance, repair and replacement of HVAC
systems. Growth in this segment is driven by a number of factors, particularly
(i) the aging of the installed base, (ii) the increasing energy efficiency,
sophistication and complexity of HVAC systems and (iii) the increasing
restrictions on the use of refrigerants commonly used in older HVAC systems. The
energy efficiency and sophistication of new HVAC systems are encouraging
building owners to upgrade and reconfigure their current HVAC systems. Moreover,
the increasing sophistication and complexity of these HVAC systems are leading
many commercial and industrial building owners and property managers to
outsource maintenance and repair through service agreements with HVAC service
providers. Service agreements lead to better utilization of personnel, link the
customer with the Company should a major repair or replacement be needed and
result in recurring revenues. The Company believes there is also an opportunity
to expand its presence in the highly-fragmented residential maintenance, repair
and replacement market. The replacement segment of the residential HVAC market
has grown significantly in recent years as a result of the aging of the
installed base of residential HVAC systems, the introduction of more
energy-efficient systems and the upgrading of older homes with central air
conditioning.
The Company plans to achieve its goal of becoming a leading national
provider of comprehensive HVAC services by improving operations, emphasizing
continued internal growth and expanding through acquisitions.
OPERATING STRATEGY. The Company believes there are significant
opportunities to increase its profitability and that of subsequently acquired
businesses. The key elements of the Company's operating strategy are:
FOCUS ON COMMERCIAL AND INDUSTRIAL MARKETS. The Company believes that
the commercial and industrial HVAC markets are attractive because of their
growth opportunities, diverse customer base, attractive margins and
potential for long-term relationships with building owners and managers,
general contractors and architects.
OPERATE ON DECENTRALIZED BASIS. The Company believes that, while
maintaining strong operating and financial controls, a decentralized
operating structure will retain the entrepreneurial spirit present in each
of the Founding Companies and will allow the Company to capitalize on the
considerable local and regional market knowledge and customer relationships
possessed by each Founding Company.
ACHIEVE OPERATING EFFICIENCIES. The Company intends to use its
increased purchasing power to gain volume discounts in areas such as HVAC
components, raw materials, service vehicles, advertising, bonding and
insurance. In addition, the Company will identify "best practices" that
can be successfully implemented throughout its operations.
ATTRACT AND RETAIN QUALITY EMPLOYEES. The Company intends to attract
and retain quality employees by providing them (i) an enhanced career path
from working for a larger public company, (ii) additional training,
education and apprenticeships to allow talented employees to advance to
higher-paying positions, (iii) the opportunity to realize a more stable
income and (iv) improved benefits packages.
4
<PAGE>
INTERNAL GROWTH. A key component of the Company's strategy is to continue
the internal growth at the Founding Companies and subsequently acquired
businesses. The key elements of the Company's internal growth strategy are:
CAPITALIZE ON SPECIALIZED TECHNICAL AND MARKETING STRENGTHS. The
Company believes it will be able to expand the services it offers in its
local markets by leveraging the specialized technical and marketing
strengths of individual Founding Companies.
ESTABLISH NATIONAL MARKET COVERAGE. The Company believes that
significant demand exists from large national companies to utilize the
services of a single HVAC service provider and believes existing local and
regional relationships can be expanded as it develops a nationwide network.
ACQUISITIONS. The Company believes that, due to the highly fragmented
nature of the HVAC industry, it has a significant opportunity to achieve its
acquisition strategy. The Company anticipates that acquisition candidates in the
commercial and industrial markets will typically have annual revenues ranging
from $5 million to $35 million. The key elements of the Company's acquisition
strategy are:
ENTER NEW GEOGRAPHIC MARKETS. The Company will pursue acquisitions
that are located in new geographic markets, are financially stable, and
which will have the customer base, technical skills and infrastructure
necessary to be a core business into which other HVAC service operations
can be consolidated.
EXPAND WITHIN EXISTING MARKETS. Once the Company has entered a
market, it will seek to acquire other well-established HVAC businesses
operating within that region and will also pursue "tuck-in" acquisitions
of smaller companies, whose operations can be integrated into an existing
operation to leverage the Company's infrastructure.
ACQUIRE COMPLEMENTARY BUSINESSES. The Company will focus on the HVAC
industry and may also acquire companies providing complementary services to
the same customer base, such as commercial and industrial process piping
and plumbing and electrical companies.
5
<PAGE>
RECENT DEVELOPMENTS
During late 1996 and early 1997, members of the Company's management team
and certain consultants were assembled to pursue the consolidation of the
Founding Companies. Notre, a consolidator of highly-fragmented industries,
provided the Company with expertise regarding the consolidation process and
advanced the Company the funds needed to pay organizational and Offering
expenses. In connection therewith, during 1996 and January and February 1997,
Comfort Systems sold an aggregate of 1,269,935 shares of Common Stock to
management of and consultants to the Company at a price of $0.01 per share. As a
result, the Company recorded a non-recurring, non-cash compensation charge of
$11.6 million (the "Compensation Charge") in the first quarter of 1997,
representing the difference between the amount paid for the shares and the
estimated fair value of the shares on the date of sale. This Compensation Charge
of $11.6 million is not included in pro forma combined net income.
On July 2, 1997, the Company consummated the IPO and the Mergers. In
connection therewith, the Company issued 7,015,000 shares of Common Stock at a
price of $13.00 per share (less underwriting discounts and commissions).
The aggregate consideration paid by Comfort Systems in the Mergers
consisted of $45.3 million in cash and 9,720,927 shares of Common Stock, plus
the assumption of $19.7 million of existing debt of the Founding Companies. The
consideration paid by Comfort Systems for each Founding Company was negotiated
by the parties and was based primarily upon the pro forma adjusted net income of
each Founding Company. For a more detailed description of these transactions,
see "Certain Transactions -- Organization of the Company."
Between January 1, 1997 and the date of the Mergers, each Founding Company
which was a C Corporation, except Atlas, distributed to its stockholders an
amount equal to its net income for the period from January 1, 1997 through the
date of the Mergers (the "Interim Earnings Distributions"). These aggregate
distributions were $1.5 million and were funded from the Founding Companies'
cash and from borrowings from existing sources available to the Founding
Companies.
Comfort Systems USA, Inc. was incorporated in 1996 in Delaware. The
Company's executive
offices are located at 4801 Woodway, Suite 300E, Houston, Texas 77056, and its
telephone number is
(800) 723-8431.
RISK FACTORS
The Common Stock offered hereby involves a high degree of risk. See "Risk
Factors".
6
<PAGE>
SUMMARY PRO FORMA COMBINED FINANCIAL DATA
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
Comfort Systems acquired the Founding Companies in connection with the IPO.
For financial statement presentation purposes, Comfort Systems has been
identified as the "accounting acquirer." The following table presents
unaudited pro forma combined financial data for the Company, adjusted for (i)
the effects of the Mergers, (ii) the effects of certain pro forma adjustments to
the historical financial statements described below and (iii) the consummation
of the IPO and the application of the net proceeds therefrom. See "Selected
Financial Data," the Unaudited Pro Forma Combined Financial Statements and the
Notes thereto and the historical Financial Statements for Comfort Systems and
certain of the Founding Companies and the Notes thereto included elsewhere in
this Prospectus.
PRO FORMA COMBINED(1)
------------------------------------
TWELVE MONTHS THREE MONTHS
ENDED ENDED
DECEMBER 31, 1996 MARCH 31, 1997
----------------- ---------------
INCOME STATEMENT DATA:
Revenues........................ $167,525 $39,505
Gross profit.................... 47,813 10,705
Selling, general and
administrative expenses(2)..... 27,814 7,814
Goodwill amortization(3)........ 3,495 874
Income from operations.......... 16,504 2,017
Interest and other income
(expense), net(4).............. (961) (250)
Income before income taxes...... 15,543 1,767
Net income(5)................... 7,928 847
Net income per share............ 0.44 0.05
Shares used in computing pro
forma net income per
share(6)....................... 18,180,311 18,180,311
MARCH 31, 1997
----------------------------
PRO FORMA AS
COMBINED ADJUSTED(8)
--------- -----------
BALANCE SHEET DATA:(7)
Working capital(4).............. $ (31,197)(9) $ 48,678
Total assets.................... 188,683 220,389
Long-term debt, net of current
maturities(4).................. 14,292 14,292
Stockholders' equity(4)......... 101,118 180,993
- ------------
(1) The pro forma combined income statement data assume that the Mergers and the
IPO were consummated on January 1, 1996 and are not necessarily indicative
of the results the Company would have obtained had these events actually
then occurred or of the Company's future results.
(2) The pro forma combined income statement data reflect an aggregate of $6.6
million for the twelve months ended December 31, 1996 and $428,000 for the
three months ended March 31, 1997 in pro forma reductions in salaries,
bonuses and benefits to the owners of the Founding Companies to which they
have agreed prospectively (the "Compensation Differential") and does not
include the Compensation Charge of $11.6 million recorded in the first
quarter of 1997.
(3) Consists of amortization of goodwill to be recorded as a result of the
Mergers over a 40-year period and computed on the basis described in the
Notes to the Unaudited Pro Forma Combined Financial Statements.
(4) Several of the Founding Companies were S Corporations. In connection with
the Mergers, these Founding Companies made distributions to their
stockholders totalling $16.8 million, representing substantially all of
their previously taxed undistributed earnings through March 31, 1997 (the
"S Corporation Distributions"). In order to fund these distributions, the
Founding Companies borrowed $11.0 million from existing sources.
Accordingly, pro forma interest expense has been increased by $935,000 for
the twelve months ended December 31, 1996 and $207,000 for the three months
ended March 31, 1997, pro forma working capital has been reduced by $1.9
million, pro forma long-term debt has been increased by $11.0 million and
pro forma stockholders' equity has been reduced by $12.9 million. Quality
has declared S Corporation Distributions of $3.9 million which have been
recorded as a dividend payable to shareholder and reduction of stockholders'
equity in the pro forma combined balance sheet data. This $3.9 million is
included in the $16.8 million of S Corporation Distributions.
(5) Assuming a corporate income tax rate of 40% and the non-deductibility of
goodwill.
(6) Includes (i) 2,969,912 shares issued to Notre, (ii) 1,269,935 shares issued
to management of and consultants to Comfort Systems, (iii) 9,720,927 shares
issued to owners of the Founding Companies and (iv) 4,219,537 of the
7,015,000 shares sold in the IPO necessary to pay the cash portion of the
Merger consideration and expenses of the IPO and excludes 915,000 shares of
common stock purchased by the underwriters pursuant to an overallotment
option.
(7) The pro forma combined balance sheet data assume that the Mergers were
consummated on March 31, 1997.
(8) Adjusted for the sale of the 7,015,000 shares of Common Stock offered in the
IPO and the application of the estimated net proceeds therefrom, which
includes 915,000 shares of common stock purchased by the underwriters
pursuant to an overallotment option.
(9) Includes a $45.3 million note payable to owners of the Founding Companies,
representing the cash portion of the Merger consideration paid from a
portion of the net proceeds of the IPO.
7
<PAGE>
SUMMARY INDIVIDUAL FOUNDING COMPANY FINANCIAL DATA
(IN THOUSANDS)
The following table presents summary income statement data for the Founding
Companies for each of their three most recent fiscal years. Income from
operations has not been adjusted for the Compensation Differential or to take
into account increased costs associated with the Company's new corporate
management and with being a public company. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Introduction."
<TABLE>
<CAPTION>
THREE MONTHS ENDED
FISCAL YEARS ENDED(1) MARCH 31,(2)
------------------------------- --------------------
1994 1995 1996 1996 1997
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
QUALITY:
Revenues........................... $ 24,434 $ 32,594 $ 29,597 $ 6,315 $ 8,766
Income from operations............. 2,154 4,953 4,490 416 1,300
ATLAS:
Revenues........................... 21,848 22,444 30,030 6,207 6,115
Income from operations............. 105 643 2,101 120 496
TRI-CITY:
Revenues........................... 16,883 25,030 24,237 6,482 6,791
Income from operations............. 393 2,539 1,773 374 278
LAWRENCE:
Revenues........................... 12,758 12,568 17,163 3,280 4,565
Income (loss) from operations...... 112 (51) 67 (93) 541
ACCURATE:
Revenues........................... 9,763 12,171 16,806 3,161 2,642
Income (loss) from operations...... (122) 213 499 27 21
EASTERN:
Revenues........................... 7,348 6,067 7,944 1,525 1,284
Income (loss) from operations...... 274 117 431 20 (103)
CSI/BONNEVILLE:
Revenues........................... 6,502 6,361 7,842 1,369 1,562
Income from operations............. 881 448 981 75 59
TECH:
Revenues........................... 6,923 6,960 7,537 1,075 1,656
Income from operations............. 593 948 1,680 46 57
SEASONAIR:
Revenues........................... 5,168 5,942 6,737 1,128 1,831
Income (loss) from operations...... 189 451 134 (62) 22
WESTERN:
Revenues........................... 4,149 4,112 6,494 1,185 1,072
Income (loss) from operations...... 161 (151) 744 96 29
ALL OTHER FOUNDING COMPANIES(3):
Revenues........................... 8,934 12,264 13,138 3,072 3,221
Income (loss) from operations...... 266 321 531 48 (22)
</TABLE>
- ------------
(1) The fiscal years presented are as follows: Quality -- the fiscal years ended
March 31, 1995 and 1996 and the year ended December 31, 1996; Atlas and
Accurate -- the fiscal years ended June 30, 1994 and 1995 and the year ended
December 31, 1996; Lawrence -- the fiscal years ended October 31, 1994, 1995
and 1996; and Tri-City, Eastern, CSI/Bonneville, Tech, Seasonair and
Western -- the years ended December 31.
(2) Lawrence's revenues and income from operations are for the three months
ended January 31, 1996 and 1997.
(3) The other Founding Companies are Standard and Freeway, and data presented
are for the years ended December 31, 1994, 1995 and 1996, in the case of
Standard, and the fiscal years ended March 31, 1995 and 1996 and the year
ended December 31, 1996, in the case of Freeway.
8
<PAGE>
RISK FACTORS
AN INVESTMENT IN THE SHARES OF COMMON STOCK OFFERED BY THIS PROSPECTUS
INVOLVES A HIGH DEGREE OF RISK. IN ADDITION TO THE OTHER INFORMATION IN THIS
PROSPECTUS, THE FOLLOWING RISK FACTORS SHOULD BE CONSIDERED CAREFULLY IN
EVALUATING AN INVESTMENT IN THE COMMON STOCK. THIS PROSPECTUS CONTAINS CERTAIN
FORWARD-LOOKING STATEMENTS. ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THOSE
PROJECTED IN THE FORWARD-LOOKING STATEMENTS AS A RESULT OF ANY NUMBER OF
FACTORS, INCLUDING THE RISK FACTORS SET FORTH BELOW AND ELSEWHERE IN THIS
PROSPECTUS.
ABSENCE OF COMBINED OPERATING HISTORY. Comfort Systems was founded in 1996
but conducted no operations and generated no revenues prior to the Mergers on
July 2, 1997. The Founding Companies operated as separate independent entities
prior to the IPO, and there can be no assurance that the Company will be able to
integrate the operations of these businesses successfully or to institute the
necessary systems and procedures, including accounting and financial reporting
systems, to manage the combined enterprise on a profitable basis. The Company's
management group has been assembled only recently, and there can be no assurance
that the management group will be able to effectively manage the combined entity
or successfully implement the Company's operating strategy, internal growth
strategy and acquisition program. The pro forma combined historical financial
results of the Founding Companies cover periods when the Founding Companies and
Comfort Systems were not under common control or management and, therefore, may
not be indicative of the Company's future financial or operating results. The
inability of the Company to integrate the Founding Companies successfully would
have a material adverse effect on the Company's business, financial condition
and results of operations and would make it unlikely that the Company's
acquisition program will be successful. See "Business -- Strategy" and
"Management."
RISKS RELATED TO THE COMPANY'S ACQUISITION STRATEGY. The Company intends
to grow significantly through the acquisition of additional HVAC and
complementary businesses. The Company expects to face competition for
acquisition candidates, which may limit the number of acquisition opportunities
and may lead to higher acquisition prices. There can be no assurance that the
Company will be able to identify, acquire or manage profitably additional
businesses or to integrate successfully any acquired businesses into the Company
without substantial costs, delays or other operational or financial problems.
Further, acquisitions involve a number of special risks, including failure of
the acquired business to achieve expected results, diversion of management's
attention, failure to retain key personnel of the acquired business and risks
associated with unanticipated events or liabilities, some or all of which could
have a material adverse effect on the Company's business, financial condition
and results of operations. Customer dissatisfaction or performance problems at a
single acquired company could have an adverse effect on the reputation of the
Company generally and render ineffective the Company's national sales and
marketing initiatives. The Company may consider acquiring complementary
businesses in the electrical, process piping and plumbing industries, and there
can be no assurance that these complementary businesses can be successfully
integrated. In addition, there can be no assurance that the Founding Companies
or other businesses acquired in the future will achieve anticipated revenues and
earnings. See "Business -- Strategy."
RISKS RELATED TO ACQUISITION FINANCING. The timing, size and success of
the Company's acquisition efforts and the associated capital commitments cannot
be readily predicted. The Company currently intends to finance future
acquisitions by using shares of its Common Stock for all or a substantial
portion of the consideration to be paid. If the Common Stock does not maintain a
sufficient market value, or if potential acquisition candidates are otherwise
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 initiate and maintain its acquisition
program. As of the date of the Mergers, the Company had $34.6 million of
proceeds available for future acquisition and working capital. If the Company
does not have sufficient cash resources, its growth could be limited unless it
is able to obtain additional capital through debt or equity financings. The
Company has obtained a bank line of credit of $75.0 million from Bank One,
Texas, NA ("Bank One") for working capital and acquisitions. As of July 28,
1997, borrowings under the line of credit were $17.3 million, which was used to
repay existing indebtedness of the Founding Companies. The line of credit is
subject to customary financial covenants and drawing conditions. See
9
<PAGE>
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Combined Liquidity and Capital Resources."
RISKS RELATED TO OPERATING AND INTERNAL GROWTH STRATEGY. Key elements of
the Company's strategy are to improve the profitability of the Founding
Companies and subsequently acquired businesses and to continue to expand the
revenues of the Founding Companies and any subsequently acquired businesses. The
Company intends to seek to improve the profitability of the Founding Companies
and any subsequently acquired businesses by various means, including increased
purchasing efficiencies and a reduction, in some cases, of duplicative operating
costs and overhead. The Company's ability to increase the revenues of the
Founding Companies and any subsequently acquired company will be affected by
various factors, including demand for new or replacement HVAC systems, the level
of new construction, the Company's ability to expand the range of services
offered to customers of individual Founding Companies and other acquired
businesses, the Company's ability to develop national accounts and other
marketing programs in order to attract new customers and the Company's ability
to attract and retain a sufficient number of qualified HVAC technicians and
other necessary personnel. Many of these factors are beyond the control of the
Company, and there can be no assurance that the Company's operating and internal
growth strategies will be successful or that it will be able to generate cash
flow adequate for its operation and to support internal growth. See
"Business -- Strategy."
COMPETITION. The HVAC industry is highly competitive and is served by
small, owner-operated private companies and several large companies. Certain of
these competitors may have lower overhead cost structures and may, therefore, be
able to provide their services at lower rates than the Company. The HVAC
industry is currently undergoing rapid consolidation on both a national and a
regional level by other companies which have acquisition objectives which are
the same as or similar to the Company's objectives. These companies and other
consolidators may have greater financial resources than the Company to finance
acquisition and internal growth opportunities and might be willing to pay higher
prices than the Company for the same acquisition opportunities. Additionally,
HVAC equipment manufacturers and certain public utilities are beginning to enter
the maintenance, repair and replacement segment of the HVAC industry. These
companies generally are better capitalized, have greater name recognition and
may be able to provide these services at a lower cost. Consequently, the Company
may encounter significant competition in its efforts to achieve both its
acquisition and internal growth objectives as well as its operating strategy to
increase the profitability of the Founding Companies and subsequently acquired
companies. See "Business -- Competition."
AVAILABILITY OF HVAC TECHNICIANS. The timely provision of high-quality
installation service and maintenance, repair and replacement of HVAC systems by
the Company requires an adequate supply of skilled HVAC technicians.
Accordingly, the Company's ability to increase its productivity and
profitability will be limited by its ability to employ, train and retain the
skilled technicians necessary to meet the Company's service requirements. From
time to time, there are shortages of qualified HVAC technicians, and there can
be no assurance that the Company will be able to maintain an adequate skilled
labor force necessary to operate efficiently, that the Company's labor expenses
will not increase as a result of a shortage in the supply of skilled technicians
or that the Company will not have to curtail its planned internal growth as a
result of labor shortages. See "Business -- Employees" and " -- Recruiting,
Training and Safety."
SEASONAL AND CYCLICAL NATURE OF THE HVAC INDUSTRY. The HVAC industry is
subject to seasonal variations. Specifically, the demand for new installations
is generally lower during the winter months due to reduced construction activity
during inclement weather and less use of air conditioning during colder months.
Demand for HVAC maintenance, repair and replacement services is generally higher
in the second and third calendar quarters due to the increased use of air
conditioning during warmer months. Accordingly, the Company expects its revenues
and operating results generally will be lower in the first and fourth quarters.
Historically, the construction industry has been highly cyclical. As a result,
the Company's volume of business may be adversely affected by declines in new
installation projects in various geographic regions of the United States.
10
<PAGE>
REGULATION. HVAC systems are subject to various environmental statutes and
regulations, including the Clean Air Act and those regulating the production,
servicing and disposal of certain ozone depleting refrigerants used in HVAC
systems. 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 impose licensing standards on technicians
who install and service HVAC systems. The Company's failure to comply with these
laws and regulations could subject it to substantial fines and the loss of its
licenses. See "Business -- Governmental Regulation and Environmental Matters."
RELIANCE ON KEY PERSONNEL. The Company will be highly dependent on the
continuing efforts of its executive officers and the senior management of the
Founding Companies, and the Company likely will depend on the senior management
of any significant business it acquires in the future. The business or prospects
of the Company could be affected adversely if any of these persons does not
continue in his management role until the Company is able to attract and retain
qualified replacements. See "Management."
CONTROL BY EXISTING MANAGEMENT AND STOCKHOLDERS. The Company's executive
officers and directors, former stockholders of the Founding Companies and
entities affiliated with them beneficially own approximately 66.6% of the
outstanding shares of Common Stock. These persons, if acting in concert, would
be able to exercise control over the Company's affairs, to elect the entire
Board of Directors and to control the outcome of any matter submitted to a vote
of stockholders. See "Principal Stockholders."
SUBSTANTIAL PROCEEDS OF OFFERING PAYABLE TO AFFILIATES OF FOUNDING
COMPANIES. Of the net proceeds of the IPO, $45.3 million, or approximately
53.4%, were paid as the cash portion of the purchase price for the Founding
Companies. Some of the recipients of these funds are directors of the Company or
holders of more than 5% of the Common Stock.
BENEFITS TO NOTRE AND MANAGEMENT. Notre, management and certain
consultants to the Company own in the aggregate 4,239,847 shares of Common
Stock. These stockholders acquired their Common Stock at a price of $0.01 per
share. These parties own, in the aggregate, approximately 20% of the outstanding
Common Stock. Of these shares of Common Stock, 2,742,912 shares are Restricted
Common Stock, which are entitled to elect one member of the Company's Board of
Directors and to 0.55 of one vote for each share held on all other matters on
which they are entitled to vote. Holders of Restricted Common Stock are not
entitled to vote on the election of any other directors and control in the
aggregate 8.8% of the votes of all shares of Common Stock. See "Principal
Stockholders."
NO PRIOR PUBLIC MARKET AND DETERMINATION OF OFFERING PRICE. Prior to the
IPO, there was no public market for the Common Stock. The offering prices for
the Common Stock to be issued pursuant to this registration statement will be
determined by negotiation between the Company and in each instance, certain
owners of the company to be acquired and may bear no relationship to the price
at which the Common Stock will trade after the respective acquisition
transactions. The Common Stock is listed on The New York Stock Exchange;
however, there can be no assurance that an active trading market will be
sustained subsequent to the IPO or the acquisition transactions. After the
acquisition transaction, the market price of the Common Stock may be subject to
significant fluctuations in response to numerous factors, including the timing
of any acquisitions by the Company, variations in the Company's annual or
quarterly financial results or those of its competitors, changes by financial
research analysts in their estimates of the future earnings of the Company,
conditions in the economy in general or in the Company's industry in particular,
unfavorable publicity or changes in applicable laws and regulations (or judicial
or administrative interpretations thereof) affecting the Company or the HVAC,
process piping and plumbing and electrical services industries. From time to
time, the stock market experiences significant price and volume volatility,
which may affect the market price of the Common Stock for reasons unrelated to
the Company's performance.
POTENTIAL EFFECT OF SHARES ELIGIBLE FOR FUTURE SALE ON PRICE OF COMMON
STOCK. After the consummation of the Mergers, 20,975,774 shares of Common Stock
were outstanding. The 7,015,000 shares sold in the IPO (other than shares that
may have been or that may subsequently be purchased by affiliates of the
Company) are freely tradable. The remaining outstanding shares may be resold
publicly only following their registration under the Securities Act of 1933, as
amended (the "Securities Act"), or pursuant to an
11
<PAGE>
available exemption from registration (such as provided by Rule 144 following a
one year holding period for previously unregistered shares). The holders of
these remaining shares have certain rights to have their shares registered in
the future under the Securities Act, but may not exercise such registration
rights, and have agreed with the Company that they will not sell, transfer or
otherwise dispose of any of their shares for one year following the closing of
the IPO. See "Shares Eligible for Future Sale." On completion of the IPO, the
Company also had outstanding options to purchase up to a total of 2,174,954
shares of Common Stock. In addition, the 8,000,000 shares to be issued pursuant
to this registration statement may be freely traded after their issuance by
persons not affiliated with the Company unless the Company contractually
restricts their resale. The market price of the Common Stock might be adversely
affected by the sale, or availability for sale, of substantial amounts of the
Common Stock in the public market as described above.
POSSIBLE ANTI-TAKEOVER EFFECT OF CERTAIN CHARTER PROVISIONS. Comfort
Systems' Amended and Restated Certificate of Incorporation (the "Certificate of
Incorporation"), authorizes the Board of Directors to issue, without
stockholder approval, one or more series of preferred stock having such
preferences, powers and relative, participating, optional and other rights
(including preferences over the Common Stock respecting dividends and
distributions and voting rights) as the Board of Directors may determine. The
issuance of this "blank-check" preferred stock could render more difficult or
discourage an attempt to obtain control of the Company by means of a tender
offer, merger, proxy contest or otherwise. In addition, the Certificate of
Incorporation provides for a classified Board of Directors, which may also have
the effect of inhibiting or delaying a change in control of the Company. Certain
provisions of the Delaware General Corporation Law may also discourage takeover
attempts that have not been approved by the Board of Directors. See
"Description of Capital Stock."
DILUTION. Purchasers of Common Stock will experience immediate,
substantial dilution in the net tangible book value of their stock.
PRICE RANGE OF COMMON STOCK
The Company's Common Stock has traded on the New York Stock Exchange since
June 27, 1997. On July 29, 1997, the last sale price of the Common Stock was
$17.625 per share, as published in THE WALL STREET JOURNAL on July 30, 1997. At
July 29, 1997 there were approximately 84 stockholders of record of the
Company's Common Stock. The following table sets forth the range of high and low
sale prices for the Common Stock for the period from June 27, 1997, the date of
the IPO, through June 30, 1997, and from July 1, 1997, through July 29, 1997.
HIGH LOW
--------- ---------
June 27-30, 1997..................... $ 16.125 $ 13.00
July 1-29, 1997...................... $ 18.625 $ 15.50
12
<PAGE>
THE COMPANY
Comfort Systems was founded in 1996 to become a leading national provider
of comprehensive HVAC installation services and maintenance, repair and
replacement of HVAC systems, focusing primarily on the commercial and industrial
markets. In furtherance of this goal, Comfort Systems acquired the twelve
Founding Companies on July 2, 1997. In 1996, the Founding Companies, which have
been in business an average of 39 years, had pro forma combined revenues of
$167.5 million and served customers in 27 states. For a description of the
transactions pursuant to which these businesses were acquired, see "Certain
Transactions." The following is a description of the Founding Companies:
QUALITY AIR HEATING AND COOLING, INC. -- Quality Air Heating and Cooling,
Inc. ("Quality"), headquartered in Grand Rapids, Michigan, was founded in 1968
and operates primarily in western Michigan. Quality focuses on providing
"design and build" installation services and maintenance, repair and
replacement of HVAC systems, primarily for medium and large commercial
facilities. Quality operates a sheet metal and ductwork fabrication facility for
its installation services. Quality had 1996 revenues of $29.6 million and
currently has 222 employees. Robert J. Powers, the President of Quality, has
been employed by Quality for 16 years, has signed a five-year employment
agreement with Quality to continue his present position and is a director of the
Company.
ATLAS AIR CONDITIONING CO. -- Atlas Comfort Services USA, Inc., which does
business as Atlas Air Conditioning Co. ("Atlas"), and is headquartered in
Houston, Texas, was founded in 1947 and operates primarily in the southwest,
northeast and mid-Atlantic regions of the United States. Atlas is a leading
provider of HVAC installation services for apartment complexes, condominiums,
hotels and elder care facilities in the United States and also provides
maintenance, repair and replacement of HVAC systems. Atlas had 1996 revenues of
$30.0 million and currently has 205 employees. Brian S. Atlas and Michael Atlas,
the Chief Executive Officer and Chief Operating Officer of Atlas, respectively,
have been employed by Atlas for 22 and 20 years, respectively. They have signed
five-year employment agreements with Atlas to continue their present positions
following consummation of this Offering. Brian S. Atlas is a director of the
Company.
TRI-CITY MECHANICAL, INC. -- Tri-City Mechanical, Inc. ("Tri-City"),
headquartered in Tempe, Arizona, was founded in 1962 and operates in Arizona,
California and Nevada. Tri-City focuses on providing "design and build"
installation services and maintenance, repair and replacement of HVAC systems
primarily for large commercial and industrial facilities, as well as process
piping for industrial facilities. Tri-City operates a sheet metal and ductwork
fabrication facility for its installation services. Tri-City had 1996 revenues
of $24.2 million and currently has 283 employees. Michael Nothum, Jr., the
President of Tri-City, has been employed by Tri-City for 18 years, has signed a
five-year employment agreement with Tri-City to continue his present position
and is a director of the Company.
S. M. LAWRENCE CO., INC. -- S. M. Lawrence Co., Inc. and Lawrence Service,
Inc. (together "Lawrence"), headquartered in Jackson, Tennessee, were founded
in 1917 and operate primarily in Tennessee and the surrounding states. Lawrence
focuses on providing "design and build" installation services and process
piping primarily for industrial facilities and maintenance, repair and
replacement of commercial and industrial HVAC systems. Lawrence operates a sheet
metal and ductwork fabrication facility for its installation services. Lawrence
had 1996 revenues of $17.2 million and currently has 184 employees. Samuel M.
Lawrence III and Frank F. Lawrence, the Chief Executive Officer and President of
Lawrence, respectively, have been employed by Lawrence for 20 and 17 years,
respectively, and have signed five-year employment agreements with Lawrence to
continue their present positions. Samuel M. Lawrence III is a director of the
Company.
ACCURATE AIR SYSTEMS, INC. -- Accurate Air Systems, Inc. ("Accurate"),
headquartered in Houston, Texas, was founded in 1980 and operates primarily in
Texas, Oklahoma and New Mexico. Accurate focuses on providing "design and
build" installation services and maintenance, repair and replacement of HVAC
systems for commercial facilities. Accurate operates a sheet metal and ductwork
fabrication facility for its installation services. Accurate had 1996 revenues
of $16.8 million and currently has 115 employees. Thomas J. Beaty, President and
founder of Accurate, has been employed by Accurate for 16 years, has
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<PAGE>
signed a five-year employment agreement with Accurate to continue his present
position and is a director of the Company.
FREEWAY HEATING AND AIR CONDITIONING, INC. -- Freeway Heating and Air
Conditioning, Inc. ("Freeway"), headquartered in Bountiful, Utah, was founded
in 1947 and operates primarily in the Salt Lake City area. Freeway provides
installation services and maintenance, repair and replacement of HVAC systems
for commercial and residential facilities. Freeway had 1996 revenues of $9.4
million and currently has 107 employees. Robert Arbuckle, President of Freeway,
has been employed by Freeway for 22 years and has signed a five-year employment
agreement with Freeway to continue his present position.
EASTERN HEATING AND COOLING INC. -- Eastern Heating and Cooling Inc.
("Eastern"), headquartered in Albany, New York, was founded in 1945 and
operates primarily within a 75-mile radius of Albany, New York. Eastern focuses
on providing "design and build" installation and maintenance, repair and
replacement of HVAC systems for commercial and industrial facilities. Eastern
also offers continuous monitoring and control services for commercial
facilities. Eastern had 1996 revenues of $7.9 million and currently has 57
employees. Alfred J. Giardenelli, Jr., President of Eastern, has been employed
by Eastern for 26 years, has signed a five-year employment agreement with
Eastern to continue his present position and is a director of the Company.
CSI/BONNEVILLE -- Contract Service Inc., which does business as C. S. I.
Heating and Air Conditioning and Bonneville Heating and Cooling
("CSI/Bonneville") and is headquartered in Salt Lake City, Utah, was founded
in 1969 and operates primarily in Utah. CSI/Bonneville focuses on providing
maintenance, repair and replacement of HVAC systems for commercial and
residential facilities. CSI/Bonneville had 1996 revenues of $7.8 million and
currently has 81 employees. John C. Phillips, President and co-founder of
CSI/Bonneville, has been employed by CSI/Bonneville for 28 years, has signed a
five-year employment agreement with CSI/Bonneville to continue his present
position and is a director of the Company.
TECH HEATING AND AIR CONDITIONING, INC. -- Tech Heating and Air
Conditioning, Inc. and Tech Mechanical, Inc. (together "Tech"), headquartered
in Solon, Ohio, were founded in 1979 and operate primarily in the greater
Cleveland, Ohio area. Tech focuses on providing "design and build"
installation services and maintenance, repair and replacement of HVAC systems
for commercial and industrial facilities. Tech also offers continuous monitoring
and control services for commercial facilities. Tech had 1996 revenues of $7.5
million and currently has 65 employees. Robert R. Cook, President and founder of
Tech, has been employed by Tech for 18 years, has signed a five-year employment
agreement with Tech to continue his present position and is a director of the
Company.
SEASONAIR, INC. -- Seasonair, Inc. ("Seasonair"), headquartered in
Rockville, Maryland, was founded in 1966 and operates primarily in Maryland, the
District of Columbia and Virginia. Seasonair focuses on providing installation
services and maintenance, repair and replacement of HVAC systems for light
commercial facilities. Seasonair had 1996 revenues of $6.7 million and currently
has 62 employees. James C. Hardin, Sr., who became Chief Executive Officer of
Seasonair upon consummation of the IPO, has been employed by Seasonair for 11
years and has signed a five-year employment agreement with Seasonair.
WESTERN BUILDING SERVICES, INC. -- Western Building Services, Inc.
("Western"), headquartered in Denver, Colorado, was founded in 1980 and
operates primarily in Colorado. Western focuses on providing "design and
build" installation services and maintenance, repair and replacement of HVAC
systems for commercial facilities. Western also offers continuous monitoring and
control services for commercial facilities. Western had 1996 revenues of $6.5
million and currently has 53 employees. Charles W. Klapperich, President and
founder of Western, has been employed by Western for 17 years, has signed a
five-year employment agreement with Western to continue his present position and
is a director of the Company.
STANDARD HEATING AND AIR CONDITIONING CO. -- Standard Heating and Air
Conditioning Co. ("Standard"), headquartered in Birmingham, Alabama, was
founded in 1939 and operates primarily in Alabama. Standard focuses on providing
comprehensive maintenance, repair and replacement of HVAC systems for
residential and light commercial facilities. Standard had 1996 revenues of $3.7
million and currently has 38
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<PAGE>
employees. Thomas B. Kime, President of Standard, has been employed by Standard
for over 20 years and has signed a five-year employment agreement with Standard
to continue his present position with Standard.
DIVIDEND POLICY
The Company intends to retain all of its future earnings, if any, to
finance the expansion of its business and for general corporate purposes,
including future acquisitions, and does not anticipate paying any cash dividends
on its Common Stock for the foreseeable future. In addition, the Company's
credit facility includes restrictions on the ability of the Company to pay
dividends without the consent of the lender.
CAPITALIZATION
The following table sets forth the current maturities of long-term
obligations and capitalization at March 31, 1997 (i) of the Founding Companies
combined; (ii) of Comfort Systems on a pro forma combined basis to give effect
to the issuance of 1,269,935 shares of Common Stock to management of and
consultants to Comfort Systems, the Mergers and the S Corporation Distributions;
and (iii) of Comfort Systems, pro forma combined, as adjusted to give effect to
the Mergers, the S Corporation Distributions, the IPO and the application of a
portion of the net proceeds therefrom. This table should be read in conjunction
with the Unaudited Pro Forma Combined Financial Statements of the Company and
the Notes thereto included elsewhere in this Prospectus.
MARCH 31, 1997
----------------------------------------
PRO FORMA
COMBINED COMBINED AS ADJUSTED
-------- --------- -----------
(IN THOUSANDS)
Current maturities of long-term debt
obligations(1)..................... $ 9,230 $ 50,658(2) $ 5,355
======== ========= ===========
Long-term obligations, less current
maturities(1)...................... $ 3,267 $ 14,292(3) $ 14,292
Stockholders' equity:
Preferred Stock: $0.01 par
value, 5,000,000 shares
authorized; none issued or
outstanding................... -- -- --
Common Stock: $0.01 par value,
52,969,912 shares authorized;
14,875,774 shares issued and
outstanding pro forma
combined; and 20,975,774
shares issued and outstanding,
as adjusted(4)................ 433 140 210
Additional paid-in capital...... 12,149 100,978 180,783
Retained earnings............... 8,160 -- --
Treasury stock.................. (1,201 ) -- --
-------- --------- -----------
Total stockholders'
equity.................. 19,541 101,118 180,993
-------- --------- -----------
Total
capitalization..... $22,808 $ 115,410 $ 195,285
======== ========= ===========
- ------------
(1) For a description of the Company's debt, see the Notes to Unaudited Pro
Forma Combined Financial Statements and Notes to the Founding Companies'
Financial Statements.
(2) Includes a $45.3 million note payable to owners of the Founding Companies,
representing the cash portion of the Merger consideration that was paid from
a portion of the net proceeds of the IPO.
(3) Includes $11.0 million in long-term obligations to reflect that portion of
the S Corporation Distributions that were funded through borrowings.
(4) Excludes 2,174,954 shares of Common Stock subject to options to be granted
upon consummation of the IPO at an exercise price equal to the initial
public offering price. See "Management -- 1997 Long-Term Incentive Plan"
and "-- 1997 Non-Employee Directors' Stock Plan."
15
<PAGE>
SELECTED FINANCIAL DATA
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
Comfort Systems acquired the Founding Companies in connection with the
consummation of the IPO. For financial statement presentation purposes, Comfort
Systems has been identified as the "accounting acquirer." The following
selected financial data for Comfort Systems as of December 31, 1996 has been
derived from audited financial statements of Comfort Systems. The selected
historical financial data as of March 31, 1997 and the three months ended March
31, 1997 have been derived from unaudited financial statements of Comfort
Systems, which have been prepared on the same basis as the audited financial
statements and, in the opinion of Comfort Systems, reflect all adjustments
consisting of normal recurring adjustments, necessary for a fair presentation of
such data. The selected unaudited pro forma combined financial data present data
for the Company, adjusted for (i) the effects of the Mergers, (ii) the effects
of certain pro forma adjustments to the historical financial statements
described below and (iii) the consummation of the IPO and the application of the
net proceeds therefrom. See the Unaudited Pro Forma Combined Financial
Statements and the Notes thereto and the historical Financial Statements of
Comfort Systems and certain of the Founding Companies and the Notes thereto
included elsewhere in this Prospectus.
TWELVE MONTHS THREE MONTHS
ENDED ENDED
DECEMBER 31, MARCH 31,
1996 1997
------------- ------------
INCOME STATEMENT DATA:
COMFORT SYSTEMS
Revenues......................... $ -- $ --
Gross profit..................... -- --
Selling, general and
administrative
expenses(1).................... -- 11,556
------------- ------------
Loss from operations............. -- (11,556)
Interest and other income
(expense), net.................. -- --
------------- ------------
Net loss......................... $ -- $ (11,556)
============= ============
PRO FORMA COMBINED(2)
Revenues......................... $ 167,525 $ 39,505
Gross profit..................... 47,813 10,705
Selling, general and
administrative expenses(3)...... 27,814 7,814
Goodwill amortization(4)......... 3,495 874
Income from operations........... 16,504 2,017
Interest and other income
(expense), net(5)............... (961) (250)
Income before income taxes....... 15,543 1,767
Net income(6).................... 7,928 847
Net income per share............. 0.44 0.05
Shares used in computing pro
forma net income per share(7)... 18,180,311 18,180,311
<TABLE>
<CAPTION>
COMBINED COMPANIES
COMFORT SYSTEMS ------------------------------
-------------------------
MARCH 31, 1997
DECEMBER 31, MARCH 31, ------------------------------
------------ --------- PRO FORMA
1996 1997 COMBINED(8) AS ADJUSTED(9)
------------ --------- ----------- ---------------
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital(5)............... $ 1 $ 42 $ (31,197)(10) $ 48,678
Total assets..................... 178 2,908 188,683 220,389
Long-term debt, net of current
maturities(5).................. -- -- 14,292 14,292
Stockholders' equity(5).......... 1 42 101,118 180,993
(FOOTNOTES ON FOLLOWING PAGE)
16
</TABLE>
<PAGE>
- ------------
(1) Represents the non-recurring, non-cash Compensation Charge of $11.6
million.
(2) The pro forma combined income statement data assume that the Mergers and
the IPO were consummated on January 1, 1996 and are not necessarily
indicative of the results the Company would have obtained had these events
actually then occurred or of the Company's future results.
(3) The pro forma combined income statement data reflect the Compensation
Differential of $6.6 million for the twelve months ended December 31, 1996
and $428,000 for the three months ended March 31, 1997 and does not include
the Compensation Charge of $11.6 million recorded in the first quarter of
1997.
(4) Consists of amortization of goodwill to be recorded as a result of the
Mergers over a 40-year period and computed on the basis described in the
Notes to the Unaudited Pro Forma Combined Financial Statements.
(5) Several of the Founding Companies were S Corporations. In connection with
the Mergers, these Founding Companies made S Corporation Distributions
totalling $16.8 million through March 31, 1997. In order to fund these
distributions, the Founding Companies borrowed $11.0 million from existing
sources. Accordingly, pro forma interest expense has been increased by
$935,000 for the twelve months ended December 31, 1996 and $207,000 for the
three months ended March 31, 1997, pro forma working capital has been
reduced by $1.9 million, pro forma long-term debt has been increased by
$11.0 million and pro forma stockholders' equity has been reduced by $12.9
million. Quality declared S Corporation Distributions of $3.9 million which
have been recorded as a dividend payable to an affiliate and a reduction of
stockholders' equity in the pro forma combined balance sheet data. This
$3.9 million is included in the $16.8 million of S Corporation
Distributions.
(6) Assuming a corporate income tax rate of 40% and the non-deductibility of
goodwill.
(7) Includes (i) 2,969,912 shares issued to Notre, (ii) 1,269,935 shares issued
to management of and consultants to Comfort Systems, (iii) 9,720,927 shares
issued to owners of the Founding Companies and (iv) 4,219,537 of the
7,015,000 shares sold in the Offering necessary to pay the cash portion of
the Merger consideration and expenses of the IPO and excludes 915,000
shares of common stock purchased by the underwriters pursuant to an
overallotment option.
(8) The pro forma combined balance sheet data assume that the Mergers were
consummated on March 31, 1997.
(9) Adjusted for the sale of the 7,015,000 shares of Common Stock offered in
the IPO and the application of the estimated net proceeds therefrom.
(10) Includes a $45.3 million note payable to owners of the Founding Companies,
representing the cash portion of the Merger consideration paid from a
portion of the net proceeds of the IPO.
17
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with "Selected
Financial Data" and the Founding Companies' Financial Statements and related
Notes thereto appearing elsewhere in this Prospectus.
INTRODUCTION
The Company's revenues are derived from providing comprehensive HVAC
installation services and maintenance, repair and replacement of HVAC systems
primarily for commercial and industrial customers. The Company's commercial and
industrial applications include office buildings, retail centers, apartment
complexes, hotels, manufacturing plants and government facilities. The Company
also provides specialized HVAC applications such as process cooling, control
systems, electronic monitoring and process piping. Approximately 90% of the
Company's pro forma combined 1996 revenues of $167.5 million was derived from
commercial and industrial customers, with approximately 53% of total revenues
attributable to installation services and 47% attributable to maintenance,
repair and replacement services.
Revenues related to commercial and industrial installation are of two
types: "design and build" and "plan and spec." Approximately 80% of the
commercial and industrial installation revenues for 1996 were generated from
"design and build" projects, which generally yield higher margins than "plan
and spec" projects because the Company is responsible for designing,
engineering and installing a cost-effective, energy-efficient system that is
customized to the specific needs of the building owner. This enables the Company
to control the customer's cost and reduce overall design and installation time.
Additionally, the costs and other terms of "design and build" projects are
normally established through relationship-based negotiation with the building
owner or its representative rather than through a competitive bid process.
"Plan and spec" installation projects typically yield lower margins than
"design and build" projects because the building's architect or consulting
engineer designs the HVAC system and the installation project is put out for
bid.
Most installation and reconfiguration projects are completed within one
year. Generally, these contracts are accounted for under the
percentage-of-completion method of accounting. Revenues are recorded based on
the percentage of costs incurred during a particular period, in proportion to
total estimated costs for each contract. Maintenance, repair and replacement
service revenues are recorded as services are performed. Costs of services
consist primarily of HVAC components, parts and materials related to new
installation, equipment maintenance and rental, salaries and benefits payable to
service and repair technicians, as well as supervisory and subcontract labor.
Selling, general and administrative expenses consist primarily of compensation
and benefits to owners as well as to sales and administrative employees, fees
for professional services, depreciation of equipment and other general office
expenses. Selling, general and administrative expenses also include incentive
and discretionary bonuses paid to owners, significant portions of which were
paid in lieu of S Corporation distributions to enable stockholders to meet their
income tax obligations.
The Founding Companies have operated throughout the periods presented as
independent, privately-owned entities, and their results of operations reflect
varying tax structures (S Corporations or C Corporations) which have influenced
the historical level of owners' compensation. Gross profit margins and selling,
general and administrative expenses as a percentage of revenues may not be
comparable among the individual Founding Companies. The owners of the Founding
Companies have agreed to certain reductions in their compensation and benefits
in connection with the organization of the Company. The Compensation
Differential for 1996 of $6.6 million has been reflected as a pro forma
adjustment in the Unaudited Pro Forma Combined Statements of Operations.
The Company anticipates that following the Mergers it will realize savings
from (i) greater volume discounts from suppliers of HVAC components, parts and
raw materials; (ii) consolidation of insurance and bonding programs; (iii) other
general and administrative areas such as training and advertising; and (iv) the
Company's ability to borrow at lower interest rates than most of the Founding
Companies. It is anticipated that these savings will be offset by costs related
to the Company's new corporate management and by the
18
<PAGE>
costs associated with being a public company. The Company believes that neither
these savings nor the costs associated therewith can be quantified because the
Mergers have not occurred, and there have been no combined operating results
upon which to base any assumptions. As a result, they have not been included in
the pro forma financial information included herein.
During January and February 1997, Comfort Systems sold an aggregate of
1,269,935 shares of Common Stock to management and consultants. As a result, the
Company recorded a non-recurring, non-cash Compensation Charge of $11.6 million
in the first quarter of 1997, representing the difference between the amount
paid for the shares and the estimated fair value of the shares on the date of
sale. This Compensation Charge of $11.6 million is not included in pro forma
financial information or Combined Results of Operations.
In July 1996, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 97 ("SAB 97") relating to business combinations
immediately prior to an initial public offering. SAB 97 requires that these
combinations be accounted for using the purchase method of acquisition
accounting. Under the purchase method, one of the companies must be designated
as the accounting acquirer. For the remaining companies, $139.8 million,
representing the excess of the fair value of the Merger consideration received
over the fair value of the net assets to be acquired, will be recorded as
"goodwill" on the Company's balance sheet. Goodwill will be amortized as a
non-cash charge to the income statement over a 40-year period. The pro forma
impact of this amortization expense, which is non-deductible for tax purposes,
is $3.5 million per year on an after-tax basis. Prior to the issuance of SAB 97,
goodwill and related amortization expense were not required to be recorded for
most business combinations similar to the Mergers. See "Certain
Transactions -- Organization of the Company."
COMBINED RESULTS OF OPERATIONS
The combined results of operations of the Founding Companies for the
periods presented do not represent combined results of operations presented in
accordance with generally accepted accounting principles, but are only a
summation of the revenues, cost of services and selling, general and
administrative expenses of the individual Founding Companies on a historical
basis. The combined results also exclude the effect of pro forma adjustments and
may not be comparable to, and may not be indicative of, the Company's
post-combination results of operations because (i) the Founding Companies were
not under common control or management during the periods presented; (ii) the
Founding Companies used different tax structures (S Corporations or C
Corporations) during the periods presented; (iii) the Company will incur
incremental costs related to its new corporate management and the costs of being
a public company; (iv) the Company will use the purchase method to record the
Mergers, resulting in the recording of goodwill which will be amortized over 40
years; and (v) the combined data do not reflect the Compensation Differential
and potential benefits and cost savings the Company expects to realize when
operating as a combined entity.
The following table sets forth the combined results of operations of the
Founding Companies on a historical basis and such results as a percentage of
revenues.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
FISCAL YEARS ENDED(1) MARCH 31,(3)
-------------------------------------------------------------- ----------------------------------------
1994 1995(2) 1996(2) 1996 1997
------------------- -------------------- -------------------- -------------------- -------------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues................... $ 124,710 100.0% $ 146,512 100.0% $ 167,525 100.0% $ 34,799 100.0% $ 39,505 100.0%
Cost of services........... 92,318 74.0 105,043 71.7 119,712 71.5 25,759 74.0 28,800 72.9
--------- ------ --------- ------- --------- ------- --------- ------- --------- -------
Gross profit............... 32,392 26.0 41,469 28.3 47,813 28.5 9,040 26.0 10,705 27.1
Selling, general and
administrative expenses.. 27,386 22.0 31,038 21.2 34,382 20.5 7,973 22.9 8,027 20.3
--------- ------ --------- ------- --------- ------- --------- ------- --------- -------
Income from operations..... 5,006 4.0 10,431 7.1 13,431 8.0 1,067 3.1 2,678 6.8
</TABLE>
- ------------
(1) The fiscal years presented are as follows: Quality -- the fiscal years ended
March 31, 1995 and 1996 and the year ended December 31, 1996; Atlas and
Accurate -- the fiscal years ended June 30, 1994 and 1995 and the year ended
December 31, 1996; Lawrence -- the fiscal years ended October 31, 1994, 1995
and 1996; and Tri-City, Eastern, CSI/Bonneville, Tech, Seasonair and
Western -- the years ended December 31 for all periods presented.
(2) The financial data for 1995 and 1996 both include Quality's results for the
three months ended March 31, 1996 which were as follows: revenues of $6.3
million, cost of services of $4.3 million, and selling, general and
administrative expenses of $1.6 million.
(3) Lawrence's results of operations are presented for the three months ended
January 31, 1996 and 1997.
19
<PAGE>
COMBINED RESULTS FOR THE THREE MONTHS ENDED MARCH 31, 1997 COMPARED TO THE THREE
MONTHS ENDED MARCH 31, 1996
REVENUES. Combined revenues increased approximately $4.7 million, or
13.5%, from $34.8 million for the three months ended March 31, 1996 to $39.5
million for the three months ended March 31, 1997. The increase in revenues
occurred primarily at Quality, Lawrence and Tech. Revenues at Quality increased
$2.5 million due to a $1.5 million increase in installation revenues and a $1.0
million increase in maintenance, repair and replacement revenues. Revenues
increased $1.3 million at Lawrence due primarily to a "design and build"
installation project for a manufacturing facility in North Carolina. Revenues at
Tech increased $0.6 million due to an increase in commercial installation
services because there were fewer days of inclement weather in the first three
months of 1997 as compared to the prior comparable period. Four of the other
Founding Companies reported an increase in revenues from the first quarter of
1996 compared to the first quarter of 1997, partially offset by a decline in
revenues at Accurate and Eastern.
GROSS PROFIT. Combined gross profit increased $1.7 million, or 18.4%, from
$9.0 million for the three months ended March 31, 1996 to $10.7 million for the
three months ended March 31, 1997, due primarily to increases of $1.4 million at
Quality, $0.5 million at Atlas and $0.3 million at Lawrence. As a percentage of
revenues, combined gross profit increased from 26.0% in the three months ended
March 31, 1996 to 27.1% in the three months ended March 31, 1997. Gross profit
as a percentage of revenues at Quality increased from 32.1% in the three months
ended March 31, 1996 to 38.7% in the three months ended March 31, 1997 as a
result of Quality's ability to be more selective in accepting projects. Gross
profit as a percentage of revenues at Atlas increased from 12.1% for the three
months ended March 31, 1996 to 20.4% for the three months ended March 31, 1997.
This improvement resulted from Atlas's ability to be more selective in accepting
projects.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Combined selling, general
and administrative expenses increased $0.1 million, or 0.7%, from $7.9 million
for the three months ended March 31, 1996 to $8.0 million for the three months
ended March 31, 1997 due primarily to an increase in infrastructure needed to
support increased volume, partially offset by a decrease in compensation to
owners and incentive compensation to key employees totalling $1.2 million. As a
percentage of revenues, selling, general and administrative expenses decreased
from 22.9% in the three months ended March 31, 1996 to 20.3% in the three months
ended March 31, 1997.
COMBINED RESULTS FOR 1996 COMPARED TO 1995
REVENUES. Combined revenues increased approximately $21.0 million, or
14.3%, from $146.5 million in 1995 to $167.5 million in 1996. The increase in
combined revenues occurred primarily at Atlas, Accurate and Lawrence. This
increase in combined revenues was primarily attributable to an increase in
commercial and industrial "design and build" revenues of approximately 15% and
an increase in maintenance, repair and replacement revenues of approximately
30%. Revenues for Atlas increased $7.6 million from 1995 to 1996 due to
increasing demand by several large national customers for HVAC "design and
build" installation services provided by Atlas for multi-unit facilities.
Revenues for Accurate increased $4.6 million from 1995 to 1996 reflecting the
success of an increased marketing effort along with the addition of sales
personnel and project managers. Revenues at Lawrence increased by $4.6 million
from 1995 to 1996 due to a management decision in 1995 to expand the number of
general contractors for which Lawrence provides industrial installation services
and due to a large "design and build" installation contract obtained in 1996
for a food processing facility. Seven of the other Founding Companies reported
an increase in revenues from 1995 and 1996, partially offset by a decline in
revenues at Quality and Tri-City.
GROSS PROFIT. Combined gross profit increased $6.3 million, or 15.3%, from
$41.5 million in 1995 to $47.8 million in 1996, due principally to increases in
gross profit of $2.2 million at Atlas, $1.5 million at Lawrence and $1.1 million
at Western. As a percentage of revenues, combined gross profit increased from
28.3% in 1995 to 28.5% in 1996. Gross profit as a percentage of revenues at
Atlas increased from 12.5% of revenues in 1995 to 16.5% of revenues in 1996 as
increasing demand for Atlas' specialized installation services enabled Atlas to
earn higher margins. Gross profit as a percentage of revenues at Accurate
decreased from 26.1% of revenues in 1995 to 21.0% of revenues in 1996 as a
result of an increase in
20
<PAGE>
overtime and subcontract labor necessary to support the increased number of
"design and build" projects. Gross profit as a percentage of revenues at
Western increased from 17.1% to 28.2% from 1995 to 1996, which resulted in part
from Western's participation in an incentive program sponsored by the Public
Service Company of Colorado during 1996. Western does not intend to participate
in this program during 1997.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Combined selling, general
and administrative expenses increased $3.4 million, or 10.8%, from $31.0 million
in 1995 to $34.4 million in 1996. Selling, general and administrative expenses
increased $1.4 million at Lawrence, approximately one-half of which was related
to increases in salary and incentive compensation paid to the owners, and the
other half of which was related to increases in incentive compensation and
discretionary profit sharing contributions for employees. Selling, general and
administrative expenses increased $0.7 million at Tri-City as a result of a $1.1
million increase in compensation to the owners in lieu of S Corporation
distributions, offset by $0.4 million of reductions in other overhead expenses.
As a percentage of combined revenues, selling, general and administrative
expenses decreased from 21.2% in 1995 to 20.5% in 1996.
COMBINED RESULTS FOR 1995 COMPARED TO 1994
REVENUES. Combined revenues increased approximately $21.8 million, or
17.5%, from $124.7 million in 1994 to $146.5 million in 1995, primarily due to
an increase in commercial and industrial "design and build" revenues of
approximately 40% and an increase of approximately 10% in maintenance, repair
and replacement revenues. Revenues at Quality increased $8.2 million from 1994
to 1995 as a result of management's focus on obtaining more "design and build"
projects and related service work. Revenues at Tri-City increased $8.1 million
from 1994 to 1995 as a result of a strategy implemented in late 1994 to focus on
larger "design and build" projects and the related service relationships. To
accomplish its strategy, Tri-City increased the size of its sales and project
management staff.
GROSS PROFIT. Combined gross profit increased $9.1 million, or 28.0%, from
$32.4 million in 1994 to $41.5 million in 1995. Gross profit increased $3.1
million at Tri-City and $2.9 million at Quality. As a percentage of revenues,
combined gross profit increased from 26.0% in 1994 to 28.3% in 1995. Gross
profit as a percentage of revenues at Tri-City increased from 15.5% in 1994 to
22.9% in 1995 as a result of an increase in the number of higher-margin "design
and build" installation projects. Gross profit as a percentage of revenues at
Lawrence increased from 23.2% in fiscal 1994 to 27.3% in fiscal 1995 as
management emphasized higher-margin "design and build" projects and
successfully implemented an incentive program for project managers to control
project costs.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Combined selling, general
and administrative expenses increased $3.6 million, or 13.3%, from $27.4 million
in 1994 to $31.0 million in 1995. Selling, general and administrative expenses
increased $1.0 million at Tri-City from 1994 to 1995 primarily due to a $0.8
million increase in compensation to its owners. Selling, general and
administrative expenses at Lawrence increased $0.6 million primarily due to an
increase in salary and incentive compensation to its owners. As a percentage of
combined revenues, combined selling, general and administrative expenses
decreased from 22.0% in 1994 to 21.2% in 1995.
COMBINED LIQUIDITY AND CAPITAL RESOURCES
On a combined basis, the Founding Companies generated $2.1 million of net
cash from operating activities for the three months ended March 31, 1997,
primarily at Quality, Tri-City and Seasonair. Net cash used in investing
activities was $0.8 million, primarily for equipment purchases. Net cash used in
financing activities was $0.4 million and consisted of increases in long-term
debt of $1.9 million offset by distributions to stockholders of $2.3 million. At
March 31, 1997, the combined Founding Companies had working capital of $16.0
million and total debt of $12.5 million, including $5.1 million of debt to
stockholders.
In connection with and prior to the Mergers, certain Founding Companies
made S Corporation Distributions to their owners of substantially all of their
previously-taxed undistributed earnings. The pro forma combined financial
statements as of March 31, 1997 and for the three months then ended, included
elsewhere in this Prospectus, reflect pro forma adjustments for the estimated
amount of these S Corporation
21
<PAGE>
Distributions and additional debt needed to fund these distributions had they
occurred in their entirety as of March 31, 1997. These pro forma adjustments
reflect $16.8 million of S Corporation Distributions and $11.0 million of
additional debt.
On a combined basis, the Founding Companies generated $9.0 million of net
cash from operating activities during fiscal 1996, primarily at Quality,
Tri-City and CSI/Bonneville. Net cash used in investing activities was $3.0
million on a combined basis, primarily for equipment purchases. Net cash used in
financing activities was $7.3 million on a combined basis, consisting of net
reductions in long-term debt of $1.6 million and distributions to stockholders
of $5.7 million. At December 31, 1996, the combined Founding Companies had
working capital of $18.9 million and total debt of $8.6 million, including debt
to stockholders.
The Company intends to pursue acquisition opportunities. The Company
expects to fund future acquisitions through the issuance of additional Common
Stock, borrowings, including use of amounts available under its credit facility
executed in connection with the IPO and cash flow from operations. The Company
anticipates that its cash flow from operations will provide cash in excess of
the Company's normal working capital needs, debt service requirements and
planned capital expenditures for equipment. On a combined basis, the Founding
Companies made capital expenditures of $2.3 million in fiscal 1996.
The Company has obtained a revolving line of credit of $75.0 million from
Bank One. The facility will be used for acquisitions, capital expenditures,
refinancing of debt not paid out of the proceeds of the IPO and for general
corporate purposes. The credit facility requires the Company to comply with
various loan covenants including (i) maintenance of certain financial ratios,
(ii) restrictions on additional indebtedness, and (iii) restrictions on liens,
guarantees, advances and dividends. As of July 28, 1997, borrowings under the
line of credit were credit $17.3 million, which was used to repay existing
indebtedness of the Founding Companies.
QUALITY RESULTS OF OPERATIONS
Quality, headquartered in Grand Rapids, Michigan, was founded in 1968 and
operates primarily throughout western Michigan. Quality focuses on providing
"design and build" installation services and maintenance, repair and
replacement of HVAC systems, primarily for medium and large commercial
facilities.
The following table sets forth selected statement of operations data and
such data as a percentage of revenues for the periods indicated:
<TABLE>
<CAPTION>
YEAR ENDED NINE MONTHS ENDED
YEAR ENDED MARCH 31, DECEMBER 31, DECEMBER 31,
------------------------------------------ -------------------- --------------------
1995 1996(1) 1996(1) 1995
-------------------- -------------------- -------------------- --------------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues............................. $ 24,434 100.0% $ 32,594 100.0% $ 29,597 100.0% $ 26,279 100.0%
Cost of services..................... 15,634 64.0 20,850 64.0 18,467 62.4 16,559 63.0
--------- ------- --------- ------- --------- ------- --------- -------
Gross profit......................... 8,800 36.0 11,744 36.0 11,130 37.6 9,720 37.0
Selling, general and administrative
expenses........................... 6,646 27.2 6,791 20.8 6,640 22.4 5,183 19.7
--------- ------- --------- ------- --------- ------- --------- -------
Income from operations............... 2,154 8.8 4,953 15.2 4,490 15.2 4,537 17.3
THREE MONTHS ENDED
MARCH 31,
------------------------------------------
1996 1996 1997
-------------------- -------------------- --------------------
Revenues............................. $ 23,282 100.0% $ 6,315 100.0% $ 8,766 100.0%
Cost of services..................... 14,176 60.9 4,291 67.9 5,372 61.3
--------- --------- --------- --------- --------- ---------
Gross profit......................... 9,106 39.1 2,024 32.1 3,394 38.7
Selling, general and administrative
expenses........................... 5,032 21.6 1,608 25.5 2,094 23.9
--------- --------- --------- --------- --------- ---------
Income from operations............... 4,074 17.5 416 6.6 1,300 14.8
</TABLE>
- ------------
(1) The financial data for the year ended December 31, 1996 and the year ended
March 31, 1996 both include results for the three months ended March 31,
1996, which were as follows: revenues of $6.3 million, cost of services of
$4.3 million and selling, general and administrative expenses of $1.6
million.
QUALITY RESULTS FOR THREE MONTHS ENDED MARCH 31, 1997 COMPARED TO THREE MONTHS
ENDED MARCH 31, 1996
REVENUES. Revenues increased $2.5 million, or 38.8%, from $6.3 million for
the three months ended March 31, 1996 to $8.8 million for the three months ended
March 31, 1997 due to a $1.5 million increase in installation revenues and a
$1.0 million increase in maintenance, repair and replacement revenues.
GROSS PROFIT. Gross profit increased $1.4 million, or 67.7%, from $2.0
million for the three months ended March 31, 1996 to $3.4 million for the three
months ended March 31, 1997. As a percentage of
22
<PAGE>
revenues, gross profit increased from 32.1% to 38.7% as a result of Quality's
ability to be more selective in accepting projects.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased $0.5 million, or 30.2%, from $1.6 million for
the three months ended March 31, 1996 to $2.1 million for the three months ended
March 31, 1997. The increase in selling, general and administrative expenses was
primarily attributable to an increase in administrative costs associated with
the higher sales volume. As a percentage of revenues, selling, general and
administrative expenses decreased from 25.5% to 23.9% as Quality was able to
increase its sales volume without a commensurate increase in overhead expenses.
QUALITY RESULTS FOR NINE MONTHS ENDED DECEMBER 31, 1996 COMPARED TO NINE MONTHS
ENDED DECEMBER 31, 1995
REVENUES. Revenues decreased $3.0 million, or 11.4%, from $26.3 million
for the nine months ended December 31, 1995 to $23.3 million for the nine months
ended December 31, 1996 due to a decrease in Quality's volume of commercial
"design and build" installation projects. Quality's decline in revenues from
1995 to 1996 resulted from management's decision to be more selective in
accepting installation projects. Management continues to emphasize project
selectivity and expansion of capacity through the addition of technical staff
and management rather than through subcontract labor and employee overtime.
GROSS PROFIT. Gross profit decreased $0.6 million, or 6.3%, from $9.7
million for the nine months ended December 31, 1995 to $9.1 million for the nine
months ended December 31, 1996. As a percentage of revenues, gross profit
increased from 37.0% to 39.1% due to management's emphasis on project selection
and a decrease in the use of subcontract labor, employee overtime and outside
services.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses decreased $0.2 million, or 2.9%, from $5.2 million for
the nine months ended December 31, 1995 to $5.0 million for the nine months
ended December 31, 1996. As a percentage of revenues, these expenses increased
from 19.7% to 21.6% due to the decline in revenues.
QUALITY RESULTS FOR YEAR ENDED DECEMBER 31, 1996 COMPARED TO YEAR ENDED MARCH
31, 1996
REVENUES. Revenues decreased $3.0 million, or 9.2%, from $32.6 million for
the year ended March 31, 1996 to $29.6 million for the year ended December 31,
1996, for the reasons described above.
GROSS PROFIT. Gross profit decreased $0.6 million, or 5.2%, from $11.7
million for the year ended March 31, 1996 to $11.1 million for the year ended
December 31, 1996. As a percentage of revenues, gross profit increased from
36.0% to 37.6% due to management's emphasis on project selection and a decrease
in the use of subcontract labor, employee overtime and outside services.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses decreased $0.2 million, or 2.2%, from $6.8 million for
the year ended March 31, 1996 to $6.6 million for the year ended December 31,
1996. As a percentage of revenues, selling, general and administrative expenses
increased from 20.8% to 22.4% due to the decline in revenues.
QUALITY RESULTS FOR YEAR ENDED MARCH 31, 1996 COMPARED TO YEAR ENDED MARCH 31,
1995
REVENUES. Revenues increased $8.2 million, or 33.4%, from $24.4 million
for the fiscal year ended March 31, 1995 to $32.6 for the fiscal year ended
March 31, 1996. This increase in revenues was primarily attributable to
management's emphasis on obtaining more "design and build" installation
projects and the related service work.
GROSS PROFIT. Gross profit increased $2.9 million, or 33.5%, from $8.8
million for the fiscal year ended March 31, 1995 to $11.7 million for the fiscal
year ended March 31, 1996. As a percentage of revenues, gross profit remained
unchanged at 36.0% as the benefits associated with higher revenues were offset
by an increase in subcontract labor, employee overtime and outside services.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased $0.2 million, or 2.2%, from $6.6 million for
the fiscal year ended March 31, 1995 to $6.8 million for the fiscal year ended
March 31, 1996. As a percentage of revenues, selling, general and administrative
expenses
23
<PAGE>
decreased from 27.2% to 20.8% as the Company successfully leveraged its
infrastructure to support the significant increase in volume.
QUALITY LIQUIDITY AND CAPITAL RESOURCES
Quality generated $1.5 million in net cash from operating activities for
the three months ended March 31, 1997. Net cash used in investing activities was
approximately $0.1 million, principally for equipment purchases. Net cash used
in financing activities was $0.3 million, representing repayment of long-term
debt.
At March 31, 1997, Quality had working capital of $3.5 million and $1.1
million of total debt outstanding.
Quality generated $4.5 million in net cash from operating activities for
the twelve months ended December 31, 1996. Net cash used in investing activities
was approximately $0.4 million, principally for equipment purchases. Net cash
used in financing activities was $4.4 million, of which $3.5 million was
distributed to shareholders and $0.9 million was used to repay long-term debt.
At December 31, 1996, Quality had working capital of $4.9 million and $1.3
million of total debt outstanding.
ATLAS RESULTS OF OPERATIONS
Atlas, headquartered in Houston, Texas, was founded in 1947 and operates
primarily in the southwest, northeast and mid-Atlantic regions of the United
States. Atlas is a leading provider of HVAC installation services for apartment
complexes, condominiums, hotels and elder care facilities in the United States
and also provides maintenance, repair and replacement of HVAC systems.
The following table sets forth selected statement of operations data and
such data as a percentage of revenues for the periods indicated:
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED JUNE 30, DECEMBER 31,
---------------------------------------------------------------- --------------------
1994 1995 1996 1995
-------------------- -------------------- -------------------- --------------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues............................. $ 21,848 100.0% $ 22,444 100.0% $ 29,174 100.0% $ 14,689 100.0%
Cost of services..................... 19,657 90.0 19,635 87.5 25,449 87.2 12,886 87.7
--------- ------- --------- ------- --------- ------- --------- -------
Gross profit......................... 2,191 10.0 2,809 12.5 3,725 12.8 1,803 12.3
Selling, general and administrative
expenses........................... 2,086 9.5 2,166 9.6 2,843 9.8 1,417 9.6
--------- ------- --------- ------- --------- ------- --------- -------
Income from operations.. 105 0.5 643 2.9 882 3.0 386 2.7
THREE MONTHS ENDED
MARCH 31,
------------------------------------------
1996 1996 1997
-------------------- -------------------- --------------------
Revenues............................. $ 15,545 100.0% $ 6,207 100.0% $ 6,115 100.0%
Cost of services..................... 12,508 80.5 5,456 87.9 4,866 79.6
--------- ------- --------- ------- --------- -------
Gross profit......................... 3,037 19.5 751 12.1 1,249 20.4
Selling, general and administrative
expenses........................... 1,432 9.2 631 10.2 753 12.3
--------- ------- --------- ------- --------- -------
Income from operations.. 1,605 10.3 120 1.9 496 8.1
</TABLE>
ATLAS RESULTS FOR THREE MONTHS ENDED MARCH 31, 1997 COMPARE D TO THREE MONTHS
ENDED MARCH 31, 1996
REVENUES. Revenues decreased $0.1 million, or 1.5%, from $6.2 million for
the three months ended March 31, 1996 to $6.1 million for the three months ended
March 31, 1997.
GROSS PROFIT. Gross profit increased $0.4 million, or 66.3%, from $0.8
million for the three months ended March 31, 1996 to $1.2 million for the three
months ended March 31, 1997. As a percentage of revenues, gross profit increased
from 12.1% to 20.4% due to management's ability to be more selective in
accepting projects.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased $0.2 million, or 19.3%, from $0.6 million for
the three months ended March 31, 1996 to $0.8 million for the three months ended
March 31, 1997. As a percentage of revenues, selling, general and administrative
expenses increased from 10.2% to 12.3% due to the addition of administrative
personnel and related costs.
ATLAS RESULTS FOR SIX MONTHS ENDED DECEMBER 31, 1996 COMPARED TO SIX MONTHS
ENDED DECEMBER 31, 1995
REVENUES. Revenues increased $0.8 million, or 5.8%, from $14.7 million for
the six months ended December 31, 1995 to $15.5 million for the six months ended
December 31, 1996. This increase was primarily attributable to an increase in
demand for Atlas' specialized services for multi-unit facilities.
GROSS PROFIT. Gross profit increased $1.2 million, or 68.4%, from $1.8
million for the six months ended December 31, 1995 to $3.0 million for the six
months ended December 31, 1996. As a percentage of
24
<PAGE>
revenues, gross profit increased from 12.3% to 19.5% due to an increase in the
proportion of "design and build" projects and management's ability to be more
selective in accepting projects.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses remained unchanged at $1.4 million for the six months
ended December 31, 1995 and the six months ended December 31, 1996. As a
percentage of revenues, selling, general and administrative expenses decreased
from 9.6% to 9.2% as Atlas was able to increase revenues without a commensurate
increase in overhead expenses.
ATLAS RESULTS FOR YEAR ENDED JUNE 30, 1996 COMPARED TO YEAR ENDED JUNE 30, 1995
REVENUES. Revenues increased $6.8 million, or 30.0%, from $22.4 million
for the year ended June 30, 1995 to $29.2 million for the year ended June 30,
1996 due to an increase in demand for Atlas' specialized services for multi-unit
facilities.
GROSS PROFIT. Gross profit increased $0.9 million, or 32.6%, from $2.8
million for the year ended June 30, 1995 to $3.7 million for the year ended June
30, 1996. As a percentage of revenues, gross profit increased from 12.5% to
12.8%.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased $0.6 million, or 31.3%, from $2.2 million for
the year ended June 30, 1995 to $2.8 million for the year ended June 30, 1996,
as Atlas increased its infrastructure to support higher volume. As a percentage
of revenues, selling, general and administrative expenses increased from 9.6% to
9.8%.
ATLAS RESULTS FOR JUNE 30, 1995 COMPARED TO YEAR ENDED JUNE 30, 1994
REVENUES. Revenues increased $0.6 million, or 2.7%, from $21.8 million for
the year ended June 30, 1994 to $22.4 million for the year ended June 30, 1995.
GROSS PROFIT. Gross profit increased $0.6 million, or 28.2%, from $2.2
million for the year ended June 30, 1994 to $2.8 million for the year ended June
30, 1995. As a percentage of revenues, gross profit increased from 10.0% to
12.5%. The increase in the gross profit percentage from 1994 to 1995 was
primarily related to higher demand for Atlas' specialized installation services
for multi-unit facilities and a decrease in lower-margin "plan and spec"
projects.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased $0.1 million, or 3.8%, from $2.1 million for
the twelve months ended June 30, 1994 to $2.2 million for the twelve months
ended June 30, 1995. As a percentage of revenues, selling, general and
administrative expenses increased from 9.5% to 9.6%.
ATLAS LIQUIDITY AND CAPITAL RESOURCES
Atlas generated $0.2 million in net cash from operating activities for the
three months ended March 31, 1997. Net cash used in investing activities was
approximately $0.1 million, primarily for equipment purchases. Net cash provided
by financing activities was $0.2 million, representing borrowings on the line of
credit.
At March 31, 1997, Atlas had working capital of $2.8 million and total debt
of $2.0 million.
Atlas used $0.3 million in net cash from operating activities for the
twelve months ended June 30, 1996 primarily due to an increase in accounts
receivable which were collected in subsequent periods. Net cash used in
investing activities was approximately $0.1 million for equipment purchases. Net
cash provided by financing activities was $0.3 million for the twelve months
ended June 30, 1996, principally as a result of a net increase in long-term debt
and notes payable.
At December 31, 1996, Atlas had working capital of $2.7 million and total
debt of $1.8 million.
TRI-CITY RESULTS OF OPERATIONS
Tri-City, headquartered in Tempe, Arizona, was founded in 1962 and operates
in Arizona, California and Nevada. Tri-City focuses on providing "design and
build" installation services and maintenance, repair
25
<PAGE>
and replacement of HVAC systems primarily for large commercial and industrial
facilities, as well as process piping for industrial facilities.
The following table sets forth selected statement of operations data and
such data as a percentage of revenues for the periods indicated:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
---------------------------------------------------------------- --------------------
1994 1995 1996 1996
-------------------- -------------------- -------------------- --------------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues............................. $ 16,883 100.0% $ 25,030 100.0% $ 24,237 100.0% $ 6,482 100.0%
Cost of services..................... 14,271 84.5 19,298 77.1 18,561 76.6 5,082 78.4
--------- ------- --------- ------- --------- ------- --------- -------
Gross profit......................... 2,612 15.5 5,732 22.9 5,676 23.4 1,400 21.6
Selling, general and administrative
expenses........................... 2,219 13.2 3,193 12.8 3,903 16.1 1,026 15.8
--------- ------- --------- ------- --------- ------- --------- -------
Income from operations............... 393 2.3 2,539 10.1 1,773 7.3 374 5.8
</TABLE>
THREE MONTHS ENDED
MARCH 31,
--------------------
1997
--------------------
Revenues............................. $ 6,791 100.0%
Cost of services..................... 5,946 87.6
--------- ---------
Gross profit......................... 845 12.4
Selling, general and administrative
expenses........................... 567 8.3
--------- ---------
Income from operations............... 278 4.1
TRI-CITY RESULTS FOR THREE MONTHS ENDED MARCH 31, 1997 COMPARED TO THREE MONTHS
ENDED MARCH 31, 1996
REVENUES. Revenues increased $0.3 million, or 4.8%, from $6.5 million for
the three months ended March 31, 1996 to $6.8 million for the three months ended
March 31, 1997 due primarily to an increase in "design and build" installation
activity for a large medical institution. Tri-City pursued this project to
expand its presence in its regional healthcare HVAC market. Tri-City was
selected as the lead mechanical contractor on this project. Installation of the
HVAC and process piping systems on this project began in October 1996 and
accounted for approximately 45% of the revenues in the three months ended March
31, 1997. This particular project is for a nationally-known healthcare
organization, and represents the first major facility on what is expected to be
a medical campus covering more than 100 acres.
GROSS PROFIT. Gross profit decreased $0.6 million, or 39.6%, from $1.4
million for the three months ended March 31, 1996 to $0.8 million for the three
months ended March 31, 1997. As a percentage of revenues, gross profit decreased
from 21.6% to 12.4%. In its role as lead mechanical contractor on this major
healthcare project Tri-City is responsible for arranging a significant amount of
subcontract work as well as for procuring most of the HVAC equipment on this
project. Margins on subcontract work and procured equipment are typically lower
than margins on work performed directly by Tri-City.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses decreased $0.4 million, or 44.7%, from $1.0 million for
the three months ended March 31, 1996 to $0.6 million for the three months ended
March 31, 1997 due to a decrease in owners' compensation. As a percentage of
revenues, selling, general and administrative expenses decreased from 15.8% to
8.3% due to the decrease in owners' compensation.
TRI-CITY RESULTS FOR YEAR ENDED DECEMBER 31, 1996 COMPARED TO YEAR ENDED
DECEMBER 31, 1995
REVENUES. Revenues decreased $0.8 million, or 3.2%, from $25.0 million in
1995 to $24.2 million in 1996, primarily due to a decrease in "plan and spec"
revenues from 1995 to 1996 of approximately $2.0 million, partially offset by an
increase of approximately $1.2 million in commercial HVAC maintenance, repair
and replacement service revenues.
GROSS PROFIT. Gross profit remained constant at $5.7 million for 1995 and
1996. As a percentage of revenues, gross profit increased from 22.9% to 23.4%,
due to a decrease in lower margin "plan and spec" projects in 1996.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased $0.7 million, or 22.2%, from $3.2 million in
1995 to $3.9 million in 1996 due to a $1.1 million increase in compensation to
owners in lieu of S Corporation distributions, offset by a $0.4 million
reduction in other overhead expenses. As a percentage of revenues, selling,
general and administrative expenses increased from 12.8% in 1995 to 16.1% in
1996, primarily as a result of the increase in owners' compensation.
26
<PAGE>
TRI-CITY RESULTS FOR YEAR ENDED DECEMBER 31, 1995 COMPARED TO YEAR ENDED
DECEMBER 31, 1994
REVENUES. Revenues increased $8.1 million, or 48.2%, from $16.9 million in
1994 to $25.0 million in 1995 as a result of a strategy implemented in 1994 to
emphasize "design and build" projects. To implement its strategy, Tri-City
increased its sales and project management staff.
GROSS PROFIT. Gross profit increased $3.1 million, or 119.4%, from $2.6
million in 1994 to $5.7 million in 1995. As a percentage of revenues, gross
profit increased from 15.5% in 1994 to 22.9% in 1995 as a result of an increase
in the proportion of "design and build" installation projects.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased $1.0 million, or 43.9%, from $2.2 million in
1994 to $3.2 million in 1995. The increase in selling, general and
administrative expenses in 1995 was primarily attributable to a $0.8 million
increase in compensation to owners in lieu of S Corporation distributions and an
increase in the number of the sales personnel and project managers. As a
percentage of revenues, selling, general and administrative expenses decreased
from 13.2% in 1994 to 12.8% in 1995 as Tri-City was able to substantially
increase its volume without a commensurate increase in overhead expenses.
TRI-CITY LIQUIDITY AND CAPITAL RESOURCES
Tri-City generated $0.7 million in net cash from operating activities for
the three months ended March 31, 1997. Investing and financing activities were
immaterial during this period.
At March 31, 1997, working capital was $5.8 million and there was no debt
outstanding.
Tri-City generated $1.4 million in net cash from operating activities in
1996. Net cash used in investing activities was approximately $0.7 million, of
which $0.5 million was used for investments in U.S. Treasury obligations and
$0.2 million for equipment purchases. Net cash used in financing activities was
$1.2 million, primarily for distributions to shareholders.
At December 31, 1996, working capital was $5.5 million and there was no
debt outstanding.
LAWRENCE RESULTS OF OPERATIONS
Lawrence, headquartered in Jackson, Tennessee, was founded in 1917 and
operates primarily in Tennessee and the surrounding states. Lawrence focuses on
providing "design and build" installation services and process piping
primarily for industrial facilities and maintenance, repair and replacement of
commercial and industrial HVAC systems.
The following table sets forth selected statement of operations data and
such data as a percentage of revenues for the periods indicated:
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED OCTOBER 31, APRIL 30
---------------------------------------------------------------- --------------------
1994 1995 1996 1996
-------------------- -------------------- -------------------- --------------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues............................. $ 12,758 100.0% $ 12,568 100.0% $ 17,163 100.0% $ 6,736 100.0%
Cost of services..................... 9,797 76.8 9,142 72.7 12,211 71.1 4,958 73.6
--------- ------- --------- ------- --------- ------- --------- -------
Gross profit......................... 2,961 23.2 3,426 27.3 4,952 28.9 1,778 26.4
Selling, general and administrative
expenses........................... 2,849 22.3 3,477 27.7 4,885 28.5 1,976 29.3
--------- ------- --------- ------- --------- ------- --------- -------
Income (loss) from operations........ 112 0.9 (51) (0.4) 67 0.4 (198) (2.9)
</TABLE>
SIX MONTHS ENDED
APRIL 30
--------------------
1997
--------------------
Revenues............................. $ 8,563 100.0%
Cost of services..................... 6,139 71.7
--------- ---------
Gross profit......................... 2,424 28.3
Selling, general and administrative
expenses........................... 1,630 19.0
--------- ---------
Income (loss) from operations........ 794 9.3
LAWRENCE RESULTS FOR SIX MONTHS ENDED APRIL 30, 1997 COMPARED TO SIX MONTHS
ENDED APRIL 30, 1996
REVENUES. Revenues increased $1.9 million, or 27.1%, from $6.7 million for
the six months ended April 30, 1996 to $8.6 million for the six months ended
April 30, 1997 primarily due to both an increase in "design and build"
installation revenues primarily related to a manufacturing facility in North
Carolina and a $0.6 million increase in maintenance, repair and replacement
revenues.
GROSS PROFIT. Gross profit increased $0.6 million, or 36.3%, from $1.8
million for the six months ended April 30, 1996 to $2.4 million for the six
months ended April 30, 1997. As a percentage of revenues,
27
<PAGE>
gross profit increased from 26.4% to 28.3% as a result of an increase in the
proportion of "design and build" installation projects.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses decreased $0.4 million, or 17.5%, from $2.0 million for
the six months ended April 30, 1996 to $1.6 million for the six months ended
April 30, 1997 primarily due to a decrease in discretionary bonuses to the
owners of $0.6 million. As a percentage of revenues, selling, general and
administrative expenses decreased from 29.3% to 19.0% due to the increase in
revenues and the decrease in owners' compensation.
LAWRENCE RESULTS FOR YEAR ENDED OCTOBER 31, 1996 COMPARED TO YEAR ENDED OCTOBER
31, 1995
REVENUES. Revenues increased $4.6 million, or 36.6%, from $12.6 million
for the year ended
October 31, 1995 to $17.2 million for the fiscal year ended October 31, 1996 due
to a management decision in 1995 to expand the number of general contractors for
which Lawrence provides industrial installation services and due to a large
"design and build" installation contract obtained in 1996 for a food
processing facility in Tennessee.
GROSS PROFIT. Gross profit increased $1.5 million, or 44.5%, from $3.5
million for the fiscal year ended October 31, 1995 to $5.0 million for the
fiscal year ended October 31, 1996. As a percentage of revenues, gross profit
increased from 27.3% to 28.9%, primarily as a result of an increase in the
volume of "design and build" installation projects.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased $1.4 million, or 40.5%, from $3.5 million for
the fiscal year ended October 31, 1995 to $4.9 million for the fiscal year ended
October 31, 1996. The increase in selling, general and administrative expenses
in fiscal 1996 was primarily attributable to a $0.6 million increase in salary
and incentive compensation paid to the owners and a $0.7 million increase in
incentive compensation to employees and discretionary profit sharing
contributions. As a percentage of revenues, selling, general and administrative
expenses increased from 27.7% in fiscal 1995 to 28.5% in fiscal 1996.
LAWRENCE RESULTS FOR FISCAL YEAR ENDED OCTOBER 31, 1995 COMPARED TO FISCAL YEAR
ENDED OCTOBER 31, 1994
REVENUES. Revenues decreased $0.2 million, or 1.5%, from $12.8 million the
fiscal year ended October 31, 1994 to $12.6 million for the fiscal year ended
October 31, 1995.
GROSS PROFIT. Gross profit increased $0.4 million, or 15.7%, from $3.0
million for the fiscal year ended October 31, 1994 to $3.4 million for the
fiscal year ended October 31, 1995. As a percentage of revenues, gross profit
increased from 23.2% to 27.3% as management emphasized higher-margin "design
and build" projects and successfully implemented an incentive program for
project managers designed to control project costs.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased $0.7 million, or 22.0%, from $2.8 million in
fiscal 1994 to $3.5 million in fiscal 1995 primarily due to an increase in
salary and incentive compensation paid to the owners. As a percentage of
revenues, selling, general and administrative expenses increased from 22.3% in
fiscal 1994 to 27.7% in fiscal 1995 and, as a result, Lawrence incurred an
operating loss in fiscal 1995.
LAWRENCE LIQUIDITY AND CAPITAL RESOURCES
Lawrence used $0.2 million in net cash from operating activities for the
six months ended April 30, 1997 primarily due to a decrease in accounts payable
and accrued expenses. Net cash used in investing activities was approximately
$0.1 million, principally for equipment purchases.
Working capital as of April 30 1997 was $1.8 million and there was no debt
outstanding as of that date.
Lawrence generated $0.1 million in net cash from operating activities for
the fiscal year ended
October 31, 1996. Net cash used in investing activities was approximately $0.4
million, principally for equipment purchases and leasehold improvements.
Working capital as of October 31, 1996 was $1.4 million and there was no
debt outstanding as of that date.
28
<PAGE>
ACCURATE RESULTS OF OPERATIONS
Accurate, headquartered in Houston, Texas, was founded in 1980 and operates
primarily in Texas and Oklahoma. Accurate focuses on providing "design and
build" installation services and maintenance, repair and replacement of HVAC
systems for commercial facilities.
The following table sets forth selected statement of operations data and
such data as a percentage of revenues for the periods indicated:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED JUNE 30, YEAR ENDED MARCH 31,
------------------------------------------ DECEMBER 31, --------------------
1994 1995 1996 1996
-------------------- -------------------- -------------------- --------------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues............................. $ 9,763 100.0% $ 12,171 100.0% $ 16,806 100.0% $ 3,161 100.0%
Cost of services..................... 7,204 73.8 8,998 73.9 13,270 79.0 2,450 77.5
--------- ------- --------- ------- --------- ------- --------- -------
Gross profit......................... 2,559 26.2 3,173 26.1 3,536 21.0 711 22.5
Selling, general and administrative
expenses........................... 2,681 27.5 2,960 24.3 3,037 18.0 684 21.6
--------- ------- --------- ------- --------- ------- --------- -------
Income (loss) from operations........ (122) (1.3) 213 1.8 499 3.0 27 0.9
</TABLE>
THREE MONTHS ENDED
MARCH 31,
--------------------
1997
--------------------
Revenues............................. $ 2,642 100.0%
Cost of services..................... 2,095 79.3
--------- ---------
Gross profit......................... 547 20.7
Selling, general and administrative
expenses........................... 526 19.9
--------- ---------
Income (loss) from operations........ 21 0.8
ACCURATE RESULTS FOR THREE MONTHS ENDED MARCH 31, 1997 COMPARED TO THREE MONTHS
ENDED MARCH 31, 1996
REVENUES. Revenues decreased $0.6 million, or 16.4%, from $3.2 million for
the three months ended March 31, 1996 to $2.6 million for the three months ended
March 31, 1997 due to a decrease in commercial installation services. This
decrease resulted from a decrease in commercial installation services due to the
greater number of days of inclement weather in Texas during the first three
months of 1997 compared to the same period of the prior year.
GROSS PROFIT. Gross profit decreased $0.2 million, or 23.1%, from $0.7
million for the three months ended March 31, 1996 to $0.5 million for the three
months ended March 31, 1997. As a percentage of revenues, gross profit decreased
from 22.5% to 20.7% due to the decrease in revenues.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses decreased $0.2, or 23.1% from $0.7 million for the three
months ended March 31, 1996 to $0.5 million for the three months ended March 31,
1997 primarily due to a decrease in owners' compensation. As a percentage of
revenues, selling, general and administrative expenses decreased from 21.6% to
19.9%.
ACCURATE RESULTS FOR YEAR ENDED DECEMBER 31, 1996 COMPARED TO YEAR ENDED JUNE
30, 1995
REVENUES. Revenues increased $4.6 million, or 38.1%, from $12.2 million
for the year ended June 30, 1995 to $16.8 million for the year ended December
31, 1996, reflecting the success of an increased marketing effort along with the
addition of project management personnel who also have sales responsibility.
These efforts resulted in an increase in commercial "design and build"
installation revenues and an increase in replacement services.
GROSS PROFIT. Gross profit increased $0.3 million, or 11.4%, from $3.2
million for the year ended June 30, 1995 to $3.5 million for the year ended
December 31, 1996. As a percentage of revenues, gross profit decreased from
26.1% to 21.0%, primarily as a result of an increase in subcontract labor and
employee overtime necessary to support the increased number of "design and
build" projects.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses remained constant at $3.0 million for the fiscal year
ended June 30, 1995 and the year ended December 31, 1996. As a percentage of
revenues, selling, general and administrative expenses decreased from 24.3% to
18.0% as Accurate was able to increase revenues without a commensurate increase
in overhead expenses.
ACCURATE RESULTS FOR YEAR ENDED JUNE 30, 1995 COMPARED TO YEAR ENDED JUNE 30,
1994
REVENUES. Revenues increased $2.4 million, or 24.7%, from $9.8 million for
the year ended June 30, 1994 to $12.2 million for the fiscal year ended June 30,
1995. This increase was primarily attributable to a
29
<PAGE>
new project for an existing customer to design and build an HVAC system for a
correctional facility and an increase in maintenance and replacement services.
GROSS PROFIT. Gross profit increased $0.6 million, or 24.0%, from $2.6
million for the fiscal year ended June 30, 1994 to $3.2 million for the fiscal
year ended June 30, 1995. As a percentage of revenues, gross profit remained
stable over these periods.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased $0.3 million, or 10.4%, from $2.7 million in
fiscal 1994 to $3.0 million in fiscal 1995. As a percentage of revenues,
selling, general and administrative expenses decreased from 27.5% to 24.3% as
Accurate was able to increase revenues without a commensurate increase in
overhead expenses.
ACCURATE LIQUIDITY AND CAPITAL RESOURCES
Accurate used $0.1 million of net cash for operating activities for the
three months ended March 31, 1997. Net cash provided by financing activities of
$0.2 million resulted from an increase in long-term debt used to fund working
capital needs.
Working capital at March 31, 1997 was $0.2 million and total debt
outstanding was $1.5 million, of which $0.6 million was owed to a shareholder.
Accurate generated $0.2 million in net cash from operating activities for
the year ended December 31, 1996. Net cash used in investing activities was
approximately $0.1 million for equipment purchases.
Working capital at December 31, 1996 was $0.2 million and total debt
outstanding was $1.3 million, of which $0.6 million was owed to a shareholder.
CSI/BONNEVILLE RESULTS OF OPERATIONS
CSI/Bonneville, headquartered in Salt Lake City, Utah, was founded in 1969
and operates primarily in Utah. CSI/Bonneville focuses on providing maintenance,
repair and replacement of HVAC systems for commercial and residential
facilities.
The following table sets forth selected statement of operations data and
such data as a percentage of revenues for the periods indicated:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
---------------------------------------------------------------- --------------------
1994 1995 1996 1996
-------------------- -------------------- -------------------- --------------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues............................. $ 6,502 100.0% $ 6,361 100.0% $ 7,842 100.0% $ 1,369 100.0%
Cost of services..................... 4,393 67.6 4,413 69.4 5,201 66.3 926 67.6
--------- --------- --------- --------- --------- --------- --------- ---------
Gross profit......................... 2,109 32.4 1,948 30.6 2,641 33.7 443 32.4
Selling, general and administrative
expenses........................... 1,228 18.9 1,500 23.6 1,660 21.2 368 26.9
--------- --------- --------- --------- --------- --------- --------- ---------
Income from operations............... 881 13.5 448 7.0 981 12.5 75 5.5
</TABLE>
THREE MONTHS ENDED
MARCH 31,
--------------------
1997
--------------------
Revenues............................. $ 1,562 100.0%
Cost of services..................... 1,045 66.9
--------- ---------
Gross profit......................... 517 33.1
Selling, general and administrative
expenses........................... 458 29.3
--------- ---------
Income from operations............... 59 3.8
CSI/BONNEVILLE RESULTS FOR THREE MONTHS ENDED MARCH 31, 1997 COMPARED TO THREE
MONTHS ENDED MARCH 31, 1996
REVENUES. Revenues increased $0.2 million, or 14.1%, from $1.4 million for
the three months ended March 31, 1996 to $1.6 million for the three months ended
March 31, 1997 primarily due to an increase in commercial and residential
maintenance, repair and replacement services.
GROSS PROFIT. Gross profit increased $0.1 million, or 16.7%, from $0.4
million for the three months ended March 31, 1996 to $0.5 million for the three
months ended March 31, 1997. As a percentage of revenues, gross profit increased
from 32.4% to 33.1%.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased $0.1 million, or 24.5%, from $0.4 million for
the three months ended March 31, 1996 to $0.5 million for the three months ended
March 31, 1997 as a result of an increase in administrative personnel. As a
percentage of revenues, selling, general and administrative expenses increased
from 26.9% to 29.3%.
30
<PAGE>
CSI/BONNEVILLE RESULTS FOR YEAR ENDED DECEMBER 31, 1996 COMPARED TO YEAR ENDED
DECEMBER 31, 1995
REVENUES. Revenues increased $1.4 million, or 23.3%, from $6.4 million in
1995 to $7.8 million in 1996, primarily as a result of an increase in both
commercial and residential maintenance, repair and replacement services due to
an increase in the number of sales and marketing personnel in 1995 and 1996.
Revenues declined in 1995 due to the deployment of operating personnel to a move
to a new facility in that year.
GROSS PROFIT. Gross profit increased $0.7 million, or 35.6%, from $1.9
million for 1995 to $2.6 million in 1996. As a percentage of revenues, gross
profit increased from 30.6% in 1995 to 33.7% in 1996. The lower gross profit in
1995 was due to the deployment of operating personnel to a move to a new
facility.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased $0.2 million, or 10.7%, from $1.5 million in
1995 to $1.7 million in 1996. As a percentage of revenues, selling, general and
administrative expenses decreased from 23.6% in 1995 to 21.2% in 1996.
CSI/BONNEVILLE RESULTS FOR YEAR ENDED DECEMBER 31, 1995 COMPARED TO YEAR ENDED
DECEMBER 31, 1994
REVENUES. Revenues decreased from $6.5 million in 1994 to $6.4 million in
1995 as a result of CSI/Bonneville's move into a new facility during 1995.
GROSS PROFIT. Gross profit decreased $0.2 million, or 7.6%, from $2.1
million in 1994 to $1.9 million in 1995. As a percentage of revenues, gross
profit declined from 32.4% in 1994 to 30.6% in 1995 as a result of
CSI/Bonneville's move into a new facility during 1995.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased $0.3 million, or 22.1%, from $1.2 million in
1994 to $1.5 million in 1995. As a percentage of revenues, selling, general and
administrative expenses increased from 18.9% in 1994 to 23.6% in 1995. This
percentage increase was primarily attributable to rent, depreciation and related
costs associated with the new facility occupied in 1995.
CSI/BONNEVILLE LIQUIDITY AND CAPITAL RESOURCES
CSI/Bonneville's operating activities were breakeven on a cash-flow basis
for the three months ended March 31, 1997. Net cash used in investing activities
was $0.1 million, principally for equipment purchases.
Working capital at March 31, 1997 was $0.5 million and total debt
outstanding was $0.5 million, all of which was owed to shareholders.
CSI/Bonneville generated $1.1 million in net cash from operating activities
in 1996. Net cash used in investing activities was $0.2 million, principally for
equipment purchases. Net cash used in financing activities was $0.8 million,
primarily for distributions to shareholders.
Working capital at December 31, 1996 was $0.5 million and total debt
outstanding was $0.5 million, all of which was owed to shareholders.
TECH RESULTS OF OPERATIONS
Tech, headquartered in Solon, Ohio, was founded in 1979 and operates
primarily in the greater Cleveland, Ohio area. Tech focuses on providing
"design and build" installation services and maintenance, repair and
replacement of HVAC systems for commercial and industrial facilities.
31
<PAGE>
The following table sets forth selected statement of operations data and
such data as a percentage of revenues for the periods indicated:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
------------------------------------------ ------------------------------------------
1995 1996 1996 1997
-------------------- -------------------- -------------------- --------------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues............................. $ 6,960 100.0% $ 7,537 100.0% $ 1,075 100.0% $ 1,656 100.0%
Cost of services..................... 4,212 60.5 3,996 53.0 639 59.4 1,034 62.4
--------- --------- --------- --------- --------- --------- --------- ---------
Gross profit......................... 2,748 39.5 3,541 47.0 436 40.6 622 37.6
Selling, general and administrative
expenses........................... 1,800 25.9 1,861 24.7 390 36.3 565 34.1
--------- --------- --------- --------- --------- --------- --------- ---------
Income from operations............... 948 13.6 1,680 22.3 46 4.3 57 3.5
</TABLE>
TECH RESULTS FOR THREE MONTHS ENDED MARCH 31, 1997 COMPARED TO THREE MONTHS
ENDED MARCH 31, 1996
REVENUES. Revenues increased $0.6 million, or 54.0%, from $1.1 million for
the three months ended March 31, 1996 to $1.7 million for the three months ended
March 31, 1997 due primarily to an increase in commercial installation services
because there were fewer days of inclement weather in the first three months of
1997 as compared to the prior comparable period.
GROSS PROFIT. Gross profit increased $0.2 million, or 42.7%, from $0.4
million for the three months ended March 31, 1996 to $0.6 million for the three
months ended March 31, 1997. As a percentage of revenues, gross profit decreased
from 40.6% to 37.6% due to a decrease in the proportion of maintenance, repair
and replacement revenues, which typically have higher margins than installation.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased $0.2 million, or 44.9%, from $0.4 million for
the three months ended March 31, 1996 to $0.6 million for the three months ended
March 31, 1997 due to an increased marketing effort, including an increase in
marketing personnel. As a percentage of revenues, selling, general and
administrative expenses declined from 36.3% to 34.1% as Tech was able to
substantially increase its volume without a commensurate increase in overhead
expenses.
TECH RESULTS FOR YEAR ENDED DECEMBER 31, 1996 COMPARED TO YEAR ENDED DECEMBER
31, 1995
REVENUES. Revenues increased $0.5 million, or 8.3%, from $7.0 million in
1995 to $7.5 million in 1996. This increase was primarily attributable to an
increase in commercial "design and build" installation projects and related
service work.
GROSS PROFIT. Gross profit increased $0.8 million, or 28.9%, from $2.7
million in 1995 to $3.5 million in 1996. As a percentage of revenues, gross
profit increased from 39.5% to 47.0%, primarily due to an increase in "design
and build" versus "plan and spec" installation projects.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses remained relatively unchanged from 1995 to 1996. As a
percentage of revenues, selling, general and administrative expenses decreased
from 25.9% in 1995 to 24.7% in 1996 as Tech successfully leveraged its
infrastructure to achieve revenue growth.
TECH LIQUIDITY AND CAPITAL RESOURCES
Tech generated $0.6 million in net cash from operating activities for the
three months ended March 31, 1997. Net cash used in financing activities was
$0.9 million, principally for distributions to shareholders of $1.6 million
offset by borrowings of long-term debt of $0.7 million.
Total debt outstanding at March 31, 1997 was $1.0 million.
Tech generated $0.9 million in net cash from operating activities in 1996.
Net cash used in investing activities was $0.3 million for equipment purchases.
Net cash used in financing activities was $0.4 million, principally for
distributions to shareholders.
32
<PAGE>
Working capital at December 31, 1996 was $1.6 million and total debt
outstanding was $0.3 million.
WESTERN RESULTS OF OPERATIONS
Western, headquartered in Denver, Colorado, was founded in 1980 and
operates primarily in Colorado. Western focuses on providing "design and
build" installation services and maintenance, repair and replacement of HVAC
systems for commercial facilities.
The following table sets forth selected statement of operations data and
such data as a percentage of revenues for the periods indicated:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
------------------------------------------ ------------------------------------------
1995 1996 1996 1997
-------------------- -------------------- -------------------- --------------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues............................. $ 4,112 100.0% $ 6,494 100.0% $ 1,185 100.0% $ 1,072 100.0%
Cost of services..................... 3,408 82.9 4,662 71.8 857 72.3 812 75.7
--------- --------- --------- --------- --------- --------- --------- ---------
Gross profit......................... 704 17.1 1,832 28.2 328 27.7 260 24.3
Selling, general and administrative
expenses........................... 855 20.8 1,088 16.7 232 19.6 231 21.6
--------- --------- --------- --------- --------- --------- --------- ---------
Income (loss) from operations........ (151) (3.7) 744 11.5 96 8.1 29 2.7
</TABLE>
WESTERN RESULTS FOR THREE MONTHS ENDED MARCH 31, 1997 COMPARED TO THREE MONTHS
ENDED MARCH 31, 1996
REVENUES. Revenues decreased $0.1 million, or 9.5%, from $1.2 million for
the three months ended March 31, 1996 to $1.1 million for the three months ended
March 31, 1997.
GROSS PROFIT. Gross profit was $0.3 million for the three months ended
March 31, 1996 and the three months ended March 31, 1997. As a percentage of
revenues, gross profit decreased from 27.7% to 24.3% due primarily to the
decline in revenues.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses remained constant at $0.2 million for the three months
ended March 31, 1996 and the three months ended March 31, 1997. As a percentage
of revenues, selling, general and administrative expenses increased from 19.6%
to 21.6% due to the decline in revenues.
WESTERN RESULTS FOR YEAR ENDED DECEMBER 31, 1996 COMPARED TO YEAR ENDED DECEMBER
31, 1995
REVENUES. Revenues increased $2.4 million, or 57.9%, from $4.1 million in
1995 to $6.5 million in 1996. This increase was primarily attributable to an
increase in commercial replacement revenues of $1.5 million related to the
Demand Side Management ("DSM") incentive program developed by the Public
Service Company of Colorado ("PSC"). This program provided incentives for
commercial PSC customers to replace existing HVAC systems with more
energy-efficient systems and ended in November 1996. Management believes that a
significant portion of the revenues generated under the DSM program can be
replaced by redeploying Western's sales force to emphasize installation of
commercial control systems and commercial maintenance, repair and replacement
services. Western does not intend to participate in this program during 1997.
GROSS PROFIT. Gross profit increased $1.1 million, or 160.2%, from $0.7
million in 1995 to $1.8 million in 1996. As a percentage of revenues, gross
profit increased from 17.1% in 1995 to 28.2% in 1996, primarily due to an
increase in maintenance, repair and replacement revenues, including revenues
generated under the DSM program.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased $0.2 million in 1995, or 27.3%, from $0.9
million in 1995 to $1.1 million in 1996. As a percentage of revenues, selling,
general and administrative expenses decreased from 20.8% to 16.7% as a result of
the substantial revenue increase without a commensurate increase in overhead
expenses.
33
<PAGE>
WESTERN LIQUIDITY AND CAPITAL RESOURCES
Western used $0.1 million in net cash from operating activities in the
three months ended March 31, 1997 primarily due to a decrease in accounts
payable and accrued expenses.
Working capital at March 31, 1997 was $0.3 million and total long-term debt
outstanding was $0.2 million.
Western generated $0.6 million in net cash from operating activities in
1996. Net cash used in investing activities was approximately $0.1 million,
principally for equipment purchases. Net cash used in financing activities was
$0.4 million, as a result of distributions to shareholders and net repayments of
long-term debt.
Working capital at December 31, 1996 was $0.4 million and total long-term
debt outstanding was $0.3 million.
SEASONAIR RESULTS OF OPERATIONS
Seasonair, headquartered in Rockville, Maryland, was founded in 1966 and
operates primarily in Maryland, the District of Columbia and Virginia. Seasonair
focuses on providing installation services and maintenance, repair and
replacement of HVAC systems for light commercial facilities.
The following table sets forth selected statement of operations data and
such data as a percentage of revenues for the periods indicated:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED MARCH 31,
DECEMBER 31, ------------------------------------------
1996 1996 1997
-------------------- -------------------- --------------------
<S> <C> <C> <C> <C> <C> <C>
Revenues................................ $ 6,737 100.0% $ 1,128 100.0% $ 1,831 100.0%
Cost of services........................ 4,006 59.5 586 52.0 1,165 63.6
--------- --------- --------- --------- --------- ---------
Gross profit............................ 2,731 40.5 542 48.0 666 36.4
Selling, general and administrative
expenses.............................. 2,597 38.5 604 53.5 644 35.2
--------- --------- --------- --------- --------- ---------
Income (loss) from operations........... 134 2.0 (62) (5.5) 22 1.2
</TABLE>
SEASONAIR RESULTS FOR THREE MONTHS ENDED MARCH 31, 1997 COMPARED TO THREE MONTHS
ENDED MARCH 31, 1996
REVENUES. Revenues increased $0.7 million, or 62.3%, from $1.1 million for
the three months ended March 31, 1996 to $1.8 million for the three months ended
March 31, 1997 due to an increase in maintenance, repair and replacement
services resulting from management's decision to expand the business more
rapidly.
GROSS PROFIT. Gross profit increased $0.2 million, or 22.9%, from $0.5
million for the three months ended March 31, 1996 to $0.7 million from the three
months ended March 31, 1997. As a percentage of revenues, gross profit decreased
from 48.0% to 36.4%.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses were $0.6 million for the three months ended March 31,
1996 and the three months ended March 31, 1997. As a percentage of revenues,
selling, general and administrative expenses decreased from 53.5% to 35.2% due
to management's ability to increase revenues without a commensurate increase in
overhead expenses.
SEASONAIR LIQUIDITY AND CAPITAL RESOURCES
Seasonair generated $0.1 million in net cash from operating activities for
the three months ended March 31, 1997 due to a decrease in prepaid expenses and
other current assets and an increase in accounts payable and accrued expenses.
Net cash provided by financing activities was $0.1 million from borrowings on
the line of credit.
Working capital at March 31, 1997 was $0.5 million and total debt
outstanding was $0.2 million.
Seasonair used $0.2 million in net cash from operating activities in 1996
primarily due to an increase in prepaid expenses and other current assets. Net
cash provided by investing activities was $0.1 million
34
<PAGE>
from proceeds on sale of equipment. Net cash used in financing activities was
$0.1 million to repay long-term debt.
Working capital at December 31, 1996 was $0.5 million and total debt
outstanding was $0.1 million.
EASTERN RESULTS OF OPERATIONS
Eastern, headquartered in Albany, New York, was founded in 1945 and
operates primarily within a 75 mile radius of Albany, New York. Eastern focuses
on providing "design and build" installation and maintenance, repair and
replacement of HVAC systems for commercial and industrial facilities. Eastern
also offers continuous monitoring and control services for commercial
facilities.
The following table sets forth selected statement of operations data and
such data as a percentage of revenues for the periods indicated:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED MARCH 31,
DECEMBER 31, ------------------------------------------
1996 1996 1997
-------------------- -------------------- --------------------
<S> <C> <C> <C> <C> <C> <C>
Revenues................................ $ 7,944 100.0% $ 1,525 100.0% $ 1,284 100.0%
Cost of services........................ 5,276 66.4 973 63.8 805 62.7
--------- --------- --------- --------- --------- ---------
Gross profit............................ 2,668 33.6 552 36.2 479 37.3
Selling, general and administrative
expenses.............................. 2,237 28.2 532 34.9 582 45.3
--------- --------- --------- --------- --------- ---------
Income (loss) from operations........... 431 5.4 20 1.3 (103) (8.0)
</TABLE>
EASTERN RESULTS FOR THREE MONTHS ENDED MARCH 31, 1997 COMPARED TO THREE MONTHS
ENDED MARCH 31, 1996
REVENUES. Revenues decreased $0.2 million, or 15.8% from $1.5 million for
the three months ended March 31, 1996 to $1.3 million for the three months ended
March 31, 1997 due primarily to a decrease in maintenance, repair and
replacement services. As a result of a mild winter season in the first three
months of 1997 in the Albany, New York area, the need for service work on
heating equipment decreased.
GROSS PROFIT. Gross profit decreased $0.1 million, or 13.2%, from $0.6
million for the three months ended March 31, 1996 to $0.5 million for the three
months ended March 31, 1997. As a percentage of revenues, gross profit increased
from 36.2% to 37.3%.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased $0.1 million, or 9.4%, from $0.5 million for
the three months ended March 31, 1996 to $0.6 million for the three months ended
March 31, 1997. As a percentage of revenues, selling, general and administrative
expenses increased from 34.9% to 45.3% due to the higher expenses and the
decrease in revenues.
EASTERN LIQUIDITY AND CAPITAL RESOURCES
Eastern generated $0.1 million in net cash from operating activities
primarily from a net decrease in accounts receivables of $0.3 million. Cash
flows used for financing activities were $0.1 million for distributions to
shareholders and $0.1 million for repayment of long-term debt. Cash flows used
in financing activities was $0.2 million of borrowings on the line of credit.
As of March 31, 1997, Eastern had a working capital deficit of $0.2 million
and total debt outstanding of $1.0 million. Eastern has historically funded its
operations with cash flow from operations and debt from lenders and
shareholders. The Company believes that Eastern has adequate financing
alternatives to fund its operations.
Eastern generated $0.5 million in net cash from operating activities in
1996 primarily due to $0.4 million in net income. Net cash used in investing
activities was $0.2 million for the purchase of property and equipment. Net cash
used in financing activities in 1996 was $0.3 million for distributions to
shareholders.
Working capital at December 31, 1996 was $0.1 million and total debt
outstanding was $0.9 million of which $0.3 million is payable to the former
owner.
35
<PAGE>
SEASONAL AND CYCLICAL NATURE OF THE HVAC INDUSTRY
The HVAC industry is subject to seasonal variations. Specifically, the
demand for new installations is generally lower during the winter months due to
reduced construction activities during inclement weather and less use of air
conditioning during the colder months. Demand for HVAC services is generally
higher in the second and third quarters due to the increased use of air
conditioning during the warmer months. Accordingly, the Company expects its
revenues and operating results generally will be lower in the first and fourth
quarters. Historically, the construction industry has been highly cyclical. As a
result, the Company's volume of business may be adversely affected by declines
in new installation projects in various geographic regions of the United States.
INFLATION
Inflation did not have a significant effect on the results of operations of
the combined Founding Companies for 1994, 1995 or 1996 or the three months ended
March 31, 1997.
36
<PAGE>
BUSINESS
Comfort Systems was founded in 1996 to become a leading national provider
of comprehensive HVAC installation services and maintenance, repair and
replacement of HVAC systems, focusing primarily on the commercial and industrial
markets. Comfort Systems acquired the twelve Founding Companies on July 2, 1997.
The Company's commercial and industrial applications include office buildings,
retail centers, apartment complexes, hotels, manufacturing plants and government
facilities. The Company also provides specialized HVAC applications such as
process cooling, control systems, electronic monitoring and process piping.
Approximately 90% of the Company's pro forma combined 1996 revenues of $167.5
million was derived from commercial and industrial customers, with approximately
53% of combined revenues attributable to installation services and 47%
attributable to maintenance, repair and replacement services. Combined revenues
of the Founding Companies, which have been in business an average of 39 years,
increased at a compound annual growth rate of approximately 16% from 1994
through 1996.
INDUSTRY OVERVIEW
Based on available industry data, the Company believes that the HVAC
industry is highly fragmented with over 40,000 companies, most of which are
small, owner-operated businesses with limited access to capital for
modernization and expansion. The overall HVAC industry, including the
commercial, industrial and residential markets, is estimated to generate annual
revenues in excess of $75 billion, over $35 billion of which is in the
commercial and industrial markets. HVAC systems have become a necessity in
virtually all commercial and industrial buildings as well as homes. Because most
commercial buildings are sealed, HVAC systems provide the primary method of
addressing air quality concerns and injecting fresh air. Older industrial
facilities often have poor air quality as well as inadequate air conditioning,
factors which are causing industrial facility owners to consider replacement
options. Operation of older HVAC systems represents a significant cost due to
their energy inefficiency. In many instances, the replacement of an aging system
with a modern, energy-efficient system will significantly reduce a building's
operating costs while also improving the effectiveness of the HVAC system and
air quality.
Growth in the HVAC industry is being positively affected by a number of
factors, particularly (i) the aging of the installed base, (ii) the increasing
efficiency, sophistication and complexity of HVAC systems and (iii) the
increasing restrictions on the use of refrigerants commonly used in older HVAC
systems. These factors are expected to increase demand for the reconfiguration
or replacement of existing HVAC systems. These factors also mitigate the effect
on the HVAC industry of the cyclicality inherent in the traditional construction
industry.
The HVAC industry can be broadly divided into the installation segment and
the maintenance, repair and replacement segment.
INSTALLATION SEGMENT. The installation segment consists of "design and
build" and "plan and spec" projects. In "design and build" projects, the
commercial HVAC firm is responsible for designing, engineering and installing a
cost-effective, energy-efficient system customized to meet the specific needs of
the building owner. Costs and other project terms are normally negotiated
between the building owner or its representative and the HVAC firm. Firms which
specialize in "design and build" projects generally have specially-trained
HVAC engineers, CAD/CAM design systems, in-house sheet metal and prefabrication
capabilities. These firms utilize a consultative approach with customers and
tend to develop long-term relationships with building owners and developers,
general contractors, architects and property managers. "Plan and spec"
installation refers to projects where an architect or a consulting engineer
designs the HVAC system and the installation project is put out for bid. The
Company believes that "plan and spec" projects usually take longer to complete
than "design and build" projects because the preparation of the system design
and the bid process often take months to complete. Furthermore, in "plan and
spec" projects, the HVAC firm is not responsible for project design and changes
must be approved by several parties, thereby increasing overall project time and
cost.
MAINTENANCE, REPAIR AND REPLACEMENT SEGMENT. This segment includes the
maintenance, repair, replacement, reconfiguration and monitoring of previously
installed HVAC systems and controls. Growth in
37
<PAGE>
this segment has been fueled by the aging of the installed base of HVAC systems
and the increasing demand for more efficient, sophisticated and complex systems
and controls. The increasing sophistication and complexity of these HVAC systems
is leading many commercial and industrial building owners and property managers
to outsource maintenance and repair, often through service agreements with HVAC
service providers. In addition, increasing restrictions are being placed on the
use of certain types of refrigerants used in HVAC systems, which, along with air
quality concerns, are expected to increase demand for the reconfiguration and
replacement of existing HVAC systems. State-of-the-art control and monitoring
systems feature electronic sensors and microprocessors and require specialized
training to install, maintain and repair, which the typical building engineer
does not have. Increasingly, HVAC systems in commercial and industrial buildings
are being remotely monitored through PC-based communications systems to improve
energy efficiency and expedite problem diagnosis and correction.
The Company believes that the majority of business owners in the HVAC
industry have limited access to capital for expansion of their businesses and
that few have attractive liquidity options. In addition, the increasing
complexity of HVAC systems has led to a need for better trained technicians to
install, monitor and service these systems. The cost of recruiting, training and
retaining a sufficient number of qualified technicians makes it more difficult
for smaller HVAC companies to expand their businesses. The Company believes that
significant opportunities exist for a well-capitalized, national company
operating in the commercial, industrial and residential markets of the HVAC
industry and that the highly fragmented nature of this industry should allow it
to consolidate existing HVAC businesses.
STRATEGY
The Company plans to achieve its goal of becoming a leading national
provider of comprehensive HVAC services by implementing its operating strategy,
emphasizing continued internal growth and expanding through acquisitions.
OPERATING STRATEGY. The Company believes there are significant
opportunities to increase the profitability of the Founding Companies and
subsequently acquired businesses. The key elements of the Company's operating
strategy are:
FOCUS ON COMMERCIAL AND INDUSTRIAL MARKETS. The Company intends to
focus principally on the commercial and industrial markets with particular
emphasis on the "design and build" installation and the maintenance,
repair and replacement segments. The Company believes that the commercial
and industrial HVAC markets are attractive because of their growth
opportunities, diverse customer base, attractive margins and potential for
long-term relationships with building owners and managers, general
contractors and architects.
OPERATE ON DECENTRALIZED BASIS. The Company intends to manage the
Founding Companies on a decentralized basis, with local management assuming
responsibility for the day-to-day operations, profitability and growth of
the business. The Company believes that, while maintaining strong operating
and financial controls, a decentralized operating structure will retain the
entrepreneurial spirit present in each of the Founding Companies and will
allow the Company to capitalize on the considerable local and regional
market knowledge and customer relationships possessed by each Founding
Company.
ACHIEVE OPERATING EFFICIENCIES. The Company believes there are
significant opportunities to achieve operating efficiencies and cost
savings through purchasing economies and the adoption of "best practices"
operating programs. The Company intends to use its increased purchasing
power to gain volume discounts in areas such as HVAC components, raw
materials, service vehicles, advertising, bonding and insurance. Moreover,
the Company will review its operations and training programs at the local
and regional operating levels in order to identify those "best practices"
that can be successfully implemented throughout its operations.
ATTRACT AND RETAIN QUALITY EMPLOYEES. The Company intends to attract
and retain quality employees by providing them (i) an enhanced career path
from working for a larger public company, (ii) additional training,
education and apprenticeships to allow talented employees to advance to
38
<PAGE>
higher-paying positions, (iii) the opportunity to realize a more stable
income and (iv) improved benefits packages.
INTERNAL GROWTH. A key component of the Company's strategy is to continue
the internal growth at the Founding Companies and subsequently acquired
businesses. The key elements of the Companys internal growth strategy are:
CAPITALIZE ON SPECIALIZED TECHNICAL AND MARKETING STRENGTHS. The
Company believes it will be able to expand the services it offers in its
markets by leveraging the specialized technical and marketing strengths of
individual Founding Companies. For example, one of the Founding Companies
has developed significant industry recognition for its technical expertise
within apartment complexes, condominiums, hotels and elder care facilities
which may be transferable to other Founding Companies. A number of Founding
Companies currently focus primarily on installation and, therefore, have
only limited maintenance, repair and replacement operations. The Company
believes there are significant opportunities for these Founding Companies
to provide maintenance, repair and replacement services, particularly by
offering those services to its "design and build" customers. Several of
the Founding Companies have specific expertise in HVAC control and
monitoring systems, process cooling, replacement and other service
strengths, many of which can be shared with other Founding Companies and
subsequently acquired businesses.
ESTABLISH NATIONAL MARKET COVERAGE. The Company believes that
significant demand exists from large national companies to utilize the
services of a single HVAC service company capable of providing
comprehensive commercial and industrial services on a regional or national
basis. Many of the Founding Companies already provide local or regional
coverage to companies with nationwide locations, such as commercial real
estate developers and managers, retailers and manufacturers. The Company
believes these existing relationships can be expanded as it develops a
nationwide network since these customers often desire a single source for
all of their HVAC needs to promote consistency, improve control and reduce
cost.
ACQUISITIONS. The Company believes the HVAC industry is highly fragmented
with over 40,000 companies, most of which are small, owner-operated businesses
with limited access to adequate capital for modernization and expansion. The
Company anticipates that acquisition candidates in the commercial and industrial
markets will typically have annual revenues ranging from $5 million to $35
million. The key elements of the Company's acquisition strategy are:
ENTER NEW GEOGRAPHIC MARKETS. In new markets, the Company intends to
target one or more leading local or regional companies providing HVAC or
complementary services. The acquisition target will have the customer base,
technical skills and infrastructure necessary to be a core business into
which other HVAC service operations can be consolidated. The Company will
choose businesses that are located in attractive markets, are financially
stable, are experienced in the industry and have management willing to
participate in the future growth of the Company.
EXPAND WITHIN EXISTING MARKETS. Once the Company has entered a
market, it will seek to acquire other well-established HVAC businesses to
expand its market penetration and range of services offered. The Company
also will pursue "tuck-in" acquisitions of smaller companies, whose
operations can be integrated into an existing Company operation to leverage
the existing infrastructure.
ACQUIRE COMPLEMENTARY BUSINESSES. The Company will focus on its
traditional markets in the HVAC industry and may acquire companies
providing complementary services to the same customer base, such as
commercial and industrial process piping and plumbing as well as electrical
companies. This will enable the Company to offer, on a comprehensive basis
and from a single provider, HVAC, mechanical and electrical services in
certain markets.
ACQUISITION PROGRAM
The Company believes it will be regarded by acquisition candidates as an
attractive acquirer because of: (i) the Company's strategy for creating a
national, comprehensive and professionally managed HVAC
39
<PAGE>
service provider that capitalizes on cross-marketing and business development
opportunities; (ii) the Company's decentralized operating strategy; (iii) the
Company's increased visibility and access to financial resources as a public
company; (iv) the potential for increased profitability due to certain
centralized administrative functions, enhanced systems capabilities and access
to increased marketing resources; and (v) the potential for the owners of the
businesses being acquired to participate in the Company's planned internal
growth and growth through acquisitions, while realizing liquidity.
The Company believes the management teams of the Founding Companies will be
instrumental in identifying and completing future acquisitions. The Company's
visibility within the HVAC industry will increase the awareness and interest of
acquisition candidates in the Company and its acquisition program. Within the
past several months, the Company has contacted the owners of a number of
acquisition candidates, several of whom have expressed interest in having their
business acquired by the Company. The Company currently has no binding
agreements to effect any acquisition other than the Founding Companies.
As consideration for future acquisitions, the Company intends to use
various combinations of its Common Stock, cash and notes. The consideration for
each future acquisition will vary on a case-by-case basis. The major factors in
establishing the purchase price for each acquisition will be historical
operating results, future prospects of the acquiree and the ability of that
business to complement the services offered by the Company. Management believes
that companies providing commercial and industrial HVAC services are larger than
those providing residential services, with commercial and industrial companies
generating annual revenues ranging from $5 million to $35 million, compared to
companies providing residential HVAC services which generally have annual
revenues ranging from $500,000 to $3 million.
OPERATIONS AND SERVICES PROVIDED
The Company provides a wide range of installation, maintenance, repair and
replacement services for HVAC systems in commercial, industrial and residential
properties. Daily operations are managed on a local basis by the management team
at each Founding Company. In addition to senior management, the Founding
Companies' personnel generally include design engineers, sales personnel,
customer service personnel, installation service technicians, sheet metal and
prefabrication technicians, estimators and administrative personnel. Upon
consummation of the Mergers, the Company will manage the Founding Companies on a
decentralized basis, with local management being responsible for day-to-day
operating decisions. The Company intends to centralize certain administrative
functions to enable the management of each Founding Company to focus on pursuing
new business opportunities and to improve operating efficiencies. Administrative
functions which the Company expects to centralize include Company-wide training
and safety programs, accounting programs, risk management programs, purchasing
programs and employee benefits.
INSTALLATION SEGMENT. The Company's installation business comprised
approximately 53% of the Company's 1996 revenues. This segment consists of the
design, engineering, integration, installation and start-up of HVAC systems. The
commercial and industrial installation services performed by the Company consist
primarily of "design and build" systems for office buildings, retail centers,
apartment complexes, hotels, manufacturing plants and government facilities. In
a "design and build" project, the customer typically has an overall design for
the facility prepared by an architect or a consulting engineer who then enlists
the Company's sales and engineering personnel to prepare a specific design for
the HVAC system. The Company determines the needed capacity, energy efficiency
and type of controls that best suit the proposed facility. The Company's
engineer then estimates the amount of time, labor, materials and equipment
needed to build the specified system. Materials and equipment for a typical
commercial or industrial project include ductwork, compressors, blowers,
chillers, cooling towers, air handling equipment and the associated pumps and
piping necessary to complete the system. The Company utilizes CAD/CAM systems in
the design and engineering phases of the project to calculate the material and
labor costs of the project based on previously established Company standards and
to generate mechanical drawings for each project. The drawings are prepared in a
format appropriate for submission to local building inspectors. The final
design, terms, price and timing of the project are then negotiated with the
customer or its representatives, after which any necessary modifications are
made to the system.
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Once an agreement has been reached, the Company orders the necessary
materials and equipment for delivery to meet the project schedule. In most
instances, the Company fabricates in its own facilities the ductwork and piping
and assembles certain components for the system based on the mechanical drawing
specifications, thereby eliminating the need to subcontract ductwork or piping
fabrication. The Company's CAD/CAM systems are capable of automatically cutting
ductboard, sheet metal and piping, thereby reducing the amount of labor
necessary to produce the ductwork and piping for the system. Project specific
components are then fabricated at the Company's facilities in sections small
enough to be transported to the job site. This enables the Company to limit the
amount of field work required for installation, reduce the labor associated with
the actual installation process and meet the shorter time requirements
increasingly demanded by commercial and industrial customers. The Company
installs the system at the project site, working closely with the general
contractor. Most commercial and industrial installation projects last from two
weeks to one year and generate revenues from $25,000 to $2,000,000 per project.
These projects are generally billed periodically as costs are incurred
throughout the project, with a 10% retainage until completion and successful
start-up of the HVAC system.
Atlas, one of the Founding Companies, specializes in the design and
installation of HVAC systems for apartment complexes, condominiums, hotels and
elder care facilities. Because the room layouts in these types of buildings are
typically very similar, Atlas is able to design a single HVAC system, or a few
systems, suitable for installation in all units within the project. This permits
Atlas to prepare a "kit" containing all parts for an individual unit and ship
all of the kits for a particular project to the job site, thereby significantly
decreasing installation time.
The Company also performs selected "plan and spec" installation services
when a bidder prequalification process has been used by the customer to limit
the number of potential bidders for an attractive project. The Company may use
these projects when "design and build" projects are in lower demand and to
provide additional on-the-job training to apprentice or less-experienced
technicians.
The Company also installs process cooling systems, control and monitoring
systems and industrial process piping. Process cooling systems are utilized
primarily in industrial facilities to provide heating and/or cooling to precise
temperature and climate standards for products being manufactured and for the
manufacturing equipment. Control systems are used in HVAC and process cooling
systems in order to maintain pre-established temperature or climate standards
for commercial or industrial facilities. These systems use direct digital
technology integrated with computer terminals. HVAC control systems are capable
not only of controlling a facility's entire HVAC system, often on a room-by-room
basis, but can be programmed to integrate energy management, security, fire,
card key access, lighting and overall facility monitoring. Monitoring can be
performed on-site or remotely through a PC-based communications system. The
monitoring system will sound an alarm when the HVAC system is operating outside
pre-established parameters. Diagnosis of potential problems can be performed
from the computer terminal which often can remotely adjust the control system.
Industrial process piping is utilized in manufacturing facilities to convey
required raw materials, support utilities and finished products.
The Company's residential services consist of installing complete central
HVAC systems in new and existing homes, often through agreements with housing
developers. In 1996, residential installation comprised approximately 2% of the
Company's revenues.
The Founding Companies generally warrant their labor for the first year
after installation on new HVAC systems and for 30 days after servicing of
existing HVAC systems. A reserve for warranty costs is recorded based on a
percentage of material costs.
MAINTENANCE, REPAIR AND REPLACEMENT SEGMENT. The Company's maintenance,
repair and replacement segment comprised approximately 47% of the Company's 1996
combined revenues and includes the maintenance, repair, replacement,
reconfiguration and monitoring of HVAC systems and industrial process piping.
Over one-half of the Company's maintenance, repair and replacement segment
revenues were derived from reconfiguring existing HVAC systems for commercial
and industrial customers. Reconfiguration often utilizes consultative expertise
similar to that provided in the "design and build" installation market. The
Company believes that the reconfiguration of an existing system results in a
more cost-
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effective, energy-efficient system that better meets the specific needs of the
building owner. The reconfiguration also enables the Company to utilize its
design and engineering personnel as well as its sheet metal and pre-fabrication
facilities.
Maintenance and repair services are provided either in response to service
calls or pursuant to a service agreement. Service calls are coordinated by
customer service representatives or dispatchers that use computer and
communications technology to process orders, arrange service calls, communicate
with customers, dispatch technicians and invoice customers. Service technicians
work out of service vans equipped with commonly used parts, supplies and tools
to complete a variety of jobs.
Commercial and industrial service agreements usually have terms of one to
three years, with automatic annual renewals, and typically provide fees from
$3,000 to $20,000 per year. The Company also provides remote monitoring of
temperature, pressure, humidity and air flow for HVAC systems for commercial and
industrial customers. If the system is not operating within the specifications
set forth by the customer and cannot be remotely adjusted, a service crew is
dispatched to analyze and repair the system, as appropriate. Residential service
agreements generally have one year terms, automatic renewal provisions and
provide annual fees between $100 and $200 per system.
SOURCES OF SUPPLY
The raw materials and components used by the Company include HVAC system
components, ductwork, steel, sheet metal and copper tubing and piping. These raw
materials and components are generally available from a variety of domestic or
foreign suppliers at competitive prices. Delivery times are typically short for
most raw materials and standard components, but during periods of peak demand
may take a month or more to obtain. Chillers for large units typically have the
longest delivery time and generally have lead times of up to six months. The
major components of HVAC systems are compressors and chillers that are
manufactured primarily by York Heating and Air Conditioning Corporation
("York"), Carrier Corporation and Trane Air Conditioning Company. The major
suppliers of control systems are Honeywell Inc., Johnson Controls Inc., York and
Andover Control Corporation. The Company believes that it will be able to reduce
costs on raw materials and components through volume purchases. The Company does
not currently have any significant contracts for the supply of raw materials or
components.
SALES AND MARKETING
The Company has a diverse customer base, with no single customer accounting
for more than 4% of the Company's pro forma combined 1996 revenues. Management
and a dedicated sales force at the Founding Companies have been responsible for
developing and maintaining successful long-term relationships with key
customers. Customers of the Founding Companies generally include building owners
and developers and property managers, as well as general contractors, architects
and consulting engineers. The Company intends to continue its emphasis on
developing and maintaining long-term relationships with its customers by
providing superior, high-quality service in a professional manner. Moreover, the
dedicated sales force will receive additional technical and sales training to
enhance the comprehensive selling skills necessary to serve the HVAC needs of
its customers.
The Company also intends to capitalize on cross-marketing and business
development opportunities that management believes will be available to the
Company as a national provider of comprehensive commercial, industrial and
residential HVAC services. Management believes that it will be able to leverage
the diverse technical and marketing strengths of individual Founding Companies
to expand the services offered in other local markets. Eventually, the Company
intends to offer comprehensive services from many of its regional locations.
EMPLOYEES
As of July 29, 1997 the Company had 1,482 employees, including 98
management personnel, 1,160 engineers and service and installation technicians,
67 sales personnel and 157 administrative personnel. The Company does not
anticipate any reductions in staff as a result of the recent consolidation of
the Founding Companies. Rather, as it implements its internal growth and
acquisition strategies, the Company expects
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that the number of employees will increase. Three of the Founding Companies have
collective bargaining agreements which cover, in the aggregate, fewer than 50
employees. Under these agreements, these Founding Companies make payments to
multi-employer pension plans. The Company has not experienced any strikes or
work stoppages and believes its relationship with its employees and union
representatives is satisfactory.
RECRUITING, TRAINING AND SAFETY
The Company's future success will depend, in part, on its ability to
continue to attract, retain and motivate qualified service technicians, field
supervisors and project managers. The Company believes that its success in
retaining qualified employees will be based on the quality of its recruiting,
training, compensation, employee benefits programs and opportunities for
advancement. The Company recruits at local technical schools and community
colleges where students focus on learning basic HVAC and related skills, and
provides on-the-job training, apprenticeship programs, improved benefit
packages, steady employment and opportunities for advancement.
The Company intends to establish "best practices" throughout its
operations to ensure that all technicians comply with safety standards
established by the Company, its insurance carriers and federal, state and local
laws and regulations. The Company's employment screening process seeks to
determine that prospective employees have the requisite skills, sufficient
background references and acceptable driving records, if applicable. The Company
believes that these employment criteria effectively identify potential employees
committed to safety and quality. Additionally, the Company intends to implement
a "best practices" safety program throughout its operations, which will
provide employees with incentives to improve safety performance and decrease
workplace accidents. The Company intends to implement job site safety meetings
and instruct personnel in proper lifting techniques and eye safety in an effort
to reduce the number of preventable accidents.
FACILITIES AND VEHICLES
All of the Company's facilities are leased. See "Certain
Transactions -- Leases of Real Property by Founding Companies."
The Founding Companies collectively lease approximately 250,000 square feet
of commercial property, which they utilize for office, warehouse, fabrication
and storage space. Leased premises range in size from 50,200 square feet, in the
case of Quality, to 7,000 square feet and 6,500 square feet in the case of
Eastern and Seasonair, respectively. In addition, Atlas currently leases 14
one-bedroom apartments for technicians and installation crews working on
projects around the country. The Company believes that the opportunities for
some of the Founding Companies to use fabrication and storage facilities of
other Founding Companies for sheet metal cutting, equipment fabrication and
inventory storage will increase operating efficiencies for the Company as a
whole. The Company believes that its facilities are sufficient for its current
needs.
The Company operates a fleet of approximately 600 owned or leased service
trucks, vans and support vehicles. It believes these vehicles generally are
well-maintained and adequate for the Company's current operations. The Company
expects it will be able to purchase vehicles at lower prices due to its
increased purchasing volume.
The Company leases its principal executive and administrative offices in
Houston, Texas and is currently in the process of relocating within Houston,
Texas.
RISK MANAGEMENT, INSURANCE AND LITIGATION
The primary risks in the Company's operations are bodily injury, property
damage and injured workers' compensation. The Company has obtained and intends
to maintain liability insurance for bodily injury and third party property
damage which it considers sufficient to insure against these risks, subject to
self-insured amounts. The workers' compensation insurance policies held by the
Founding Companies generally provide for first dollar coverage.
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The Company is, from time to time, a party to litigation arising in the
normal course of its business, most of which involves claims for personal injury
and property damage incurred in connection with its operations. The Company is
not currently involved in any litigation, nor is the Company aware of any
threatened litigation, that the Company believes is likely to have a material
adverse effect on its financial condition or results of operations.
The Company generally offers one year warranties on labor it performs and
passes to the customer warranties on equipment purchased from manufacturers. The
Company does not expect warranty claims to have a material effect on its results
of operations or financial condition.
COMPETITION
The HVAC industry is highly competitive. The Company believes that
purchasing decisions in the commercial and industrial markets are based on (i)
long-term customer relationships, (ii) quality, timeliness and reliability of
services provided, (iii) competitive price, (iv) range of services provided, and
(v) scale of operation. The Company believes its strategy of becoming a leading
national provider of comprehensive HVAC installation services as well as
maintenance, repair and replacement of HVAC systems directly addresses these
factors. Specifically, the Company's strategy to focus on the highly
consultative "design and build" installation segment and the maintenance,
repair and replacement segment, as well as its strategy to operate on a
decentralized basis, should promote the development and strengthening of
long-term customer relationships. In addition, the Company's focus on
attracting, training and retaining quality employees by utilizing professionally
managed recruiting, training and benefits programs should allow it to offer high
quality, comprehensive HVAC services at a competitive price.
Most of the Company's competitors are small, owner-operated companies that
typically operate in a limited geographic area. There are a few public companies
focused on providing HVAC services in some of the same services lines provided
by the Company. In addition, there are a number of private companies attempting
to consolidate HVAC companies on a regional or national basis. In the future,
competition may be encountered from new entrants, such as public utilities and
HVAC manufacturers. Certain of the Company's competitors and potential
competitors may have greater financial resources than the Company to finance
acquisition and development opportunities, to pay higher prices for the same
opportunities or to develop and support their own operations.
GOVERNMENTAL REGULATION AND ENVIRONMENTAL MATTERS
The Company's operations are subject to various federal, state and local
laws and regulations, including, (i) licensing requirements applicable to
service technicians, (ii) building and HVAC codes and zoning ordinances, (iii)
regulations relating to consumer protection, including those governing
residential service agreements and (iv) regulations relating to worker safety
and protection of the environment. The Company believes it has all required
licenses to conduct its operations and is in substantial compliance with
applicable regulatory requirements. Failure of the Company to comply with
applicable regulations could result in substantial fines or revocation of the
Company's operating licenses.
Many state and local regulations governing the HVAC services trades require
permits and licenses to be held by individuals. In some cases, a required permit
or license held by a single individual may be sufficient to authorize specified
activities for all the Company's service technicians who work in the state or
county that issued the permit or license. The Company intends to implement a
policy to ensure that, where possible, any such permits or licenses that may be
material to the Company's operations in a particular geographic region are held
by at least two Company employees within that region.
The Company's operations are subject to the federal Clean Air Act, as
amended (the "Clean Air Act"), which governs air emissions and imposes
specific requirements on the use and handling of chlorofluorocarbons ("CFCs")
and certain other refrigerants. Clean Air Act regulations require the
certification of service technicians involved in the service or repair of
equipment containing these refrigerants and also regulate the containment and
recycling of these refrigerants. These requirements have increased the Company's
training expenses and expenditures for containment and recycling equipment. The
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Clean Air Act is intended ultimately to eliminate the use of CFCs in the United
States and to require alternative refrigerants to be used in replacement HVAC
systems. As a result, the number of conversions of existing HVAC systems which
use CFCs to systems using alternative refrigerants is expected to increase.
Prior to entering into the agreements relating to the Mergers, the Company
evaluated the properties owned or leased by the Founding Companies and engaged
an independent environmental consulting firm to conduct or review assessments of
environmental conditions at these properties. No material environmental problems
were discovered in these reviews, and the Company is not aware of any material
environmental liabilities associated with these properties.
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MANAGEMENT
DIRECTORS, EXECUTIVE OFFICERS AND KEY EMPLOYEES
The following table sets forth information concerning the Company's
directors, executive officers and key employees.
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C>
Fred M. Ferreira........................ 54 Chairman of the Board, Chief Executive Officer and President
Michael Nothum, Jr...................... 43 Chief Operating Officer (acting), President of Tri-City,
Director
J. Gordon Beittenmiller................. 38 Senior Vice President, Chief Financial Officer and Director
Reagan S. Busbee........................ 33 Senior Vice President
William George, III..................... 32 Vice President, General Counsel and Secretary
Milburn E. Honeycutt.................... 33 Vice President and Controller
S. Craig Lemmon......................... 45 Vice President -- Acquisitions
Brian J. Vensel......................... 36 Vice President -- Acquisitions
Brian S. Atlas.......................... 45 Chief Executive Officer of Atlas, Director
Thomas J. Beaty......................... 43 President of Accurate, Director
Robert R. Cook.......................... 42 President of Tech, Director
Alfred J. Giardenelli, Jr............... 50 President of Eastern, Director
Charles W. Klapperich................... 50 President of Western, Director
Samuel M. Lawrence III.................. 45 Chief Executive Officer of Lawrence, Director
John C. Phillips........................ 55 President of CSI/Bonneville, Director
Robert J. Powers........................ 57 President of Quality, Director
Steven S. Harter........................ 35 Director
Larry Martin............................ 55 Director
John Mercadante, Jr..................... 52 Director
Robert Arbuckle......................... 47 President of Freeway
James C. Hardin, Sr..................... 35 Chief Executive Officer of Seasonair
Thomas B. Kime.......................... 50 President of Standard
</TABLE>
Fred M. Ferreira has served as Chairman of the Board, Chief Executive
Officer and President of Comfort Systems since January 1997. Mr. Ferreira was
responsible for introducing the consolidation opportunity in the commercial and
industrial HVAC industry to Notre and has been primarily responsible for the
organization of Comfort Systems, the acquisition of the Founding Companies and
this Offering. From 1995 through 1996, Mr. Ferreira was a private investor. He
served as Chief Operating Officer and a director of Allwaste, Inc., a
publicly-traded environmental services company ("Allwaste"), from 1994 to
1995, and was President of Allwaste Environmental Services, Inc., the largest
division of Allwaste, from 1991 to 1994. From 1989 to 1990, Mr. Ferreira served
as President of Allied Waste Industries, Inc., an environmental services
company. Prior to that time, Mr. Ferreira served as Vice President -- Southern
District and in various other positions with Waste Management, Inc., an
environmental services company.
Michael Nothum, Jr. is a director of the Company and its Chief Operating
Officer (acting). He has been employed by Tri-City since 1979, serving as
President since 1992. Mr. Nothum currently serves on the Education and Training
Committee of Associated Builders and Contractors and on the Legislative
Committee of the Air Conditioning Contractors Association. It is anticipated
that Mr. Nothum will return full-time to his duties at Tri-City when a permanent
Chief Operating Officer joins the Company.
J. Gordon Beittenmiller has served as Senior Vice President, Chief
Financial Officer and a director of Comfort Systems since February 1997. From
1994 to February 1997, Mr. Beittenmiller was Corporate Controller of Keystone
International, Inc. ("Keystone"), a publicly-traded manufacturer of industrial
valves and actuators, and served Keystone in other financial positions from 1991
to 1994. From 1987 to
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1991, he was Vice President -- Finance of Critical Industries, Inc., a
publicly-traded manufacturer and distributor of specialized safety equipment.
From 1982 to 1987, he held various positions with Arthur Andersen LLP. Mr.
Beittenmiller is a Certified Public Accountant.
Reagan S. Busbee has served as Senior Vice President of Comfort Systems
since January 1997. From 1992 through 1996, Mr. Busbee served as Vice President
of Chas. P. Young Co., a financial printer and a wholly-owned subsidiary of
Consolidated Graphics Inc., a publicly-traded company. From August 1986 to May
1992, he was a certified public accountant with Arthur Andersen LLP.
William George, III has served as Vice President, General Counsel and
Secretary of Comfort Systems since March 1997. From October 1995 to March 1997,
Mr. George was Vice President and General Counsel of American Medical Response,
Inc., a publicly-traded consolidator of the healthcare transportation industry.
From September 1992 to September 1995, Mr. George practiced corporate and
antitrust law at Ropes & Gray, a law firm.
Milburn E. Honeycutt has served as Vice President and Controller of Comfort
Systems since February 1997. From 1994 to January 1997, Mr. Honeycutt was
Financial Accounting Manager -- Corporate Controllers Group for Browning-Ferris
Industries, Inc., a publicly-traded waste services company. From 1986 to 1994,
he held various positions with Arthur Andersen LLP. Mr. Honeycutt is a Certified
Public Accountant.
S. Craig Lemmon is Vice President -- Acquisitions. Mr. Lemmon has been a
consultant to Comfort Systems since its inception in December 1996. From 1993 to
1996, he served as Manager of Mergers and Acquisitions of Allwaste Environmental
Services, Inc. From 1992 to 1993, he served as Vice President -- Acquisitions
and Vice President -- Southern Region of United Waste Systems, Inc., an
environmental services company. Prior thereto, Mr. Lemmon held various positions
in the transportation and solid waste industries.
Brian J. Vensel has served as Vice President -- Acquisitions of the Company
since February 1997. From September 1996 through January 1997, Mr. Vensel served
as Projects Director of the Liquids Business Unit of NGC Corporation, a
publicly-traded gas marketer and processor. From April 1996 through August 1996,
Mr. Vensel served as Corporate Controller and an officer of Phoenix Energy
Products, Inc., a privately-owned, oilfield service company. From 1982 through
March 1996, Mr. Vensel held various positions, primarily with Price Waterhouse
LLP and Arthur Andersen LLP. Mr. Vensel is a Certified Public Accountant.
Brian S. Atlas is a director of the Company. He has been employed by Atlas
since 1974, serving as its Chief Executive Officer since 1983.
Thomas J. Beaty is a director of the Company. He founded and has served as
President of Accurate since 1980.
Robert R. Cook is a director of the Company. He founded and has served as
President of Tech since 1979.
Alfred J. Giardenelli, Jr. is a director of the Company. He has been the
President of Eastern since 1982.
Charles W. Klapperich is a director of the Company. He founded and has
served as President of Western since 1980.
Samuel M. Lawrence III is a director of the Company. He has been employed
by Lawrence since 1977, serving as its Chairman and Chief Executive Officer
since 1991.
John C. Phillips is a director of the Company. He co-founded CSI/Bonneville
in 1969, serving as President and General Manager since 1969. Mr. Phillips was
President of the Utah Heating and Air Conditioning Contractors Association from
1981 to 1982 and is currently a director of that association.
Robert J. Powers is a director of the Company. He has been employed by
Quality since 1977, serving as President since 1988.
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Steven S. Harter has been a director of the Company since December 1996 and
is the director elected by the holders of the Restricted Common Stock. Mr.
Harter is President of Notre, a consolidator of highly-fragmented industries.
Prior to becoming the President of Notre, Mr. Harter was Senior Vice President
of Notre Capital Ventures, Ltd. ("Notre I") from June 1993 through July 1995
and was the Notre I principal primarily responsible for the initial public
offerings of US Delivery Systems, Inc., a consolidator of the local delivery
industry, and Physicians Resource Group, Inc., a consolidator of eye care
physician management companies. From April 1989 to June 1993, Mr. Harter was
Director of Mergers and Acquisitions for Allwaste. From May 1984 to April 1989,
Mr. Harter was a certified public accountant with Arthur Andersen LLP. Mr.
Harter also serves as a director of Coach USA, Inc. ("Coach").
Larry Martin is a director of the Company. Mr. Martin, a co-founder of
Sanifill, Inc., an environmental services provider ("Sanifill"), served as its
Vice Chairman from March 1992 through August 1996. From July 1991 to February
1992, he was President of Sanifill, and from October 1989 to July 1991, he
served as its President and Co-Chief Executive Officer. Prior to that time, Mr.
Martin served in various positions in the environmental services and contracting
industries. Mr. Martin currently serves on the Board of Directors of USA Waste
Services, Inc., an environmental services company.
John Mercadante, Jr. is a director of the Company. Mr. Mercadante
co-founded Leisure Time Tours, Inc. in 1970 and was President of Cape Transit
Corp. both of which are motor coach companies that were acquired by Coach at the
time of Coach's initial public offering in May 1996. Mr. Mercadante has served
as President, Chief Operating Officer and a director of Coach since its initial
public offering.
Robert Arbuckle has been employed by Freeway since 1975, serving as its
President since 1987.
James C. Hardin, Sr. has been employed by Seasonair since 1986, serving
initially as a service technician, as field supervisor from 1988 to 1990, as
service manager from 1990 to 1993 and as Vice President of Operations from 1993
to March 1997. Mr. Hardin currently serves as Chief Executive Officer of
Seasonair
Thomas B. Kime has been employed by Standard since 1977, serving as its
President since 1996.
The Board of Directors is divided into three classes of four, five and five
directors, respectively, with directors serving staggered three-year terms,
expiring at the annual meeting of stockholders in 1998, 1999 and 2000,
respectively. At each annual meeting of stockholders, one class of directors
will be elected for a full term of three years to succeed that class of
directors whose terms are expiring. All officers serve at the discretion of the
Board of Directors.
The Board of Directors has established an Audit Committee, a Compensation
Committee and an Executive Committee. The members of the Audit Committee and the
Compensation Committee are Messrs. Harter, Mercadante and Martin. The members of
the Executive Committee have yet to be selected and will include at least one
outside director.
DIRECTORS' COMPENSATION
Directors who are also employees of the Company or one of its subsidiaries
will not receive additional compensation for serving as directors. Each director
who is not an employee of the Company or one of its subsidiaries will receive a
fee of $2,000 for attendance at each Board of Directors' meeting and $1,000 for
each committee meeting (unless held on the same day as a Board of Directors'
meeting). In addition, under the Company's 1997 Non-Employee Directors' Stock
Plan, each non-employee director will automatically be granted an option to
acquire 10,000 shares of Common Stock upon such person's initial election as a
director, and an annual option to acquire 5,000 shares at each annual meeting of
the Company's stockholders thereafter at which such director is re-elected or
remains a director, unless such annual meeting is held within three months of
such person's initial election as a director. Each non-employee director also
may elect to receive shares of Common Stock or credits representing "deferred
shares" in lieu of cash directors' fees. See " -- 1997 Non-Employee Directors'
Stock Plan." Directors are also reimbursed for out-of-pocket expenses incurred
in attending meetings of the Board of Directors or committees thereof.
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<PAGE>
EXECUTIVE COMPENSATION; EMPLOYMENT AGREEMENTS; COVENANTS-NOT-TO-COMPETE
The Company was incorporated in December 1996 and did not pay any of its
executive officers compensation during 1996. The Company anticipates that during
1997 its five most highly compensated executive officers will be Messrs.
Ferreira, Beittenmiller, George, Nothum and Powers.
Each of Messrs. Ferreira, Beittenmiller and George has entered into an
employment agreement with the Company providing for an annual base salary of
$150,000. Each employment agreement is for a term of three years, and unless
terminated or not renewed by the Company or not renewed by the employee, the
term will continue thereafter on a year-to-year basis on the same terms and
conditions existing at the time of renewal. Each of these agreements provides
that, in the event of a termination of employment by the Company without cause,
the employee will be entitled to receive from the Company an amount equal to one
year's salary, payable in one lump sum on the effective date of termination. In
the event of a change in control of the Company (as defined in the agreement)
during the initial three-year term, if the employee is not given at least five
days' notice of such change in control, the employee may elect to terminate his
employment and receive in one lump sum three times the amount he would receive
pursuant to a termination without cause during such initial term. The
non-competition provisions of the employment agreement do not apply to a
termination without such notice. In the event the employee is given at least
five days' notice of such change in control, the employee may elect to terminate
his employment and receive in one lump sum three times the amount he would
receive pursuant to a termination without cause during such initial term. In
such event, the non-competition provisions of the employment agreement would
apply for two years from the effective date of termination. Each employment
agreement contains a covenant not to compete with the Company for a period of
two years immediately following termination of employment or, in the case of a
termination by the Company without cause in the absence of a change in control,
for a period of one year following termination of employment.
Each of Messrs. Nothum and Powers has entered into an employment agreement
with their respective Founding Company providing for an annual base salary of
$150,000. Each employment agreement is for a term of five years, and unless
terminated or not renewed by the Founding Company or not renewed by the
employee, the term will continue thereafter on a year-to-year basis on the same
terms and conditions existing at the time of renewal. Each of these agreements
provides that, in the event of a termination of employment by the Founding
Company without cause during the first three years of the employment term (the
"Initial Term"), the employee will be entitled to receive from the Founding
Company an amount equal to his then current salary for the remainder of the
Initial Term or for one year, whichever is greater. In the event of a
termination of employment with cause during the final two years of the initial
five year term of the employment agreement, the employee will be entitled to
receive an amount equal to his then current salary for one year. In either case,
payment is due in one lump sum on the effective date of termination. In the
event of a change in control of the Company (as defined in the agreement) during
the Initial Term, if the employee is not given at least five days' notice of
such change in control, the employee may elect to terminate his employment and
receive in one lump sum three times the amount he would receive pursuant to a
termination without cause during the Initial Term. The non-competition
provisions of the employment agreement do not apply to a termination without
such notice. In the event the employee is given at least five days' notice of
such change in control, the employee may elect to terminate his employment
agreement and receive in one lump sum two times the amount he would receive
pursuant to a termination without cause during the Initial Term. In such event,
the non-competition provisions of the employment agreement would apply for two
years from the effective date of termination. Each employment agreement contains
a covenant not to compete with the Company for a period of two years immediately
following termination of employment or, in the case of a termination by the
Company without cause in the absence of a change in control, for a period of one
year following termination of employment.
At least one principal executive officer of each of the other Founding
Companies has entered into an employment agreement, containing substantially the
same provisions, including a covenant not to compete, as Messrs. Nothum's and
Power's employment agreements.
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1997 LONG-TERM INCENTIVE PLAN
No stock options were granted to, or exercised by or held by any executive
officer in 1996. In March 1997, the Board of Directors and the Company's
stockholders approved the Company's 1997 Long-Term Incentive Plan (the
"Plan"). The purpose of the Plan is to provide directors, officers, key
employees, consultants and other service providers with additional incentives by
increasing their ownership interests in the Company. Individual awards under the
Plan may take the form of one or more of: (i) either incentive stock options
("ISOs") or non-qualified stock options ("NQSOs"), (ii) stock appreciation
rights ("SARs"), (iii) restricted or deferred stock, (iv) dividend equivalents
and (v) other awards not otherwise provided for, the value of which is based in
whole or in part upon the value of the Common Stock.
The Compensation Committee will administer the Plan and select the
individuals who will receive awards and establish the terms and conditions of
those awards. The maximum number of shares of Common Stock that may be subject
to outstanding awards, determined immediately after the grant of any award, may
not exceed the greater of 2,500,000 shares or 13% of the aggregate number of
shares of Common Stock outstanding. Shares of Common Stock which are
attributable to awards which have expired, terminated or been canceled or
forfeited are available for issuance or use in connection with future awards.
The Plan will remain in effect until terminated by the Board of Directors.
The Plan may be amended by the Board of Directors without the consent of the
stockholders of the Company, except that any amendment, although effective when
made, will be subject to stockholder approval if required by any Federal or
state law or regulation or by the rules of any stock exchange or automated
quotation system on which the Common Stock may then be listed or quoted.
At the closing of the IPO, NQSOs to purchase a total of 675,000 shares of
Common Stock were granted as follows: 200,000 shares to Mr. Ferreira, 100,000
shares to Mr. Beittenmiller, 100,000 shares to Mr. Busbee, 100,000 shares to Mr.
Lemmon, 75,000 shares to Mr. George, 50,000 shares to Mr. Honeycutt and 50,000
shares to Mr. Vensel. In addition, at the closing of the IPO, options to
purchase 1,469,953 shares were granted to certain employees of the Founding
Companies and to other key employees of the Company. Each of the foregoing
options has an exercise price equal to the initial public offering price per
share. These options will vest at the rate of 20% per year, commencing on the
first anniversary of the IPO and will expire at the earlier of seven years from
the date of grant or three months following termination of employment.
1997 NON-EMPLOYEE DIRECTORS' STOCK PLAN
The Company's 1997 Non-Employee Directors' Stock Plan (the "Directors'
Plan"), which was adopted by the Board of Directors and approved by the
Company's stockholders in March 1997, provides for (i) the automatic grant to
each non-employee director serving at the consummation of the IPO of an option
to purchase 10,000 shares, (ii) the automatic grant to each non-employee
director of an option to purchase 10,000 shares upon such person's initial
election as a director and (iii) an automatic annual grant to each non-employee
director of an option to purchase 5,000 shares at each annual meeting of
stockholders thereafter at which such director is re-elected or remains a
director, unless such annual meeting is held within three months of such
person's initial election as a director. All options have an exercise price per
share equal to the fair market value of the Common Stock on the date of grant
and are immediately vested and expire on the earlier of ten years from the date
of grant or one year after termination of service as a director. The Directors'
Plan also permits non-employee directors to elect to receive, in lieu of cash
directors' fees, shares or credits representing "deferred shares" at future
settlement dates, as selected by the director. The number of shares or deferred
shares received will equal the number of shares of Common Stock which, at the
date the fees would otherwise be payable, will have an aggregate fair market
value equal to the amount of such fees.
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CERTAIN TRANSACTIONS
ORGANIZATION OF THE COMPANY
In connection with the formation of Comfort Systems, Comfort Systems issued
to Notre a total of 2,969,912 shares of Common Stock for an aggregate cash
consideration of $29,699. Mr. Harter is the President of Notre and a director of
the Company. In March 1997, Notre exchanged 2,742,912 shares of Common Stock for
an equal number of shares of Restricted Common Stock. Notre advanced $1.4
million to provide funds necessary to effect the Mergers and the IPO. All of
Notre's advances were repaid from the net proceeds of the IPO.
In January and February 1997, the Company issued a total of 902,435 shares
of Common Stock at $.01 per share to various members of management, as follows:
Mr. Ferreira -- 479,435 shares, Mr. Beittenmiller -- 116,000 shares, Mr.
Busbee -- 116,000 shares, Mr. George -- 75,000 shares, Mr. Honeycutt -- 58,000
shares and Mr. Vensel -- 58,000 shares. The Company also issued 116,000 shares
to Mr. Lemmon and 251,500 shares of Common Stock to other consultants to the
Company at $0.01 per share. The Company also granted options to purchase 10,000
shares of Common Stock under the Directors' Plan, effective upon the
consummation of the IPO, to Mr. Harter, a Director of the Company, and to
Messrs. Mercadante and Martin, who became directors of the Company upon the
closing of the IPO.
In connection with the IPO, Comfort Systems acquired by merger or share
exchange all of the issued and outstanding stock of the Founding Companies, each
of which is now a wholly-owned subsidiary of the Company. The aggregate
consideration paid by Comfort Systems in the Mergers consisted of $45.3 million
in cash and 9,720,927 shares of Common Stock. In addition, prior to the Mergers,
Accurate distributed to Thomas J. Beaty real property having a net book value of
approximately $370,000.
The following table sets forth the consideration paid and total debt
assumed by Comfort Systems for each of the Founding Companies:
SHARES OF
COMMON
CASH STOCK TOTAL DEBT
--------- ----------- -----------
(DOLLARS IN THOUSANDS)
Quality.............................. $ 10,082 2,207,158 $ 7,389
Tri-City............................. 8,680 1,557,962 3,479
Atlas................................ 6,864 1,432,000 1,540
Lawrence............................. 4,500 1,197,796 300
Tech................................. 3,997 717,408 1,906
Accurate............................. 3,145 564,537 985
CSI/Bonneville....................... 1,813 493,672 1,385
Western.............................. 2,022 362,939 777
Freeway.............................. 1,039 319,698 203
Seasonair............................ 1,516 272,084 154
Standard............................. 947 291,457 433
Eastern.............................. 698 304,216 1,138
--------- ----------- -----------
Total...................... $ 45,303 9,720,927 $ 19,689
========= =========== ===========
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Additionally, prior to the Mergers, the Founding Companies which are C
Corporations, except Atlas, made Interim Earnings Distributions to their
stockholders in the amount of $1.5 million.
In connection with the Mergers, and as consideration for their interests in
the Founding Companies, certain officers, directors, key employees and holders
of more than 5% of the outstanding shares of the Company, together with their
spouses and trusts for which they act as trustees, received cash and shares of
Common Stock of the Company as follows:
SHARES OF
COMMON
NAME CASH STOCK
- ------------------------------------- --------- -----------
(DOLLARS IN THOUSANDS)
Robert J. Powers..................... $ 8,143 1,461,496
Michael Nothum, Jr................... 4,236 760,287
Robert R. Cook....................... 3,997 717,408
Brian S. Atlas....................... 3,432 716,000
Thomas J. Beaty...................... 3,145 564,537
John C. Phillips..................... 1,310 403,305
Samuel M. Lawrence III............... 1,031 317,307
Alfred J. Giardenelli, Jr............ 698 304,216
Charles W. Klapperich................ 1,423 255,401
Pursuant to the agreements entered into in connection with the Mergers, the
stockholders of the Founding Companies have agreed not to compete with the
Company for five years, commencing on the date of consummation of the IPO.
LEASES OF REAL PROPERTY BY FOUNDING COMPANIES
Atlas leases its office space in Houston, Texas, as well as mobile homes
located in Austin, Texas; Phoenix, Arizona; and Antioch, Tennessee. These
properties are owned by M & B Interests, Inc. ("M & B"), a corporation
wholly-owned by Mr. Brian S. Atlas, who is a director of the Company, and his
brother, Mr. Michael Atlas. The lease for the real property in Houston expires
on September 30, 1997 and provides for an annual rental of $90,000. The three
single family residences are leased on a month-to-month basis, at an annual
aggregate rental of $36,780. The Company has also agreed to enter into an
agreement with M & B to lease a newly constructed office and warehouse facility
to be constructed by M & B in Houston for an annual rental of $204,000. When
construction is completed, this new office and warehouse facility will replace
Atlas' existing facility. The Company believes that the rent for these
properties does not exceed fair market value.
Tri-City leases its office space in Tempe, Arizona from Mr. Nothum, Jr. and
his father. Mr. Nothum, Jr. is a trustee of a family trust that is a
stockholder of Tri-City and will become a director of the Company upon
consummation of this Offering. The lease expires on June 30, 1998 and provides
for an annual rental of $120,000. Additionally, Tri-City provides liability
insurance on the property and is responsible for any increases in real property
taxes due to its improvement of the leased property. Tri-City has entered into
an agreement with a limited liability corporation owned by Mr. Nothum, Jr. and
his father to lease office, operations and warehouse facilities which are being
constructed, for a ten year term at annual rental of $530,100. The Company
believes that the rent for these properties does not and will not exceed fair
market value.
Lawrence leases its office space and fabrication facility in Jackson,
Tennessee from the father of Mr. Samuel M. Lawrence III, who is Lawrence's Chief
Executive Officer and a director of the Company. The lease expires on October
31, 1997 and provides for an annual rental of $110,400. Additionally, Lawrence
provides liability insurance on the property and pays its proportionate share of
ad valorem taxes, utilities and maintenance costs. The Company believes that the
rent for this property does not exceed fair market value.
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Accurate leases two parcels of real property in Houston, Texas owned by Mr.
Beaty, who is a director of the Company. One of the leased premises is used by
Accurate for office and warehouse space. The lease on one of these premises
expires on June 30, 2002 and provides for an annual rental of $38,000. The other
leased premise is used by Accurate as a sheet metal shop under a lease dated
July 1, 1997, that will expire on June 30, 2002 and will provide for an annual
rental of $46,700. The rental rate on these premises in subsequent years of the
lease term will be adjusted in accordance with the Consumer Price Index.
Additionally, Accurate will pay all utility, taxes and insurance costs on both
leased premises. Accurate has options to renew each lease for two additional
five-year terms. The Company believes that the rent for both properties does not
and will not exceed fair market value. Accurate previously owned the property it
uses for its sheet metal shop. Prior to the Mergers, Accurate distributed this
property having a net book value of approximately $370,000 to Mr. Beaty.
Eastern leases its office and warehouse space in Albany, New York from 60
Loudonville Road Associates ("Loudonville"), a partnership of Mr. Alfred J.
Giardenelli, Jr., who is a director of the Company, and his brother. The lease
provides for annual rental of $55,000 and payment by Eastern of taxes,
maintenance, repairs, utilities and insurance costs on the leased premises. The
Company believes that the rent for this property does not exceed the fair market
value. The lease expires on December 31, 1999. Prior to expiration, however,
Eastern intends to enter into a 10-year lease with Loudonville for a new
building and to terminate the existing lease. Eastern has agreed to install the
HVAC systems in the new building at a price which the Company believes to be at
a fair market value. The Company's annual rental in the new building will be at
fair market value, as determined by an appraisal.
CSI/Bonneville leases its office and warehouse space in Salt Lake Valley,
Utah from J & J Investments, a joint venture partly owned by Mr. Phillips, who
is a director of the Company. This lease expires on February 28, 2002 and
provides for an annual rental in 1997 of $120,720, increasing annually by 5%.
CSI/Bonneville is responsible for ad valorem taxes, maintenance, insurance and
third-party management costs related thereto. CSI/Bonneville has options to
renew the lease for two additional five-year terms at a fair market value, as
determined by an appraisal. The Company believes that the rent for this property
does not exceed fair market value.
Tech leases its office and warehouse space in Solon, Ohio from Mr. Cook,
who is a director of the Company. The lease expires on April 2, 2000, and
provides for an annual rental of $84,000. Tech is responsible for its utility
costs, 15% of common utility costs and 50% of the landlord's cost of servicing
and maintaining the premises and providing comprehensive liability insurance for
the leased premises. The Company believes that the rent for such property does
not exceed fair market value.
Quality leases its warehouse facility in Grand Rapids, Michigan from Mr.
Powers, who is a director of the Company. Construction of the warehouse facility
was financed with the proceeds of a public bond issue. The lease expires on
April 30, 2005, and provides for an annual rental of the greater of $216,000 or
Mr. Powers' costs for the leased warehouse, including bond debt service or
mortgage payments, utilities, insurance, ad valorem taxes, maintenance and
repairs. Quality has an option to renew the lease for one additional three-year
term on the same terms. The Company believes that the rent for such property
does not exceed fair market value. Quality has guaranteed the payment of two
series of public bonds issued in 1985 and 1990, respectively, by the Michigan
Strategic Fund on behalf of two real property development entities owned by Mr.
Powers, the proceeds of which were used to fund the construction of Quality's
leased warehouse facility and a second adjacent warehouse. As of March 1997,
approximately $1.6 million of the bond debt remained outstanding.
The Company has adopted a policy that, whenever possible, it will not own
any real estate. Accordingly, in connection with future acquisitions, the
Company may require the distribution of real property owned by acquired
companies to its stockholders and the leaseback of such property at fair market
value.
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OTHER TRANSACTIONS
Prior to the IPO, Atlas owed $78,000 to Sid Atlas, the father of Brian and
Michael Atlas, payable in monthly installments of $5,500, including interest at
the rate of 10%, through March 1998. Atlas was also the obligor on two
promissory notes payable to Brian S. Atlas and Michael Atlas in the outstanding
principal amount of $63,537 to each, providing for aggregate monthly
installments of $4,812, including interest at the rate of 10%, through June
1999. Shortly after the IPO the Company paid and retired all such indebtedness.
On October 31, 1996, Lawrence loaned $75,000 to Charles Lawrence at an
interest rate of 8%. This note was payable on demand or October 31, 2001, and
was repaid shortly following the IPO. Charles Lawrence is a brother of Samuel M.
Lawrence III, who is a director of the Company on consummation of this Offering.
On December 27, 1996, Accurate borrowed $630,000 from Mr. Beaty. Interest
was payable monthly at the rate of 9% on the outstanding balance. The note
matured on June 30, 1997 and was repaid at that time.
CSI/Bonneville owed Messrs. Phillips and another stockholder of
CSI/Bonneville $424,000 and $105,000, respectively. Two of the promissory notes,
payable to Mr. Phillips and the other stockholder, are in the principal amount
of $80,000 and $20,000, respectively, and are payable on demand. The remaining
eight promissory notes are each payable ten years from the date of the note, and
mature at various times from 2002 to 2006. All of the notes bear interest at
10%, with interest payable monthly and principal payable at maturity. In 1996,
CSI/Bonneville made interest payments to Mr. Phillips and the other stockholder
in the amount of $35,000 and $6,000, respectively.
During 1996, Mr. Klapperich, who is a director of the Company, received
advances from Western aggregating $173,500. On December 31, 1996, Western
credited against this amount a portion of a dividend payable in the amount of
$210,315, discharging the indebtedness of Mr. Klapperich to Western.
On January 2, 1996, Standard loaned Mr. Kime $480,000 under a promissory
note at an interest rate of 7.67%. Mr. Kime has repaid the balance of this note.
The note was formerly secured by a pledge of his shares of stock in Standard;
however, Standard released its security interest in such stock on March 6, 1997
in anticipation of consummation of the Mergers.
The Company has agreed to pay up to an aggregate of $150,000 of the legal
fees of the owners of the Founding Companies.
The Company has agreed to indemnify Notre for liabilities arising in
connection with actions taken by it in connection with its role as a promoter
prior to and during the IPO.
COMPANY POLICY
Any future transactions with directors, officers, employees or affiliates
of the Company or its subsidiaries are anticipated to be minimal and will be
approved in advance by a majority of disinterested members of the Board of
Directors.
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PRINCIPAL STOCKHOLDERS
The following table sets forth information regarding the beneficial
ownership of the Common Stock, after giving effect to the Mergers and the IPO,
by (i) each person known to own beneficially more than 5% of the outstanding
shares of Common Stock; (ii) each Company director and person who has consented
to be named as a director ("named directors"); (iii) each named executive
officer; and (iv) all executive officers, directors and named directors as a
group. All persons listed have an address c/o the Company's principal executive
offices and have sole voting and investment power with respect to their shares
unless otherwise indicated.
SHARES BENEFICIALLY
OWNED(1)
----------------------
NAME NUMBER PERCENT
- ------------------------------------- ---------- --------
Notre Capital Ventures II, L.L.C..... 2,969,912 14.2%
Steven S. Harter(2).................. 2,979,912 14.2
Robert J. Powers..................... 1,461,915 7.0
Michael Nothum, Jr.(3)............... 778,981 3.7
Robert R. Cook....................... 717,408 3.4
Brian S. Atlas....................... 716,000 3.4
Thomas J. Beaty...................... 564,537 2.7
Fred M. Ferreira..................... 479,535 2.3
John C. Phillips..................... 403,305 1.9
Samuel M. Lawrence III............... 317,307 1.5
Alfred J. Giardenelli, Jr............ 304,216 1.5
Charles W. Klapperich................ 255,401 1.2
J. Gordon Beittenmiller.............. 116,000 *
Reagan S. Busbee..................... 116,000 *
William George, III.................. 75,000 *
Larry Martin(4)(5)................... 27,692 *
John Mercadante, Jr.(4)(5)........... 27,692 *
All executive officers, directors and
named directors
as a group (16 persons)............ 9,340,901 44.5
- ------------
* Less than 1%.
(1) Shares shown do not include shares that could be acquired upon exercise of
options which do not vest within 60 days.
(2) Includes 10,000 shares of Common Stock issuable upon exercise of options
granted under the Directors' Plan and 2,969,912 shares of Common Stock
issued to Notre. Mr. Harter is the President of Notre.
(3) Includes an aggregate of 18,694 shares which are held in irrevocable trusts
for Mr. Nothum's minor children and of which he is trustee.
(4) Includes 10,000 shares of Common Stock issuable upon exercise of options
granted under the Directors' Plan.
(5) Includes 7,692 shares of Common Stock issuable on conversion of a
convertible note issued by Notre which is convertible into Common Stock of
the Company owned by Notre.
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<PAGE>
DESCRIPTION OF CAPITAL STOCK
GENERAL
The authorized capital stock of the Company consists of 57,969,912 shares
of capital stock, consisting of 50,000,000 shares of Common Stock, 2,969,912
shares of Restricted Common Stock and 5,000,000 shares of Preferred Stock. The
Company has outstanding 20,975,774 shares of Common Stock, which includes
2,742,912 shares of Restricted Common Stock and no shares of Preferred Stock.
The following discussion is qualified in its entirety by reference to the
Restated Certificate of Incorporation of Comfort Systems, which is included as
an exhibit to the Registration Statement of which this Prospectus is a part.
COMMON STOCK AND RESTRICTED COMMON STOCK
The holders of Common Stock are each entitled to one vote for each share
held on all matters to which they are entitled to vote, including the election
of directors. The holders of Restricted Common Stock, voting together as a
single class, are entitled to elect one member of the Company's Board of
Directors and to 0.55 of one vote for each share held on all other matters on
which they are entitled to vote. Holders of Restricted Common Stock are not
entitled to vote on the election of any other directors. Upon consummation of
this Offering, the Board of Directors will be classified into three classes as
nearly equal in number as possible, with the term of each class expiring on a
staggered basis. The classification of the Board of Directors may make it more
difficult to change the composition of the Board of Directors and thereby may
discourage or make more difficult an attempt by a person or group to obtain
control of the Company. Cumulative voting for the election of directors is not
permitted. Any director, or the entire Board of Directors, may be removed at any
time, with cause, by of a majority of the aggregate number of votes which may be
cast by the holders of all of the outstanding shares of Common Stock and
Restricted Common Stock entitled to vote for the election of directors, except
that only the holder of the Restricted Common Stock may remove the director such
holder is entitled to elect.
Subject to the rights of any then outstanding shares of Preferred Stock,
holders of Common Stock and Restricted Common Stock are together entitled to
participate pro rata in such dividends as may be declared in the discretion of
the Board of Directors out of funds legally available therefor. Holders of
Common Stock and Restricted Common Stock together are entitled to share ratably
in the net assets of the Company upon liquidation after payment or provision for
all liabilities and any preferential liquidation rights of any Preferred Stock
then outstanding. Holders of Common Stock and holders of Restricted Common Stock
have no preemptive rights to purchase shares of stock of the Company. Shares of
Common Stock are not subject to any redemption provisions and are not
convertible into any other securities of the Company. Shares of Restricted
Common Stock are not subject to any redemption provisions and are convertible
into Common Stock as described below. All outstanding shares of Common Stock and
Restricted Common Stock are, and the shares of Common Stock to be issued
pursuant to this Offering will be, upon payment therefor, fully paid and
non-assessable.
Each share of Restricted Common Stock will automatically convert to Common
Stock on a share-for-share basis (i) in the event of a disposition of such share
of Restricted Common Stock by the holder thereof (other than a distribution by a
holder to its partners or beneficial owners, or a transfer to a related party of
such holders (as defined in Sections 267, 707, 318 and/or 4946 of the Internal
Revenue Code of 1986, as amended)), (ii) in the event any person acquires
beneficial ownership of 15% or more of the total number of outstanding shares of
Common Stock, or (iii) in the event any person offers to acquire 15% or more of
the total number of outstanding shares of Common Stock. After July 1, 1998, the
Board of Directors may elect to convert any remaining shares of Restricted
Common Stock into shares of Common Stock in the event 80% or more of the
originally outstanding shares of Restricted Common Stock have been previously
converted into shares of Common Stock.
The Common Stock is listed on The New York Stock Exchange under the symbol
"FIX." The Restricted Common Stock is not listed on any exchange.
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PREFERRED STOCK
The Preferred Stock may be issued from time to time by the Board of
Directors in one or more series. Subject to the provisions of the Company's
Certificate of Incorporation and limitations prescribed by law, the Board of
Directors is expressly authorized to adopt resolutions to issue the shares, to
fix the number of shares and to change the number of shares constituting any
series and to provide for or change the voting powers, designations, preferences
and relative, participating, optional or other special rights, qualifications,
limitations or restrictions thereof, including dividend rights (including
whether dividends are cumulative), dividend rates, terms of redemption
(including sinking fund provisions), redemption prices, conversion rights and
liquidation preferences of the shares constituting any series of the Preferred
Stock, in each case without any further action or vote by the stockholders. The
Company has no current plans to issue any shares of Preferred Stock.
One of the effects of undesignated Preferred Stock may be to enable the
Board of Directors to render more difficult or to discourage an attempt to
obtain control of the Company by means of a tender offer, proxy contest, merger
or otherwise, and thereby to protect the continuity of the Company's management.
The issuance of shares of the Preferred Stock pursuant to the Board of
Directors' authority described above may adversely affect the rights of the
holders of Common Stock. For example, Preferred Stock issued by the Company may
rank prior to the Common Stock and Restricted Common Stock as to dividend
rights, liquidation preference or both, may have full or limited voting rights
and may be convertible into shares of Common Stock. Accordingly, the issuance of
shares of Preferred Stock may discourage bids for the Common Stock or may
otherwise adversely affect the market price of the Common Stock.
STATUTORY BUSINESS COMBINATION PROVISION
The Company is subject to Section 203 of the DGCL which, with certain
exceptions, prohibits a Delaware corporation from engaging in any of a broad
range of business combinations with any "interested stockholder" for a period
of three years following the date that such stockholder became an interested
stockholder, unless: (i) prior to such date, the Board of Directors of the
corporation approved either the business combination or the transaction which
resulted in the stockholder becoming an interested stockholder, (ii) upon
consummation of the transaction which resulted in the stockholder becoming an
interested stockholder, the interested stockholder owned at least 85% of the
voting stock of the corporation outstanding at the time the transaction
commenced, excluding for purposes of determining the number of shares
outstanding those shares owned (a) by persons who are directors and officers and
(b) by employee stock plans in which employee participants do not have the right
to determine confidentially whether shares held subject to the plan will be
tendered in a tender or exchange offer, or (iii) on or after such date, the
business combination is approved by the Board of Directors and authorized at an
annual or special meeting of stockholders by the affirmative vote of at least
66 2/3% of the outstanding voting stock which is not owned by the interested
stockholder. An "interested stockholder" is defined as any person that is (a)
the owner of 15% or more of the outstanding voting stock of the corporation or
(b) an affiliate or associate of the corporation and was the owner of 15% or
more of the outstanding voting stock of the corporation at any time within the
three-year period immediately prior to the date on which it is sought to be
determined whether such person is an interested stockholder.
CERTAIN PROVISIONS OF THE CERTIFICATE OF INCORPORATION AND BYLAWS
Pursuant to the Company's Certificate of Incorporation and as permitted by
Delaware law, directors of the Company are not liable to the Company or its
stockholders for monetary damages for breach of fiduciary duty, except for
liability in connection with a breach of duty of loyalty, for acts or omissions
not in good faith or which involve intentional misconduct or a knowing violation
of law, for dividend payments or stock repurchases illegal under Delaware law or
any transaction in which a director has derived an improper personal benefit.
Additionally, the Certificate of Incorporation of the Company provides that
directors and officers of the Company shall be, and at the discretion of the
Board of Directors non-officer employees and agents may be, indemnified by the
Company to the fullest extent authorized by Delaware law, as it now exists or
may in
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the future be amended, against all expenses and liabilities actually and
reasonably incurred in connection with service for or on behalf of the Company,
and further permits the advancing of expenses incurred in defense of claims.
The Certificate of Incorporation also provides that any action required or
permitted to be taken by the stockholders of the Company at an annual or special
meeting of stockholders must be effected at a duly called meeting and may not be
taken or effected by a written consent of stockholders in lieu thereof. The
Company's Bylaws provide that a special meeting of stockholders may be called
only by the Chief Executive Officer, by a majority of the Board of Directors, or
by a majority of the Executive Committee of the Board of Directors. The Bylaws
provide that only those matters set forth in the notice of the special meeting
may be considered or acted upon at that special meeting. To amend or repeal the
Company's Bylaws, an amendment or repeal thereof must first be approved by the
Board of Directors or by affirmative vote of the holders of at least 66 2/3% of
the total votes eligible to be cast by holders of voting stock with respect to
such amendment or repeal.
The Company's Bylaws establish an advance notice procedure with regard to
the nomination, other than by or at the direction of the Board of Directors or a
committee thereof, of candidates for election as directors (the "Nomination
Procedure") and with regard to other matters to be brought by stockholders
before an annual meeting of stockholders of the Company (the "Business
Procedure"). The Nomination Procedure requires that a stockholder give prior
written notice, in proper form, of a planned nomination for the Board of
Directors to the Secretary of the Company. The requirements as to the form and
timing of that notice are specified in the Company's Bylaws. If the Chairman of
the Board of Directors determines that a person was not nominated in accordance
with the Nomination Procedure, such person will not be eligible for election as
a director. Under the Business Procedure, a stockholder seeking to have any
business conducted at an annual meeting must give prior written notice, in
proper form, to the Secretary of the Company. The requirements as to the form
and timing of that notice are specified in the Company's Bylaws. If the Chairman
of the Board of Directors determines that the other business was not properly
brought before such meeting in accordance with the Business Procedure, such
business will not be conducted at such meeting.
Although the Company's Bylaws do not give the Board of Directors any power
to approve or disapprove stockholder nominations for the election of directors
or of any other business desired by stockholders to be conducted at an annual or
any other meeting, the Company's Bylaws (i) may have the effect of precluding a
nomination for the election of directors or precluding the conduct of business
at a particular meeting if the proper procedures are not followed or (ii) may
discourage or deter a third party from conducting a solicitation of proxies to
elect its own slate of directors or otherwise attempting to obtain control of
the Company, even if the conduct of such solicitation or such attempt might be
beneficial to the Company and its stockholders.
TRANSFER AGENT AND REGISTRAR
The Transfer Agent and Registrar for the Common Stock is American Stock
Transfer & Trust Company, 40 Wall Street, New York, New York, 10005.
58
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
The Company has outstanding 20,974,774 shares of Common Stock. The
7,015,000 shares sold in the IPO will be freely tradeable without restriction
unless acquired by affiliates of the Company. None of the remaining outstanding
shares of Common Stock or Restricted Common Stock have been registered under the
Securities Act, which means that they may be resold publicly only upon
registration under the Securities Act or in compliance with an exemption from
the registration requirements of the Securities Act, including the exemption
provided by Rule 144 thereunder.
In general, under Rule 144, if a period of at least one year has elapsed
between the later of the date on which restricted securities were acquired from
the Company or the date on which they were acquired from an affiliate, the
holder of such restricted securities (including an affiliate) is entitled to
sell a number of shares within any three-month period that does not exceed the
greater of (i) one percent of the then outstanding shares of the Common Stock
(approximately 209,758 shares upon completion of the IPO) or (ii) the average
weekly reported volume of trading of the Common Stock during the four calendar
weeks preceding such sale. Sales under Rule 144 are also subject to certain
requirements pertaining to the manner of such sales, notices of such sales and
the availability of current public information concerning the Company.
Affiliates may sell shares not constituting restricted securities in accordance
with the foregoing volume limitations and other requirements but without regard
to the one year holding period. Under Rule 144(k), if a period of at least two
years has elapsed between the later of the date on which restricted securities
were acquired from the Company and the date on which they were acquired from an
affiliate, a holder of such restricted securities who is not an affiliate at the
time of the sale and has not been an affiliate for a least three months prior to
the sale is entitled to sell the shares immediately without regard to the volume
limitations and other conditions described above.
The Company and its officers, directors and certain stockholders, who
beneficially own 4,239,947 shares in the aggregate, have agreed not to sell or
otherwise dispose of any shares of Common Stock or Restricted Common Stock for a
period of 180 days after the date of this Prospectus without the prior written
consent of Alex. Brown & Sons Incorporated, except that the Company may issue
Common Stock in connection with acquisitions, in connection with its 1997
Long-Term Incentive Plan and its 1997 Non-Employee Directors' Stock Plan (the
"Plans") or upon conversion of shares of the Restricted Common Stock. See
"Underwriting." In addition, all of the stockholders of the Founding
Companies, the Company's officers and directors and certain stockholders,
holding in the aggregate 13,960,874 shares of Common Stock, have agreed with the
Company that they will not sell any of their shares for a period of one year
after the closing of the IPO. These stockholders, however, have the right, in
the event the Company proposes to register under the Securities Act any Common
Stock for its own account or for the account of others, subject to certain
exceptions, to require the Company to include their shares in the registration,
subject to the right of the Company to exclude some or all of the shares in the
offering upon the advice of the managing underwriter. In addition, certain of
such stockholders have certain limited demand registration rights to require the
Company to register shares held by them following the first anniversary of the
closing of the IPO.
The Company is hereby registering 8,000,000 shares of its Common Stock
under the Securities Act for use by the Company in connection with future
acquisitions. After the effective date of such registration, any such shares
that may be issued will generally be freely tradeable, unless acquired by
persons who become affiliates of the Company. In some instances, however, the
Company may contractually restrict the sale of shares issued in connection with
future acquisitions. The piggyback registration rights described above do not
apply to the registration statement relating to these 8,000,000 shares.
No prediction can be made as to the effect, if any, that the sale of shares
or the availability of shares for sale will have on the market price for the
Common Stock prevailing from time to time. Nevertheless, sales, or the
availability for sale of, substantial amounts of the Common Stock in the public
market could adversely affect prevailing market prices and the future ability of
the Company to raise equity capital and complete any additional acquisitions for
Common Stock.
59
<PAGE>
LEGAL MATTERS
The validity of the Common Stock offered hereby will be passed on for the
Company by Bracewell & Patterson, L.L.P., Houston, Texas.
EXPERTS
The audited financial statements included in this Prospectus and elsewhere
in the registration statement have been audited by Arthur Andersen LLP,
independent public accountants, as indicated in their reports with respect
thereto, and are included herein in reliance upon the authority of said firm as
experts in giving said reports.
ADDITIONAL INFORMATION
The Company has filed with the SEC a Registration Statement (which term
shall encompass any and all amendments thereto) on Form S-1 (the "Registration
Statement") under the Securities Act of 1933, as amended (the "Securities
Act"), with respect to the Common Stock offered hereby. This Prospectus, which
is part of the Registration Statement, does not contain all the information set
forth in the Registration Statement and the exhibits and schedules thereto,
certain items of which are omitted in accordance with the rules and regulations
of the SEC. Statements made in this Prospectus as to the contents of any
contract, agreement or other document referred to are not necessarily complete.
With respect to each such contract, agreement or other document filed as an
exhibit to the Registration Statement, reference is hereby made to the exhibit
for a more complete description of the matter involved, and each such statement
shall be deemed qualified in its entirety by such reference. For further
information with respect to the Company, reference is hereby made to the
Registration Statement and such exhibits and schedules filed as a part thereof,
which may be inspected, without charge, at the Public Reference Section of the
SEC at Room 1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C.
20549, and at the regional offices of the SEC located at Seven World Trade
Center, 13th Floor, New York, New York 10048 and at Citicorp Center, 500 West
Madison Street, Suite 1400, Chicago, Illinois 60661. The SEC maintains a web
site that contains reports, proxy and information statements regarding
registrants that file electronically with the SEC. The address of this web site
is (http://www.sec.gov). Copies of all or any portion of the Registration
Statement may be obtained from the Public Reference Section of the SEC, upon
payment of the prescribed fees.
The Common Stock is listed on the New York Stock Exchange. Proxy
statements, reports and other information concerning the Company that are filed
under the Exchange Act can be inspected at the offices of the New York Stock
Exchange, Inc., 20 Broad Street, New York, New York 10005.
60
<PAGE>
INDEX TO FINANCIAL STATEMENTS
PAGE
-----
COMFORT SYSTEMS USA, INC. (UNAUDITED)
PRO FORMA COMBINED FINANCIAL
STATEMENTS
Introduction to Unaudited Pro
Forma Combined Financial
Statements..................... F-3
Unaudited Pro Forma Combined
Balance Sheet.................. F-4
Unaudited Pro Forma Combined
Statements of Operations....... F-5
Notes to Unaudited Pro Forma
Combined Financial
Statements..................... F-7
COMFORT SYSTEMS USA, INC.
Report of Independent Public
Accountants.................... F-11
Balance Sheets.................. F-12
Statement of Operations......... F-13
Statement of Stockholders'
Equity......................... F-14
Statement of Cash Flows......... F-15
Notes to Financial Statements... F-16
FOUNDING COMPANIES
QUALITY AIR HEATING & COOLING, INC.
Report of Independent Public
Accountants.................... F-19
Balance Sheets.................. F-20
Statements of Operations........ F-21
Statements of Shareholders'
Equity......................... F-22
Statements of Cash Flows........ F-23
Notes to Financial Statements... F-24
ATLAS COMFORT SERVICES USA, INC.
AND SUBSIDIARY
Report of Independent Public
Accountants.................... F-29
Consolidated Balance Sheets..... F-30
Consolidated Statements of
Operations..................... F-31
Consolidated Statements of
Shareholders' Equity........... F-32
Consolidated Statements of Cash
Flows.......................... F-33
Notes to Consolidated Financial
Statements..................... F-34
TRI-CITY MECHANICAL, INC.
Report of Independent Public
Accountants.................... F-42
Balance Sheets.................. F-43
Statements of Operations........ F-44
Statements of Shareholders'
Equity......................... F-45
Statements of Cash Flows........ F-46
Notes to Financial Statements... F-47
S.M. LAWRENCE INC. AND RELATED
COMPANY
Report of Independent Public
Accountants.................... F-52
Combined Balance Sheets......... F-53
Combined Statements of
Operations..................... F-54
Combined Statements of
Shareholders' Equity........... F-55
Combined Statements of Cash
Flows.......................... F-56
Notes to Combined Financial
Statements..................... F-57
F-1
<PAGE>
PAGE
-----
ACCURATE AIR SYSTEMS, INC.
Report of Independent Public
Accountants.................... F-63
Balance Sheets.................. F-64
Statements of Operations........ F-65
Statements of Shareholder's
Equity......................... F-66
Statements of Cash Flows........ F-67
Notes to Financial Statements... F-68
EASTERN HEATING AND COOLING, INC.
Report of Independent Public
Accountants.................... F-75
Balance Sheets.................. F-76
Statements of Operations........ F-77
Statements of Shareholder's
Equity......................... F-78
Statements of Cash Flows........ F-79
Notes to Financial Statements... F-80
CONTRACT SERVICE, INC.
Report of Independent Public
Accountants.................... F-85
Balance Sheets.................. F-86
Statements of Operations........ F-87
Statements of Shareholders'
Equity......................... F-88
Statements of Cash Flows........ F-89
Notes to Financial Statements... F-90
TECH HEATING AND AIR CONDITIONING,
INC. AND RELATED COMPANY
Report of Independent Public
Accountants.................... F-95
Combined Balance Sheets......... F-96
Combined Statements of
Operations..................... F-97
Combined Statements of
Shareholders' Equity........... F-98
Combined Statements of Cash
Flows.......................... F-99
Notes to Combined Financial
Statements..................... F-100
SEASONAIR, INC.
Report of Independent Public
Accountants.................... F-105
Balance Sheets.................. F-106
Statements of Operations........ F-107
Statements of Shareholders'
Equity......................... F-108
Statements of Cash Flows........ F-109
Notes to Financial Statements... F-110
WESTERN BUILDING SERVICES, INC.
Report of Independent Public
Accountants.................... F-115
Balance Sheets.................. F-116
Statements of Operations........ F-117
Statements of Shareholders'
Equity......................... F-118
Statements of Cash Flows........ F-119
Notes to Financial Statements... F-120
F-2
<PAGE>
COMFORT SYSTEMS USA, INC. AND FOUNDING COMPANIES
UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS
BASIS OF PRESENTATION
The following unaudited pro forma combined financial statements give effect
to the acquisitions by Comfort Systems USA, Inc. ("Comfort Systems") of the
outstanding capital stock of Quality, Atlas, Tri-City, Lawrence, Accurate,
Eastern, CSI/Bonneville, Seasonair, Tech, Western, Freeway and Standard
(together, the "Founding Companies"). These acquisitions (the "Mergers")
occurred concurrently with the closing of Comfort Systems' initial public
offering (the "IPO") and were accounted for using the purchase method of
accounting. Comfort Systems has been identified as the accounting acquirer for
financial statement presentation purposes.
The unaudited pro forma combined balance sheet gives effect to the Mergers
and the IPO as if they had occurred on March 31, 1997. The unaudited pro forma
combined statements of operations give effect to these transactions as if they
had occurred on January 1, 1996.
Comfort Systems has preliminarily analyzed the savings that it expects to
be realized from reductions in salaries and certain benefits to the owners. To
the extent the owners of the Founding Companies have agreed prospectively to
reductions in salary, bonuses and benefits, these reductions have been reflected
in the pro forma combined statements of operations. With respect to other
potential cost savings, Comfort Systems has not and cannot quantify these
savings until completion of the combination of the Founding Companies. It is
anticipated that these savings will be offset by costs related to Comfort
Systems' new corporate management and by the costs associated with being a
public company. However, because these costs cannot be accurately quantified at
this time, they have not been included in the pro forma financial information of
Comfort Systems.
The pro forma adjustments are based on estimates, available information and
certain assumptions and may be revised as additional information becomes
available. The pro forma financial data do not purport to represent what Comfort
Systems' financial position or results of operations would actually have been if
such transactions in fact had occurred on those dates and are not necessarily
representative of the Comfort Systems' financial position or results of
operations for any future period. Since the Founding Companies were not under
common control or management, historical combined results may not be comparable
to, or indicative of, future performance. The unaudited pro forma combined
financial statements should be read in conjunction with the other financial
statements and notes thereto included elsewhere in this Prospectus. See "Risk
Factors" included elsewhere herein.
F-3
<PAGE>
COMFORT SYSTEMS USA, INC.
UNAUDITED PRO FORMA COMBINED BALANCE SHEET
MARCH 31, 1997
(AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
QUALITY ATLAS TRI-CITY LAWRENCE ACCURATE EASTERN CSI/BONNEVILLE TECH
------- ------ -------- -------- -------- ------- --------------- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
ASSETS
Cash and cash equivalents............ $ 3,778 $ 356 $2,665 $-- $ 104 $ 131 $ 103 $ 249
Restricted cash and investments...... -- -- 828 -- -- -- -- --
Accounts receivable.................. 6,512 4,764 4,532 3,706 2,330 921 743 1,261
Less allowance...................... 80 100 30 -- 28 25 21 45
------- ------ -------- -------- -------- ------- --------------- ------
Accounts receivable, net............. 6,432 4,664 4,502 3,706 2,302 896 722 1,216
Other receivables.................... 6 -- 66 76 85 27 -- 20
Inventories.......................... 601 1,676 218 255 141 97 491 193
Prepaid expenses and other........... 50 56 2 31 -- -- 4 20
Costs in excess of billings.......... 595 314 380 262 228 48 129
Other................................ 692 145 -- -- -- -- -- --
------- ------ -------- -------- -------- ------- --------------- ------
Total current assets.............. 12,154 7,211 8,661 4,330 2,860 1,199 1,449 1,698
Property and equipment, net.......... 774 598 643 716 932 607 690 484
Goodwill, net........................ -- 22 -- -- -- -- -- --
Other noncurrent assets.............. -- 88 -- 237 -- 174 15 --
------- ------ -------- -------- -------- ------- --------------- ------
Total assets......................... $12,928 $7,919 $9,304 $5,283 $3,792 $1,980 $ 2,154 $2,182
======= ====== ======== ======== ======== ======= =============== ======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current maturities of long-term
debt................................ $ 695 $ 800 $-- $ 450 $ 716 $ 607 $ 101 $ 969
Accounts payable and accrued
expenses............................ 2,654 3,037 2,408 1,241 1,197 759 657 701
Payable to shareholder/affiliate..... 3,875 -- -- -- 630 -- -- --
Billings in excess of costs and
earnings............................ 988 570 435 890 97 53 218
Deferred income taxes................ -- -- -- 217 -- -- -- --
Other................................ 391 -- -- -- -- -- -- --
------- ------ -------- -------- -------- ------- --------------- ------
Total current liabilities......... 8,603 4,407 2,843 2,798 2,640 1,419 976 1,670
Deferred income taxes................ -- -- -- -- -- -- -- --
Long-term debt, net of current
maturities.......................... 362 1,174 -- -- 149 353 4 32
Payable to shareholder/affiliate..... -- 75 -- -- -- -- 430 --
------- ------ -------- -------- -------- ------- --------------- ------
Total liabilities................. 8,965 5,656 2,843 2,798 2,789 1,772 1,410 1,702
Commitments and contingencies........ -- -- -- -- -- -- -- --
Stockholders' equity:
Common stock........................ 22 1 25 161 1 50 9 1
Additional paid-in-capital.......... 6 -- 105 -- -- -- -- --
Retained earnings................... 4,833 2,262 6,331 2,339 1,002 158 735 482
Treasury stock...................... (898) -- -- (15) -- -- -- (3)
------- ------ -------- -------- -------- ------- --------------- ------
Total stockholders' equity...... 3,963 2,263 6,461 2,485 1,003 208 744 480
------- ------ -------- -------- -------- ------- --------------- ------
Total liabilities and stockholders'
equity.............................. $12,928 $7,919 $9,304 $5,283 $3,792 $1,980 $ 2,154 $2,182
======= ====== ======== ======== ======== ======= =============== ======
OTHER PRO POST
FOUNDING COMFORT PRO FORMA FORMA MERGER AS
SEASONAIR WESTERN COMPANIES SYSTEMS ADJUSTMENTS COMBINED ADJUSTMENTS ADJUSTED
--------- ------- --------- -------- ----------- --------- ----------- --------
ASSETS
Cash and cash equivalents............ $ 221 $ 34 $ 227 $ 42 $ (5,760) $ 2,150 $ 34,572 $36,722
Restricted cash and investments...... -- -- -- -- -- 828 -- 828
Accounts receivable.................. 922 641 1,677 -- -- 28,009 -- 28,009
Less allowance...................... 9 -- 69 -- -- 407 -- 407
--------- ------- --------- -------- ----------- --------- ----------- --------
Accounts receivable, net............. 913 641 1,608 -- -- 27,602 -- 27,602
Other receivables.................... 40 6 443 -- -- 769 -- 769
Inventories.......................... 187 86 519 -- -- 4,464 -- 4,464
Prepaid expenses and other........... 49 9 82 -- -- 303 -- 303
Costs in excess of billings.......... 89 91 -- -- -- 2,136 -- 2,136
Other................................ 104 -- -- 2,866 -- 3,807 (2,866) 941
--------- ------- --------- -------- ----------- --------- ----------- --------
Total current assets.............. 1,603 867 2,879 2,908 (5,760) 42,059 31,706 73,765
Property and equipment, net.......... 61 189 288 -- -- 5,982 -- 5,982
Goodwill, net........................ -- -- -- -- 139,790 139,812 -- 139,812
Other noncurrent assets.............. 110 174 32 -- -- 830 -- 830
--------- ------- --------- -------- ----------- --------- ----------- --------
Total assets......................... $ 1,774 $1,230 $ 3,199 $ 2,908 $ 134,030 $188,683 $ 31,706 $220,389
========= ======= ========= ======== =========== ========= =========== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current maturities of long-term
debt................................ $ 91 $ 97 $ 199 $ -- $ -- $ 4,725 $ -- $ 4,725
Accounts payable and accrued
expenses............................ 866 437 1,548 2,866 -- 18,371 (2,866) 15,505
Payable to shareholder/affiliate..... -- -- -- -- 41,428 45,933 (45,303) 630
Billings in excess of costs and
earnings............................ 134 21 44 -- -- 3,450 -- 3,450
Deferred income taxes................ -- -- 49 -- -- 266 -- 266
Other................................ -- -- 120 -- -- 511 -- 511
--------- ------- --------- -------- ----------- --------- ----------- --------
Total current liabilities......... 1,091 555 1,960 2,866 41,428 73,256 (48,169) 25,087
Deferred income taxes................ 17 -- -- -- -- 17 -- 17
Long-term debt, net of current
maturities.......................... 9 241 370 -- 11,025 13,719 -- 13,719
Payable to shareholder/affiliate..... 68 -- -- -- -- 573 -- 573
--------- ------- --------- -------- ----------- --------- ----------- --------
Total liabilities................. 1,185 796 2,330 2,866 52,453 87,565 (48,169) 39,396
Commitments and contingencies........ -- -- -- -- -- -- -- --
Stockholders' equity:
Common stock........................ 78 1 42 42 (293) 140 70 210
Additional paid-in-capital.......... 1 62 419 11,556 88,829 100,978 79,805 180,783
Retained earnings................... 745 371 458 (11,556) (8,160) -- -- --
Treasury stock...................... (235) -- (50) -- 1,201 -- -- --
--------- ------- --------- -------- ----------- --------- ----------- --------
Total stockholders' equity...... 589 434 869 42 81,577 101,118 79,875 180,993
--------- ------- --------- -------- ----------- --------- ----------- --------
Total liabilities and stockholders'
equity.............................. $ 1,774 $1,230 $ 3,199 $ 2,908 $ 134,030 $188,683 $ 31,706 $220,389
========= ======= ========= ======== =========== ========= =========== ========
</TABLE>
F-4
<PAGE>
COMFORT SYSTEMS USA, INC.
UNAUDITED PRO FORMA COMBINED STATEMENTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 1996
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
QUALITY ATLAS TRI-CITY LAWRENCE ACCURATE EASTERN CSI/BONNEVILLE
-------- --------- --------- --------- --------- ------- ---------------
<S> <C> <C> <C> <C> <C> <C> <C>
REVENUES............................. $29,597 $ 30,030 $24,237 $17,163 $16,806 $7,944 $ 7,842
COST OF SERVICES..................... 18,467 25,071 18,561 12,211 13,270 5,276 5,201
-------- --------- --------- --------- --------- ------- ---------------
Gross profit........................ 11,130 4,959 5,676 4,952 3,536 2,668 2,641
SELLING, GENERAL AND ADMINISTRATIVE
EXPENSES............................ 6,640 2,858 3,903 4,885 3,037 2,237 1,660
GOODWILL AMORTIZATION................ -- -- -- -- -- -- --
-------- --------- --------- --------- --------- ------- ---------------
INCOME FROM OPERATIONS............... 4,490 2,101 1,773 67 499 431 981
OTHER INCOME (EXPENSE):
Interest income..................... -- -- 152 47 -- -- --
Interest expense.................... (154 ) (292) -- -- (80) (87 ) (29)
Other............................... 97 65 89 8 14 40 51
-------- --------- --------- --------- --------- ------- ---------------
INCOME BEFORE INCOME TAXES........... 4,433 1,874 2,014 122 433 384 1,003
PROVISION FOR INCOME TAXES........... -- 750 -- 60 -- -- --
-------- --------- --------- --------- --------- ------- ---------------
NET INCOME........................... $ 4,433 $ 1,124 $ 2,014 $ 62 $ 433 $ 384 $ 1,003
======== ========= ========= ========= ========= ======= ===============
NET INCOME PER SHARE.................
SHARES USED IN COMPUTING PRO FORMA
NET INCOME PER SHARE(1).............
OTHER
FOUNDING COMFORT PRO FORMA PRO FORMA
TECH SEASONAIR WESTERN COMPANIES SYSTEMS ADJUSTMENTS COMBINED
--------- ---------- -------- ---------- -------- ------------ ----------
REVENUES............................. $ 7,537 $6,737 $6,494 $ 13,138 $-- $ -- $ 167,525
COST OF SERVICES..................... 3,996 4,006 4,662 8,991 -- -- 119,712
--------- ---------- -------- ---------- -------- ------------ ----------
Gross profit........................ 3,541 2,731 1,832 4,147 -- -- 47,813
SELLING, GENERAL AND ADMINISTRATIVE
EXPENSES............................ 1,861 2,597 1,088 3,616 -- (6,568) 27,814
GOODWILL AMORTIZATION................ -- -- -- -- -- 3,495 3,495
--------- ---------- -------- ---------- -------- ------------ ----------
INCOME FROM OPERATIONS............... 1,680 134 744 531 -- 3,073 16,504
OTHER INCOME (EXPENSE):
Interest income..................... -- -- -- 17 -- -- 216
Interest expense.................... (18) (21) (51) -- -- (935) (1,667 )
Other............................... 31 82 (21) 34 -- -- 490
--------- ---------- -------- ---------- -------- ------------ ----------
INCOME BEFORE INCOME TAXES........... 1,693 195 672 582 -- 2,138 15,543
PROVISION FOR INCOME TAXES........... -- 69 -- 49 -- 6,687 7,615
--------- ---------- -------- ---------- -------- ------------ ----------
NET INCOME........................... $ 1,693 $ 126 $ 672 $ 533 $-- $ (4,549) $ 7,928
========= ========== ======== ========== ======== ============ ==========
NET INCOME PER SHARE................. $ 0.44
==========
SHARES USED IN COMPUTING PRO FORMA
NET INCOME PER SHARE(1)............. 18,180,311
==========
</TABLE>
(1) Includes (i) 2,969,912 shares issued to Notre, (ii) 1,269,935 shares issued
to management of and consultants to Comfort Systems, (iii) 9,720,927 shares
issued to owners of the Founding Companies and (iv) 4,219,537 of the
7,015,000 shares sold in the IPO necessary to pay the cash portion of the
Merger consideration and expenses of the IPO. The 2,795,463 shares excluded
reflects 1,880,463 shares for the net cash proceeds to Comfort Systems from
the IPO, and 915,000 shares purchased by the underwriters pursuant to an
overallotment option.
F-5
<PAGE>
COMFORT SYSTEMS USA, INC.
UNAUDITED PRO FORMA COMBINED STATEMENTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 1997
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
QUALITY ATLAS TRI-CITY LAWRENCE ACCURATE EASTERN CSI/BONNEVILLE
-------- --------- --------- --------- --------- ------- ---------------
<S> <C> <C> <C> <C> <C> <C> <C>
REVENUES............................. $ 8,766 $ 6,115 $ 6,791 $ 4,565 $ 2,642 $1,284 $ 1,562
COST OF SERVICES..................... 5,372 4,866 5,946 3,326 2,095 805 1,045
-------- --------- --------- --------- --------- ------- ---------------
Gross profit........................ 3,394 1,249 845 1,239 547 479 517
SELLING, GENERAL AND ADMINISTRATIVE
EXPENSES............................ 2,094 753 567 698 526 582 458
GOODWILL AMORTIZATION................ -- -- -- -- -- -- --
-------- --------- --------- --------- --------- ------- ---------------
INCOME (LOSS) FROM OPERATIONS........ 1,300 496 278 541 21 (103 ) 59
OTHER INCOME (EXPENSE):
Interest income..................... 38 -- 25 -- 1 -- 2
Interest expense.................... (29 ) (54) -- -- (33) (20 ) (17)
Other............................... (34 ) 17 9 2 7 -- 9
-------- --------- --------- --------- --------- ------- ---------------
INCOME (LOSS) BEFORE INCOME TAXES.... 1,275 459 312 543 (4) (123 ) 53
PROVISION FOR INCOME TAXES........... -- 188 -- 217 -- -- --
-------- --------- --------- --------- --------- ------- ---------------
NET INCOME (LOSS).................... $ 1,275 $ 271 $ 312 $ 326 $ (4) $ (123 ) $ 53
======== ========= ========= ========= ========= ======= ===============
NET INCOME PER SHARE.................
SHARES USED IN COMPUTING PRO FORMA
NET INCOME PER SHARE(1).............
OTHER
FOUNDING COMFORT PRO FORMA PRO FORMA
TECH SEASONAIR WESTERN COMPANIES SYSTEMS ADJUSTMENTS COMBINED
--------- ---------- -------- ---------- -------- ------------ ----------
REVENUES............................. $ 1,656 $1,831 $1,072 $ 3,221 $ -- $ -- $ 39,505
COST OF SERVICES..................... 1,034 1,165 812 2,334 -- -- 28,800
--------- ---------- -------- ---------- -------- ------------ ----------
Gross profit........................ 622 666 260 887 -- -- 10,705
SELLING, GENERAL AND ADMINISTRATIVE
EXPENSES............................ 565 644 231 909 11,556 (11,769) 7,814
GOODWILL AMORTIZATION................ -- -- -- -- -- 874 874
--------- ---------- -------- ---------- -------- ------------ ----------
INCOME (LOSS) FROM OPERATIONS........ 57 22 29 (22) (11,556 ) 10,895 2,017
OTHER INCOME (EXPENSE):
Interest income..................... -- -- -- 6 -- -- 72
Interest expense.................... (10) (3) (11) -- -- (207) (384 )
Other............................... 11 28 (2) 15 -- -- 62
--------- ---------- -------- ---------- -------- ------------ ----------
INCOME (LOSS) BEFORE INCOME TAXES.... 58 47 16 (1) (11,556 ) 10,688 1,767
PROVISION FOR INCOME TAXES........... -- 23 -- -- -- 492 920
--------- ---------- -------- ---------- -------- ------------ ----------
NET INCOME (LOSS).................... $ 58 $ 24 $ 16 $ (1) $(11,556) $ 10,196 $ 847
========= ========== ======== ========== ======== ============ ==========
NET INCOME PER SHARE................. $ 0.05
==========
SHARES USED IN COMPUTING PRO FORMA
NET INCOME PER SHARE(1)............. 18,180,311
==========
</TABLE>
(1) Includes (i) 2,969,912 shares issued to Notre, (ii) 1,269,935 shares issued
to management of and consultants to Comfort Systems, (iii) 9,720,927 shares
issued to owners of the Founding Companies and (iv) 4,219,537 of the
7,015,000 shares sold in the IPO necessary to pay the cash portion of the
Merger consideration and expenses of the IPO. The 2,795,463 shares excluded
reflects 1,880,463 shares for the net cash proceeds to Comfort Systems from
the IPO, and 915,000 shares purchased by the underwriters pursuant to an
overallotment option.
F-6
<PAGE>
COMFORT SYSTEMS USA, INC. AND FOUNDING COMPANIES
NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS
1. GENERAL:
Comfort Systems USA, Inc. ("Comfort Systems") was founded to become a
leading national provider of comprehensive heating, ventilation and air
conditioning ("HVAC") installation services as well as maintenance, repair and
replacement of HVAC systems, focusing primarily on commercial and industrial
markets. Comfort Systems conducted no operations prior to the IPO and acquired
the Founding Companies concurrently with and as a condition to the closing of
the Offering.
The historical financial statements reflect the financial position and
results of operations of the Founding Companies and were derived from the
respective Founding Companies' financial statements where indicated. The periods
included in these financial statements for the individual Founding Companies are
as of and for the three months ended March 31, 1997 and for the year ended
December 31, 1996, with the exception of Lawrence for which the period is as of
and for the three months ended January 31, 1997 and for the fiscal year ended
October 31, 1996. The audited historical financial statements included elsewhere
herein have been included in accordance with Securities and Exchange Commission
("SEC") Staff Accounting Bulletin No. 80.
2. ACQUISITION OF FOUNDING COMPANIES:
Concurrently with and as a condition to the closing of the IPO, Comfort
Systems acquired all of the outstanding capital stock of the Founding Companies.
The acquisitions were accounted for using the purchase method of accounting with
Comfort Systems being treated as the accounting acquirer.
The following table sets forth the consideration paid (a) in cash and (b)
in shares of Common Stock to the common stockholders of each of the Founding
Companies. For purposes of computing the estimated purchase price for accounting
purposes, the value of the shares was determined using an estimated fair value
of $10.40 per share (or $101.1 million), which represents a discount of twenty
percent from the initial public offering price of $13.00 due to restrictions on
the sale and transferability of the shares issued. The total estimated purchase
price of $146.4 million for the acquisitions is based upon preliminary estimates
and is subject to certain purchase price adjustments at and following closing.
The table does not reflect the distributions totaling $16.8 million as of March
31, 1997 constituting substantially all of the Founding Companies undistributed
earnings previously taxed to their stockholders ("S Corporation
Distributions").
SHARES
CASH OF COMMON STOCK
--------- ---------------
(DOLLARS IN THOUSANDS)
Quality.............................. $ 10,082 2,207,158
Atlas................................ 6,864 1,432,000
Tri-City............................. 8,680 1,557,962
Lawrence............................. 4,500 1,197,796
Accurate............................. 3,145 564,537
Eastern.............................. 698 304,216
CSI/Bonneville....................... 1,813 493,672
Tech................................. 3,997 717,408
Seasonair............................ 1,516 272,084
Western.............................. 2,022 362,939
Freeway.............................. 1,039 319,698
Standard............................. 947 291,457
--------- ---------------
Total........................... $ 45,303 9,720,927
========= ===============
F-7
<PAGE>
COMFORT SYSTEMS USA, INC. AND FOUNDING COMPANIES
NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
3. UNAUDITED PRO FORMA COMBINED BALANCE SHEET ADJUSTMENTS:
(a) Records the S Corporation Distributions of $16.8 million as of
March 31, 1997, (including $3.9 million recorded as a payable to
affiliate at Quality) (See (b) below).
(b) Records the debt obtained to fund the S Corporation Distributions.
(c) Records the liability for the cash portion of the consideration
paid to the stockholders of the Founding Companies in connection
with the Mergers.
(d) Records the purchase of the Founding Companies by Comfort System
consisting of $45.3 million in cash and 9,720,927 shares of Common
Stock valued at $10.40 per share (or $101.1 million) for a total
purchase price of $146.4 million resulting in excess purchase
price of $139.8 million over the net assets acquired of $6.6
million. See Note 2.
(e) Records the cash proceeds of $79.3 million from the issuance of
shares of Comfort Systems Common Stock net of offering costs of
$10.5 million (includes the payment of deferred offering costs of
$4.9 of which $2.9 million was incurred through March 31, 1997).
Offering costs primarily consist of underwriting discounts and
commissions, accounting fees, legal fees and printing expenses.
(f) Records the cash portion of the consideration to be paid to the
stockholders of the Founding Companies in connection with the
Mergers.
(g) Records the cash proceeds of $11.9 million from the purchase of
915,000 shares of Comfort Systems Common Stock by the underwriters
pursuant to an overallotment option net of offering costs of $0.8
million. Offering costs primarily consist of underwriting
discounts and commissions.
The following table summarizes unaudited pro forma combined balance sheet
adjustments (in thousands):
<TABLE>
<CAPTION>
ADJUSTMENT
------------------------------------------ PRO FORMA
(A) (B) (C) (D) ADJUSTMENTS
--------- --------- --------- --------- -----------
ASSETS
<S> <C> <C> <C> <C> <C>
Cash and cash equivalents............... $ (16,785) $ 11,025 $ -- $ -- $ (5,760)
--------- --------- --------- --------- -----------
Total current assets................ (16,785) 11,025 -- -- (5,760)
Goodwill, net........................... -- -- -- 139,790 139,790
--------- --------- --------- --------- -----------
Total assets............................ $ (16,785) $ 11,025 $ -- $ 139,790 $ 134,030
========= ========= ========= ========= ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Payable to shareholder/affiliate........ $ (3,875) $ -- $ 45,303 $ -- $ 41,428
--------- --------- --------- --------- -----------
Total current liabilities........... (3,875) -- 45,303 -- 41,428
--------- --------- --------- --------- -----------
Long-term debt, net of current
maturities............................ -- 11,025 -- -- 11,025
--------- --------- --------- --------- -----------
Total liabilities................... (3,875) 11,025 45,303 -- 52,453
Stockholders' equity:
Common stock........................ -- -- -- (293) (293)
Additional paid-in capital.......... (12,910) -- (45,303) 147,042 88,829
Retained earnings................... -- -- -- (8,160) (8,160)
Treasury stock...................... -- -- -- 1,201 1,201
--------- --------- --------- --------- -----------
Total stockholders' equity..... (12,910) -- (45,303) 139,790 81,577
--------- --------- --------- --------- -----------
Total liabilities and stockholders'
equity................................ $ (16,785) $ 11,025 $ -- $ 139,790 $ 134,030
========= ========= ========= ========= ===========
POST MERGER
(E) (F) (G) ADJUSTMENTS
--------- --------- --------- -----------
ASSETS
Cash and cash equivalents............... $ 68,813 $ (45,303) $ 11,062 $ 34,572
--------- --------- --------- -----------
Other............................... (2,866) -- -- (2,866)
Total current assets................ 65,947 (45,303) 11,062 31,706
--------- --------- --------- -----------
Total assets............................ $ 65,947 $ (45,303) $ 11,062 $ 31,706
========= ========= ========= ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable and accrued expenses... $ (2,866) $ -- $ -- $ (2,866)
Payable to shareholder/affiliate........ -- (45,303) -- (45,303)
--------- --------- --------- -----------
Total current liabilities........... (2,866) (45,303) -- (48,169)
--------- --------- --------- -----------
Total liabilities................... (2,866) (45,303) -- (48,169)
Stockholders' equity:
Common stock........................ 61 -- 9 70
Additional paid-in capital.......... 68,752 -- 11,053 79,805
Retained earnings................... -- -- -- --
Treasury stock...................... -- -- -- --
--------- --------- --------- -----------
Total stockholders' equity..... 68,813 -- 11,062 79,875
--------- --------- --------- -----------
Total liabilities and stockholders'
equity................................ $ 65,947 $ (45,303) $ 11,062 $ 31,706
========= ========= ========= ===========
</TABLE>
F-8
<PAGE>
COMFORT SYSTEMS USA, INC. AND FOUNDING COMPANIES
NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
4. UNAUDITED PRO FORMA COMBINED STATEMENTS OF OPERATIONS ADJUSTMENTS:
YEAR ENDED DECEMBER 31, 1996
(a) Reflects the reduction in salaries, bonuses and benefits from an
aggregate total of $9.0 million to $2.4 million to the owners of
the Founding Companies to which they have agreed prospectively.
These reductions in salaries, bonuses and benefits are in
accordance with the terms of the employment agreements. Such
employment agreements are primarily for 5 years, contain
restrictions related to competition and provide severance for
termination of employment in certain circumstances.
(b) Reflects the amortization of goodwill to be recorded as a result
of these Mergers over a 40-year estimated life.
(c) Reflects the interest expense on borrowings of $12.5 million
necessary to fund the S Corporation Distributions.
(d) Reflects the incremental provision for federal and state income
taxes relating to the other statements of operations adjustments
and for income taxes on S Corporation income.
The following table summarizes unaudited pro forma combined statements of
operations adjustments (in thousands):
<TABLE>
<CAPTION>
ADJUSTMENT
------------------------------------------ PRO FORMA
(A) (B) (C) (D) ADJUSTMENTS
--------- --------- --------- --------- -----------
<S> <C> <C> <C> <C> <C>
SELLING, GENERAL AND ADMINISTRATIVE
EXPENSES........................... $ (6,568) $ -- $ -- $ -- $(6,568)
GOODWILL AMORTIZATION................ -- 3,495 -- -- 3,495
--------- --------- --------- --------- -----------
INCOME (LOSS) FROM OPERATIONS........ 6,568 (3,495) -- -- 3,073
OTHER INCOME (EXPENSE):
Interest expense................ -- -- (935) -- (935)
--------- --------- --------- --------- -----------
INCOME (LOSS) BEFORE INCOME TAXES.... 6,568 (3,495) (935) -- 2,138
PROVISION FOR INCOME TAXES........... -- -- -- 6,687 6,687
--------- --------- --------- --------- -----------
NET INCOME (LOSS).................... $ 6,568 $ (3,495) $ (935) $ (6,687) $(4,549)
========= ========= ========= ========= ===========
</TABLE>
F-9
<PAGE>
COMFORT SYSTEMS USA, INC. AND FOUNDING COMPANIES
NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
THREE MONTHS ENDED MARCH 31, 1997
(a) Reflects the reduction in salaries, bonuses and benefits from an
aggregate total of $1.0 million to $0.6 million to the owners of
the Founding Companies to which they have agreed prospectively.
These reductions in salaries, bonuses and benefits are in
accordance with the terms of the employment agreements. Such
employment agreements are primarily for 5 years, contain
restrictions related to competition and provide severance for
termination of employment in certain circumstances.
(b) Reflects the amortization of goodwill to be recorded as a result
of these Mergers over a 40-year estimated life.
(c) Reflects the interest expense on borrowings of $11.0 million
necessary to fund the S Corporation Distributions.
(d) Reflects the incremental provision for federal and state income
taxes relating to the other statements of operations adjustments
and for income taxes on S Corporation income.
(e) Reflects the reduction in compensation expense related to the
non-recurring, non-cash compensation charge of $11.6 million
recorded by Comfort in the first quarter of 1997 related to Common
Stock issued to management of and consultants to the Company
offset by the increase in compensation expense related to the
on-going salaries of the management of Comfort Systems of $0.2
million in the first quarter of 1997. The issuances of Common
Stock were made in contemplation of the Mergers and the IPO, and
no future issuances of this nature are anticipated.
The following table summarizes unaudited pro forma combined statements of
operations adjustments (in thousands):
<TABLE>
<CAPTION>
ADJUSTMENT
------------------------------------------------------ PRO FORMA
(A) (B) (C) (D) (E) ADJUSTMENTS
--------- --------- --------- --------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C>
SELLING, GENERAL AND ADMINISTRATIVE
EXPENSES........................... $ (428) $ -- $ -- $ -- (11,341) $ (11,769)
GOODWILL AMORTIZATION................ -- 874 -- -- -- 874
--------- --------- --------- --------- ---------- -----------
INCOME (LOSS) FROM OPERATIONS........ 428 (874) -- -- 11,341 10,895
OTHER INCOME (EXPENSE):
Interest expense................ -- -- (207) -- -- (207)
--------- --------- --------- --------- ---------- -----------
INCOME (LOSS) BEFORE INCOME TAXES.... 428 (874) (207) -- 11,341 10,688
PROVISION FOR INCOME
TAXES.............................. -- -- -- 492 -- 492
--------- --------- --------- --------- ---------- -----------
NET INCOME (LOSS).................... $ 428 $ (874) $ (207) $ (492) $ 11,341 $ 10,196
========= ========= ========= ========= ========== ===========
</TABLE>
F-10
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Comfort Systems USA, Inc.:
We have audited the accompanying balance sheet of Comfort Systems USA, Inc.
as of December 31, 1996. This financial statement is the responsibility of the
Company's management. Our responsibility is to express an opinion on this
financial statement 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 statement is 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 statement referred to above presents fairly,
in all material respects, the financial position of Comfort Systems USA, Inc. as
of December 31, 1996, in conformity with generally accepted accounting
principles.
ARTHUR ANDERSEN LLP
Houston, Texas
March 25, 1997
F-11
<PAGE>
COMFORT SYSTEMS USA, INC.
BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE INFORMATION)
DECEMBER 31, MARCH 31,
1996 1997
------------ -----------
(UNAUDITED)
ASSETS
CASH AND CASH EQUIVALENTS............... $ 1 $ 42
DEFERRED OFFERING COSTS................. 177 2,866
------------ -----------
Total assets.................. $ 178 $ 2,908
============ ===========
LIABILITIES AND STOCKHOLDER'S EQUITY
ACCRUED LIABILITIES AND AMOUNTS DUE TO
STOCKHOLDER........................... $ 177 $ 2,866
STOCKHOLDER'S EQUITY:
Preferred stock, $.01 par,
5,000,000 authorized, none issued
and outstanding.................. -- --
Common stock, $.01 par, 52,969,912
shares authorized, 121,139 and
4,239,847 shares issued and
outstanding, respectively........ 1 42
Additional paid in capital......... -- 11,556
Retained deficit................... -- (11,556)
------------ -----------
Total stockholder's equity.... 1 42
------------ -----------
Total liabilities and
stockholder's equity....... $ 178 $ 2,908
============ ===========
Reflects a 121.1387-for-one stock split effective on March 19, 1997.
The accompanying notes are an integral part of these financial statements.
F-12
<PAGE>
COMFORT SYSTEMS USA, INC.
STATEMENT OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 1997 (UNAUDITED)
(IN THOUSANDS)
REVENUES............................. $ --
SELLING, GENERAL AND ADMINISTRATIVE
EXPENSES............................. 11,556
----------
LOSS BEFORE INCOME TAXES............. (11,556)
INCOME TAX BENEFIT................... --
----------
NET LOSS............................. $ (11,556)
==========
The accompanying notes are an integral part of these financial statements.
F-13
<PAGE>
COMFORT SYSTEMS USA, INC.
STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE PERIOD FROM INCEPTION (DECEMBER 12, 1996)
THROUGH MARCH 31, 1997
(IN THOUSANDS, EXCEPT SHARE INFORMATION)
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL TOTAL
-------------------- PAID-IN RETAINED STOCKHOLDERS'
SHARES AMOUNT CAPITAL DEFICIT EQUITY
----------- ------ ---------- -------- --------------
<S> <C> <C> <C> <C> <C>
Initial Capitalization............... 121,139 $ 1 $ -- $ -- $ 1
----------- ------ ---------- -------- --------------
BALANCE, December 31, 1996........... 121,139 1 -- -- 1
Issuance of Management Shares
(unaudited)..................... 4,118,708 41 11,556 -- 11,597
Net loss (unaudited)............ -- -- -- (11,556) (11,556)
----------- ------ ---------- -------- --------------
BALANCE, March 31, 1997
(unaudited)........................ 4,239,847 $ 42 $ 11,556 $(11,556) $ 42
=========== ====== ========== ======== ==============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-14
<PAGE>
COMFORT SYSTEMS USA, INC.
STATEMENT OF CASH FLOWS
THREE MONTHS ENDED MARCH 31, 1997 (UNAUDITED)
(IN THOUSANDS)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Loss............................. $ (11,556)
Adjustments to reconcile net loss
to net cash provided by (used
in) operating activities --
Compensation expense related to
issuance of management shares... 11,556
Changes in assets and
liabilities --
Increase in deferred offering
costs........................ (2,689)
Increase in accrued
liabilities and amounts due
to stockholder............... 2,689
----------
Net cash provided by
operating activities...... --
----------
CASH FLOWS FROM FINANCING ACTIVITIES
Issuance of stock.................. 41
----------
Net cash provided by
financing activities...... 41
----------
NET INCREASE IN CASH AND CASH
EQUIVALENTS........................ 41
CASH AND CASH EQUIVALENTS, beginning
of period.......................... 1
----------
CASH AND CASH EQUIVALENTS, end of
period............................. $ 42
==========
The accompanying notes are an integral part of these financial statements.
F-15
<PAGE>
COMFORT SYSTEMS USA, INC.
NOTES TO FINANCIAL STATEMENTS
1. BUSINESS AND ORGANIZATION:
Comfort Systems USA, Inc., a Delaware corporation, ("Comfort Systems" or
the "Company") was founded in December 1996 to become a national provider of
comprehensive HVAC installation services and maintenance, repair and replacement
of HVAC systems, focusing primarily on the commercial and industrial markets.
Comfort intends to acquire 12 U.S. businesses (the "Mergers"), complete an
initial public offering (the "Offering") of its common stock and, subsequent
to the Offering, continue to acquire through merger or purchase, similar
companies to expand its national operations.
Comfort Systems has not conducted any operations, and all activities to
date have related to the Offering and the Mergers. The Company's cash balances
were generated from the initial capitalization of the Company (see Note 3). All
other expenditures to date have been funded by the primary stockholder, Notre
Capital Ventures II, L.L.C. ("Notre"), on behalf of the Company. Since there
were no revenues, expenses or cash flows from Inception (December 12, 1996)
through December 31, 1996, statements of operations and cash flows have been
omitted for this period. Notre has committed to fund the organization expenses
and offering costs. As of December 31, 1996 and March 31, 1997, costs of
approximately $177,000 and $2,866,000 (unaudited), respectively have been
incurred by Notre in connection with the Offering. Comfort Systems has treated
these costs as deferred offering costs. There is no assurance that the pending
Mergers discussed below will be completed or that Comfort Systems will be able
to generate future operating revenues.
2. INTERIM FINANCIAL INFORMATION:
The interim financial statements as of March 31, 1997, and for the three
months then ended are unaudited, and certain information and footnote
disclosures, normally included in financial statements prepared in accordance
with generally accepted accounting principles, have been omitted. In the opinion
of management, all adjustments, consisting only of normal recurring adjustments,
necessary to fairly present the financial position, results of operations and
cash flows with respect to the interim financial statements, have been included.
The results of operations for the interim period is not necessarily indicative
of the results for the entire fiscal year.
3. STOCKHOLDER'S EQUITY:
COMMON STOCK AND PREFERRED STOCK
Comfort Systems effected a 121.1387-for-one stock split on March 19, 1997
for each share of common stock of the Company ("Common Stock") then
outstanding. In addition, the Company increased the number of authorized shares
of Common Stock to 52,969,912 and authorized 5,000,000 shares of $.01 par value
preferred stock. The effects of the Common Stock split and the increase in the
shares of authorized Common Stock have been retroactively reflected on the
balance sheet and in the accompanying notes.
In connection with the organization and initial capitalization of Comfort
Systems, the Company issued 121,139 shares of common stock at $.01 per share to
Notre. In January 1997, the Company issued 2,848,773 additional shares to Notre
for $.01 per share.
In January and February 1997, the Company issued a total of 1,269,935
shares of Common Stock to management and consultants to the Company at a price
of $.01 per share. As a result, the Company recorded a non-recurring, non-cash
compensation charge of $10.7 million (unaudited) in the first quarter of 1997,
representing the difference between the amount paid for the shares and an
estimated fair value of the shares on the date of sale.
RESTRICTED COMMON STOCK
In March 1997, the primary stockholder exchanged its 2,742,912 shares of
Common Stock for an equal number of shares of restricted voting common stock
("Restricted Common Stock"). The holder of
F-16
<PAGE>
COMFORT SYSTEMS USA, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Restricted Common Stock is entitled to elect one member of the Company's Board
of Directors and to 0.55 of one vote for each share on all other matters on
which they are entitled to vote. Holders of Restricted Common Stock are not
entitled to vote on the election of any other directors.
Each share of Restricted Common Stock will automatically convert to Common
Stock on a share-for-share basis (i) in the event of a disposition of such share
of Restricted Common Stock by the holder thereof (other than a distribution
which is a distribution by a holder to its partners or beneficial owners, or a
transfer to a related party of such holders (as defined in Sections 267, 707,
318 and/or 4946 of the Internal Revenue of 1986, as amended)), (ii) in the event
any person acquires beneficial ownership of 15% or more of the total number of
outstanding shares of Common Stock of the Company, or (iii) in the event any
person offers to acquire 15% or more of the total number of outstanding shares
of Common Stock of the Company. After July 1, 1998, the Board of Directors may
elect to convert any remaining shares of Restricted Common Stock into shares of
Common Stock in the event 80% or more of the originally outstanding shares of
Restricted Common Stock have been previously converted into shares of Common
Stock.
LONG-TERM INCENTIVE PLAN
In March 1997, the Company's stockholders approved the Company's 1997
Long-Term Incentive Plan (the "Plan"), which provides for the granting or
awarding of incentive or non-qualified stock options, stock appreciation rights,
restricted or deferred stock, dividend equivalents and other incentive awards to
directors, officers, key employees and consultants to the Company. The number of
shares authorized and reserved for issuance under the Plan is the greater of
2,500,000 shares or 13% of the aggregate number of shares of Common Stock
outstanding. The terms of the option awards will be established by the
Compensation Committee of the Company's Board of Directors. The Company intends
to file a registration statement on Form S-8 under the Securities Act
registering the issuance of shares upon exercise of options granted under this
Plan. The Company expects to grant non-qualified stock options to purchase a
total of 675,000 shares of Common Stock to key employees of the Company at the
initial public offering price upon consummation of the Offering. In addition,
the Company expects to grant options to purchase a total of 1,271,953 shares of
Common Stock to certain employees of the Founding Companies at the initial
public offering price per share. These options will vest at the rate of 20% per
year, commencing on the first anniversary of the IPO and will expire seven years
from the date of grant or three months following termination of employment.
NON-EMPLOYEE DIRECTORS STOCK PLAN
In March 1997, the Company's stockholders approved the 1997 Non-Employee
Directors' Stock Plan (the "Directors' Plan"), which provides for the granting
or awarding of stock options and stock appreciation rights to nonemployees. The
number of shares authorized and reserved for issuance under the Stock Plan is
250,000 shares. The Directors' Plan provides for the automatic grant of options
to purchase 10,000 shares to each non-employee director serving at the
commencement of the Offering.
Each non-employee director will be granted options to purchase an
additional 10,000 shares at the time of the initial election. In addition, each
director will be automatically granted options to purchase 5,000 shares at each
annual meeting of the stockholders occurring more than two months after the date
of the director's initial election. All options will be exercised at the fair
market value at the date of grant and are immediately vested upon grant.
Options will be granted to each of two future and one current member of the
board of directors to purchase 10,000 shares of Common Stock at the initial
Offering price per share effective upon the consummation of this Offering. These
options will expire the earlier of 10 years from the date of grant or one year
after termination of service as a director.
F-17
<PAGE>
COMFORT SYSTEMS USA, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
The Directors' Plan allows non-employee directors to receive shares
("deferred shares") at future settlement dates in lieu of cash. The number of
deferred shares will have an aggregate fair market value equal to the fees
payable to the directors.
4. STOCK BASED COMPENSATION:
Statement of Financial Accounting Standards ("SFAS") No. 123,
"Accounting for Stock-Based Compensation," allows entities to choose between a
new fair value based method of accounting for employee stock options or similar
equity instruments and the current intrinsic, value-based method of accounting
prescribed by Accounting Principles Board Opinion No. 25 ("APB No. 25").
Entities electing to remain with the accounting in APB Opinion No. 25 must make
pro forma disclosures of net income and earnings per share as if the fair value
method of accounting had been applied. The Company will provide pro forma
disclosure of net income and earnings per share, as applicable, in the notes to
future consolidated financial statements.
5. EVENTS SUBSEQUENT TO THE DATE OF AUDITORS' REPORT OF INDEPENDENT PUBLIC
ACCOUNTANTS (UNAUDITED):
Wholly-owned subsidiaries of Comfort Systems have acquired by merger or
share exchange 12 companies ("Founding Companies"). The companies are Accurate
Air Systems, Inc., Atlas Comfort Services USA, Inc. and Subsidiary, Contract
Service, Inc., Eastern Heating and Cooling, Inc., Freeway Heating and Air
Conditioning, Inc., Quality Air Heating & Cooling, Inc., Seasonair, Inc., S.M.
Lawrence Inc. and Related Company, Standard Heating and Air Conditioning
Company, Tech Heating and Air Conditioning, Inc. and Related Company, Tri-City
Mechanical, Inc. and Western Building Services, Inc. The aggregate consideration
paid by Comfort Systems to acquire the Founding Companies was approximately
$45.3 million in cash and 9,720,927 shares of Common Stock.
On June 27, 1997, Comfort Systems completed the Offering, which involved
the sale by Comfort Systems of 6,100,000 shares of Common Stock at a price to
the public of $13.00 per share. The net proceeds to Comfort Systems from the
Offering (after deducting underwriting discounts and commissions and offering
expenses) were approximately $69.7 million. Of this amount, $45.3 million was
used to pay the cash portion of the purchase prices relating to the acquisitions
for the Founding Companies. On July 9, 1997, Comfort Systems sold an additional
915,000 shares of Common Stock at $13.00 per share (which represents net
proceeds to the Company of $11.1 million after underwriting discounts and
commissions) pursuant to an overallotment option granted by Comfort Systems to
the underwriters in connection with the Offering. See "Risk Factors" included
elsewhere herein.
The Company has obtained a revolving line of credit of $75.0 million. The
facility is intended to be used for acquisitions, capital expenditures,
refinancing of debt not paid out of the proceeds of the Offering and for general
corporate purposes. The credit facility requires the Company to comply with
various loan covenants including (i) maintenance of certain financial ratios,
(ii) restrictions on additional indebtedness, and (iii) restrictions on liens,
guarantees, advances and dividends. The line of credit is subject to customary
drawing conditions. As of July 28, 1997, borrowings under the line of credit
were $17.3 million which was used to repay existing indebtedness of the Founding
Companies.
F-18
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Quality Air Heating & Cooling, Inc.:
We have audited the accompanying balance sheets of Quality Air Heating &
Cooling, Inc., as of March 31, 1995 and 1996, and December 31, 1996, and the
related statements of operations, shareholders' equity and cash flows for the
years ended March 31, 1995 and 1996, the nine months ended December 31, 1996,
and the year ended December 31, 1996. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free 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 financial statements referred to above present fairly,
in all material respects, the financial position of Quality Air Heating &
Cooling, Inc., as of March 31, 1995 and 1996, and December 31, 1996, and the
results of their operations and their cash flows for the years ended March 31,
1995 and 1996, the nine months ended December 31, 1996 and the year ended
December 31, 1996, in conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Houston, Texas
March 7, 1997
F-19
<PAGE>
QUALITY AIR HEATING & COOLING, INC.
BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE INFORMATION)
<TABLE>
<CAPTION>
MARCH 31,
-------------------- DECEMBER 31, MARCH 31,
1995 1996 1996 1997
--------- --------- ------------ ------------
(UNAUDITED)
<S> <C> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents....... $ 1,669 $ 4,191 $ 2,651 $ 3,778
Accounts receivable --
Trade, net of allowance of
$87, $80, $80 and $80,
respectively............ 4,510 4,188 5,260 5,896
Retainage.................. 457 464 453 536
Other receivables.......... 14 12 5 6
Inventories..................... 445 480 541 601
Costs and estimated earnings in
excess of billings on
uncompleted contracts......... 1,192 964 1,312 595
Prepaid expenses and other
current assets................ 92 63 17 50
Federal income tax deposit...... 506 654 691 692
--------- --------- ------------ ------------
Total current
assets............. 8,885 11,016 10,930 12,154
PROPERTY AND EQUIPMENT, net.......... 771 708 758 774
--------- --------- ------------ ------------
Total assets.......... $ 9,656 $ 11,724 $ 11,688 $ 12,928
========= ========= ============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Current maturities of long-term
debt.......................... $ 470 $ 613 $ 675 $ 695
Accounts payable and accrued
expenses...................... 2,786 2,734 2,178 2,654
Dividends payable to
shareholder................... 1,538 3,314 1,519 3,875
Billings in excess of costs and
estimated earnings on
uncompleted contracts......... 897 604 1,254 988
Unearned revenue................ 335 362 372 391
--------- --------- ------------ ------------
Total current
liabilities........ 6,026 7,627 5,998 8,603
LONG-TERM DEBT, net of current
maturities......................... 2,444 1,392 646 362
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY:
Common stock, no par value;
250,000 shares authorized and
issued, 183,993 shares
outstanding................... 22 22 22 22
Additional paid-in capital...... 6 6 6 6
Retained earnings............... 2,056 3,575 5,914 4,833
Treasury stock, 66,007 shares,
at cost....................... (898) (898) (898) (898)
--------- --------- ------------ ------------
Total shareholders'
equity............. 1,186 2,705 5,044 3,963
--------- --------- ------------ ------------
Total liabilities and
shareholders'
equity............. $ 9,656 $ 11,724 $ 11,688 $ 12,928
========= ========= ============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-20
<PAGE>
QUALITY AIR HEATING & COOLING, INC.
STATEMENTS OF OPERATIONS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEARS ENDED NINE MONTHS YEAR THREE MONTHS ENDED
MARCH 31, ENDED ENDED MARCH 31,
-------------------- DECEMBER 31, DECEMBER 31, --------------------
1995 1996 1996 1996 1996 1997
--------- --------- ------------ ------------ --------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
REVENUES............................. $ 24,434 $ 32,594 $ 23,282 $ 29,597 $ 6,315 $ 8,766
COST OF SERVICES..................... 15,634 20,850 14,176 18,467 4,291 5,372
--------- --------- ------------ ------------ --------- ---------
Gross profit.................... 8,800 11,744 9,106 11,130 2,024 3,394
SELLING, GENERAL AND ADMINISTRATIVE
EXPENSES........................... 6,646 6,791 5,032 6,640 1,608 2,094
--------- --------- ------------ ------------ --------- ---------
Income from operations.......... 2,154 4,953 4,074 4,490 416 1,300
OTHER INCOME (EXPENSE):
Interest expense................ (36) (218) (101) (154) (53) (29)
Other........................... 53 98 60 97 37 4
--------- --------- ------------ ------------ --------- ---------
NET INCOME........................... $ 2,171 $ 4,833 $ 4,033 $ 4,433 $ 400 $ 1,275
========= ========= ============ ============ ========= =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-21
<PAGE>
QUALITY AIR HEATING & COOLING, INC.
STATEMENTS OF SHAREHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE INFORMATION)
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL TOTAL
----------------- PAID-IN RETAINED TREASURY SHAREHOLDERS'
SHARES AMOUNT CAPITAL EARNINGS STOCK EQUITY
------- ------ ---------- --------- -------- --------------
<S> <C> <C> <C> <C> <C> <C>
BALANCE, March 31, 1994................. 250,000 $ 22 $ 6 $ 3,636 $-- $ 3,664
Purchase of treasury stock......... -- -- -- -- (898) (898)
Distributions to shareholders...... -- -- -- (3,751) -- (3,751)
Net income......................... -- -- -- 2,171 -- 2,171
------- ------ ---------- --------- -------- --------------
BALANCE, March 31, 1995................. 250,000 22 6 2,056 (898) 1,186
Distributions to shareholders...... -- -- -- (3,314) -- (3,314)
Net income......................... -- -- -- 4,833 -- 4,833
------- ------ ---------- --------- -------- --------------
BALANCE, March 31, 1996................. 250,000 22 6 3,575 (898) 2,705
Distributions to shareholders...... -- -- -- (1,694) -- (1,694)
Net income......................... -- -- -- 4,033 -- 4,033
------- ------ ---------- --------- -------- --------------
BALANCE, December 31, 1996.............. 250,000 22 6 5,914 (898) 5,044
Distribution to shareholders
(unaudited)...................... -- -- -- (2,356) -- (2,356)
Net income (unaudited)............. -- -- -- 1,275 -- 1,275
------- ------ ---------- --------- -------- --------------
BALANCE, March 31, 1997 (unaudited)..... 250,000 $ 22 $ 6 $ 4,833 $ (898) $ 3,963
======= ====== ========== ========= ======== ==============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-22
<PAGE>
QUALITY AIR HEATING & COOLING, INC.
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS
YEARS ENDED NINE MONTHS YEAR ENDED
MARCH 31 ENDED ENDED MARCH 31,
-------------------- DECEMBER 31, DECEMBER 31, --------------------
1995 1996 1996 1996 1996 1997
--------- --------- ------------ ------------ --------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income......................... $ 2,171 $ 4,833 $ 4,033 $ 4,433 $ 400 $ 1,275
Adjustments to reconcile net income
to net cash provided by (used
in) operating activities --.....
Depreciation and amortization... 359 371 242 370 121 127
Loss (gain) on sale of property
and equipment................. 7 -- 25 25 3 (1)
Changes in operating assets and
liabilities --................
(Increase) decrease in --.....
Accounts receivable........ (1,334) 317 (1,054) 335 1,389 (720)
Inventories................ (6) (35) (61) (76) (15) (60)
Costs and estimated
earnings in excess of
billings on uncompleted
contracts............... (804) 228 (348) (253) 95 717
Prepaid expenses and other
current assets.......... (15) 29 46 (3) (49) (33)
Federal income tax
deposit................. 50 (148) (37) (185) (148) (1)
Increase (decrease) in --.....
Accounts payable and
accrued expenses........ 470 (52) (556) (481) 74 476
Billings in excess of costs
and estimated earnings
on uncompleted
contracts............... 477 (293) 650 269 (381) (266)
Unearned revenue........... (15) 27 10 26 17 19
--------- --------- ------------ ------------ --------- ---------
Net cash provided by
operating
activities......... 1,360 5,277 2,950 4,460 1,506 1,533
--------- --------- ------------ ------------ --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of property and
equipment....................... 21 -- 14 14 4 3
Additions of property and
equipment....................... (467) (308) (331) (455) (123) (145)
--------- --------- ------------ ------------ --------- ---------
Net cash used in
investing
activities......... (446) (308) (317) (441) (119) (142)
--------- --------- ------------ ------------ --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings of long-term debt....... 3,000 -- -- -- -- --
Payments of long-term debt......... (226) (909) (684) (903) (219) (264)
Distributions to shareholders...... (3,088) (1,538) (3,489) (3,488) -- --
Purchase of treasury stock......... (898) -- -- -- -- --
--------- --------- ------------ ------------ --------- ---------
Net cash used in
financing
activities......... (1,212) (2,447) (4,173) (4,391) (219) (264)
--------- --------- ------------ ------------ --------- ---------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS................... (298) 2,522 (1,540) (372) 1,168 1,127
CASH AND CASH EQUIVALENTS, beginning
of period.......................... 1,967 1,669 4,191 3,023 3,023 2,651
--------- --------- ------------ ------------ --------- ---------
CASH AND CASH EQUIVALENTS, end of
period............................. $ 1,669 $ 4,191 $ 2,651 $ 2,651 $ 4,191 $ 3,778
========= ========= ============ ============ ========= =========
SUPPLEMENTAL DISCLOSURE OF
CASH FLOW INFORMATION:
Cash paid for --
Interest........................ $ 44 $ 201 $ 107 $ 152 $ 45 $ 25
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-23
<PAGE>
QUALITY AIR HEATING & COOLING, INC.
NOTES TO FINANCIAL STATEMENTS
1. BUSINESS AND ORGANIZATION:
Quality Air Heating & Cooling, Inc., a Michigan corporation, (the
"Company") focuses on providing "design and build" installation services and
maintenance, repair and replacement of HVAC systems primarily for mid-sized to
large commercial facilities. Quality primarily operates throughout western
Michigan.
The Company and its shareholders intend to enter into a definitive
agreement with Comfort Systems USA, Inc. ("Comfort Systems"), pursuant to
which all outstanding shares of the Company's common stock will be exchanged for
cash and shares of Comfort Systems common stock concurrently with the
consummation of the initial public offering (the "Offering") of the common
stock of Comfort Systems.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
INTERIM FINANCIAL INFORMATION
The interim financial statements as of March 31, 1997, and for the three
months ended March 31, 1996 and 1997, are unaudited, and certain information and
footnote disclosures, normally included in financial statements prepared in
accordance with generally accepted accounting principles, have been omitted. In
the opinion of management, all adjustments, consisting only of normal recurring
adjustments, necessary to fairly present the financial position, results of
operations and cash flows with respect to the interim financial statements, have
been included. The results of operations for the interim periods are not
necessarily indicative of the results for the entire fiscal year.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments purchased with an
original maturity of three months or less to be cash equivalents.
INVENTORIES
Inventories consist of parts and supplies held for use in the ordinary
course of business and are stated at the lower of cost or market using the
first-in, first-out (FIFO) method.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost, and depreciation is computed
using the straight-line method over the estimated useful lives of the assets.
Leasehold improvements are capitalized and amortized over the lesser of the life
of the lease or the estimated useful life of the asset.
Expenditures for repairs and maintenance are charged to expense when
incurred. Expenditures for major renewals and betterments, which extend the
useful lives of existing equipment, are capitalized and depreciated. Upon
retirement or disposition of property and equipment, the cost and related
accumulated depreciation are removed from the accounts and any resulting gain or
loss is recognized in the statement of operations.
REVENUE RECOGNITION
The Company recognizes revenue when services are performed except when work
is being performed under a construction contract. Revenues from construction
contracts are recognized on the percentage-of-completion method measured by the
percentage of costs incurred to total estimated costs for each contract.
Provisions for the total estimated losses on uncompleted contracts are made in
the period in which such losses are determined. Changes in job performance, job
conditions, estimated profitability and final contract settlements may result in
revisions to costs and income and their effects are recognized in the period in
which the revisions are determined.
F-24
<PAGE>
QUALITY AIR HEATING & COOLING, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
The balances billed but not paid by customers pursuant to retainage
provisions in construction contracts will be due upon completion of the
contracts and acceptance by the customer. Based on the Company's experience with
similar contracts in recent years, the retention balance will be billed and
collected in the upcoming fiscal year.
WARRANTY COSTS
The Company warrants labor for the first year after installation on new air
conditioning and heating systems. The Company generally warrants labor for 30
days after servicing of existing air conditioning and heating systems. A reserve
for warranty costs is recorded upon completion of installation or service.
INCOME TAXES
The Company has elected S Corporation status as defined by the Internal
Revenue Code, whereby the Company is not subject to taxation for federal
purposes. Under S Corporation status, the shareholders report their share of the
Company's taxable earnings or losses in their personal tax returns. The Company
will terminate its S Corporation status concurrently with the effective date of
this Offering. Included in current assets are deposits to prepay certain of the
shareholders' federal income taxes.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires the use of estimates and assumptions by
management in determining the reported amounts of assets and liabilities and
disclosures of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
NEW ACCOUNTING PRONOUNCEMENT
Effective January 1, 1996, the Company adopted Statement of Financial
Accounting Standards (SFAS) No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of." Accordingly, in
the event that facts and circumstances indicate that property and equipment or
other assets may be impaired, an evaluation of recoverability would be
performed. If an evaluation is required, the estimated future undiscounted cash
flows associated with the asset are compared to the asset's carrying amount to
determine if a write-down to market value is necessary. Adoption of this
standard did not have a material effect on the financial position or results of
operations of the Company.
3. PROPERTY AND EQUIPMENT:
Property and equipment consist of the following (dollars in thousands):
<TABLE>
<CAPTION>
ESTIMATED MARCH 31,
USEFUL LIVES -------------------- DECEMBER 31,
IN YEARS 1995 1996 1996
------------ --------- --------- ------------
<S> <C> <C> <C> <C>
Transportation equipment............. 5 $ 1,449 $ 1,554 $1,725
Machinery and equipment.............. 7 480 453 465
Computer and telephone equipment..... 5-7 80 87 90
Leasehold improvements............... 5 838 834 859
Furniture and fixtures............... 7 435 414 459
--------- --------- ------------
Less -- Accumulated depreciation and
amortization....................... (2,511) (2,634) (2,840)
--------- --------- ------------
Property and equipment, net..... $ 771 $ 708 $ 758
========= ========= ============
</TABLE>
F-25
<PAGE>
QUALITY AIR HEATING & COOLING, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
4. DETAIL OF CERTAIN BALANCE SHEET ACCOUNTS (IN THOUSANDS):
Activity in the Company's allowance for doubtful accounts consists of the
following:
MARCH 31,
-------------------- DECEMBER 31,
1995 1996 1996
--------- --------- ------------
Balance at beginning of year......... $ 70 $ 87 $ 80
Additions to costs and expenses...... 142 35 2
Deductions for uncollectible
receivables written off and
recoveries......................... (125) (42) (2)
--------- --------- ------------
$ 87 $ 80 $ 80
========= ========= ============
Accounts payable and accrued expenses consist of the following:
MARCH 31,
-------------------- DECEMBER 31,
1995 1996 1996
--------- --------- ------------
Accounts payable, trade.............. $ 1,353 $ 1,145 $ 921
Accrued compensation and benefits.... 540 693 426
Other accrued expenses............... 893 896 831
--------- --------- ------------
$ 2,786 $ 2,734 $2,178
========= ========= ============
Installation contracts in progress are as follows:
MARCH 31,
-------------------- DECEMBER 31,
1995 1996 1996
--------- --------- ------------
Costs incurred on contracts in
progress........................... $ 5,240 $ 7,697 $ 7,231
Estimated earnings, net of losses.... 1,556 2,588 2,433
--------- --------- ------------
6,796 10,285 9,664
Less -- Billings to date............. 6,501 9,925 9,606
--------- --------- ------------
$ 295 $ 360 $ 58
========= ========= ============
Costs and estimated earnings in
excess of billings on uncompleted
contracts.......................... $ 1,192 $ 964 $ 1,312
Billings in excess of costs and
estimated earnings on uncompleted
contracts.......................... (897) (604) (1,254)
--------- --------- ------------
$ 295 $ 360 $ 58
========= ========= ============
5. LONG-TERM DEBT:
Long-term debt consists of a note payable to a bank. The debt is secured by
certain equipment, accounts receivable, inventory, a $1,000,000 life insurance
policy on the president and the personal guaranty of the president limited to 50
percent of the outstanding balance of the loan. The note is payable in monthly
installments of $63,000 including interest at the prime lending rate less .25
percent (8 percent at December 31, 1996). The Company has restrictive and
various financial covenants with which the Company was in compliance at December
31, 1996.
F-26
<PAGE>
QUALITY AIR HEATING & COOLING, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
The maturities of long-term debt as of December 31, 1996, are as follows
(in thousands):
Year ending December 31,
1997............................ $ 675
1998............................ 646
---------
$ 1,321
=========
The Company has a $2,000,000 line of credit with a bank. The line of credit
expires August 1, 1997, and bears interest at one-half percent below the prime
lending rate. The line of credit is secured by accounts receivable, inventory, a
$1,000,000 life insurance policy, and machinery and equipment. There was no
balance outstanding under this line of credit at March 31, 1995 and 1996, and
December 31, 1996.
6. LEASES:
The Company leases a facility from a company which is owned by one of the
Company's shareholders. The lease expires on April 30, 2005. Quality has an
option to renew the lease for one additional three-year term on the same terms.
The rent paid under this related-party lease was approximately $221,000 for each
of the years ended March 31, 1995 and 1996, and December 31, 1996. The Company
also leases a facility from a third party, which expires on June 30, 1998. The
rent paid under this lease was approximately $20,000 for each of the years ended
March 31, 1995 and 1996, and December 31, 1996. The Company has guaranteed the
payment of two series of public bonds issued in 1985 and 1990, respectively, by
the Michigan Strategic Fund on behalf of two real property development entities
owned by a shareholder, the proceeds of which were used to fund the construction
of the Company's leased warehouse facility and a second adjacent warehouse. As
of March 1997, approximately $1.6 million of the bond debt remained outstanding.
Future minimum lease payments under these non-cancellable operating leases
are as follows (in thousands):
Year ending December 31,
1997............................ $ 241
1998............................ 231
1999............................ 221
2000............................ 221
2001............................ 221
Thereafter...................... 718
---------
$ 1,853
=========
7. RELATED-PARTY TRANSACTIONS:
The Company paid management fees to an entity owned by its majority
shareholder through December 31, 1995. Total management fees paid amounted to
$260,000 and $190,000 for the years ended March 31, 1995 and 1996, respectively.
8. EMPLOYEE BENEFIT PLAN:
The Company has a defined contribution profit sharing plan. The plan
provides for the Company to match one-half of the first 4 percent contributed by
each employee. Total contributions by the Company under the plan were
approximately $104,000, $110,000 and $125,000 for the years ending March 31,
1995 and 1996, and December 31, 1996, respectively. The Company may also make
discretionary contributions. The Company made discretionary contributions of
$200,000 and $300,000 for the years ended March 31,
F-27
<PAGE>
QUALITY AIR HEATING & COOLING, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
1995 and 1996, and had accrued approximately $169,000 at December 31, 1996, for
contributions to be funded in 1997.
9. FINANCIAL INSTRUMENTS
The Company's financial instruments consist of cash and cash equivalents, a
line of credit, notes payable and debt. The Company believes that the carrying
value of these instruments on the accompanying balance sheet approximates their
fair value.
10. COMMITMENTS AND CONTINGENCIES:
LITIGATION
The Company is involved in legal actions arising in the ordinary course of
business. Management does not believe the outcome of such legal actions will
have a material adverse effect on the Company's financial position or results of
operations.
INSURANCE
The Company carries a broad range of insurance coverage, including business
auto liability, general liability and an umbrella policy. The Company has not
incurred significant claims or losses on any of these insurance policies.
The Company is self-insured for medical claims up to $30,000 per year per
covered individual. Additionally, the Company is part of the state's workers'
compensation plan and is responsible for claims up to $275,000 per accident with
a maximum aggregate exposure for twenty-four months of $648,000. Claims in
excess of these amounts are covered by a stop-loss policy. Under the state's
policy, the Company has a $300,000 letter of credit which expires December 31,
1997. The Company has recorded reserves for its portion of self-insured claims
based on estimated claims incurred through March 31, 1995 and 1996 and December
31, 1996.
ROYALTY AGREEMENT
The Company is obligated to pay royalties ranging from 1 percent to 4.5
percent based on the level of service revenues through December 1, 2001, for
management systems support. Royalties paid under this agreement were
approximately $157,000, $159,000 and $165,000 for the years ended March 31, 1995
and 1996 and December 31, 1996.
11. SHAREHOLDERS' EQUITY:
On February 15, 1995, the Company acquired 66,007 shares of common stock
from its majority shareholder for approximately $898,000.
12. EVENT SUBSEQUENT TO DATE OF AUDITORS' REPORT OF INDEPENDENT PUBLIC
ACCOUNTANTS (UNAUDITED):
In March 1997, the Company and its shareholders entered into a definitive
agreement with a wholly-owned subsidiary of Comfort Systems, providing for the
merger of the Company with the subsidiary of Comfort Systems.
As of March 31, 1997, the Company declared and accrued distributions of
$2,356,000 to its shareholders. In connection with the merger, the Company will
make additional cash distributions of approximately $4,833,000 prior to the
merger which represents the Company's estimated S Corporation accumulated
adjustment account. Had these transactions been recorded at March 31, 1997, the
effect on the accompanying unaudited balance sheet would be a decrease in assets
of $3,478,000, an increase in liabilities of $1,355,000 and a decrease in
shareholders' equity of $4,833,000.
F-28
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Atlas Comfort Services USA, Inc.:
We have audited the accompanying consolidated balance sheets of Atlas
Comfort Services USA, Inc. (a Texas corporation) and its subsidiary (the
Company) as of June 30, 1995 and 1996 and December 31, 1996, and the related
consolidated statements of operations, shareholders' equity and cash flows for
the years ended June 30, 1994, 1995 and 1996 and the six months ended December
31, 1996. These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated 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 consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated 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
Atlas Comfort Services USA, Inc., and its subsidiary as of June 30, 1995 and
1996, and December 31, 1996, and the consolidated results of their operations
and their cash flows for the three years ended June 30, 1994, 1995 and 1996 and
for the six months ended December 31, 1996, in conformity with generally
accepted accounting principles.
ARTHUR ANDERSEN LLP
Houston, Texas
March 7, 1997
F-29
<PAGE>
ATLAS COMFORT SERVICES USA, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE INFORMATION)
<TABLE>
<CAPTION>
JUNE 30,
-------------------- DECEMBER 31, MARCH 31,
1995 1996 1996 1997
--------- --------- ------------ ---------
(UNAUDITED)
<S> <C> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents....... $ 427 $ 391 $ 101 $ 356
Accounts receivable --
Trade, net of allowance of
$60, $60, $100 and $100,
respectively............ 2,920 3,953 2,604 3,226
Retainage.................. 904 1,327 1,208 1,280
Officers, employees and
other receivables....... 114 172 159 158
Inventories..................... 1,685 2,000 1,770 1,676
Costs and estimated earnings in
excess of billings on
uncompleted contracts......... 1,050 681 676 314
Current deferred income taxes... 155 164 145 145
Prepaid expenses and other
current assets................ 40 27 82 56
--------- --------- ------------ ---------
Total current
assets............. 7,295 8,715 6,745 7,211
PROPERTY AND EQUIPMENT, net.......... 231 484 499 598
OTHER ASSETS:
Goodwill, net................... 24 23 22 22
Deferred income tax............. 167 105 88 88
--------- --------- ------------ ---------
Total assets.......... $ 7,717 $ 9,327 $7,354 $ 7,919
========= ========= ============ =========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Line of credit.................. $ 500 $ 600 $-- $ 200
Current maturities of notes
payable to affiliates......... 200 102 107 107
Current obligations under
capital leases................ 32 92 101 140
Current maturities of long-term
debt.......................... 9 348 356 353
Accounts payable and accrued
expenses...................... 3,522 3,295 2,246 2,101
Income tax payable.............. 363 390 752 936
Billings in excess of costs and
estimated earnings on
uncompleted contracts......... 1,115 1,947 523 570
--------- --------- ------------ ---------
Total current
liabilities........ 5,741 6,774 4,085 4,407
NOTES PAYABLE TO AFFILIATES, net of
current portion.................... 1,271 149 98 75
OBLIGATIONS UNDER CAPITAL LEASES, net
of current portion................. 44 133 121 209
LONG-TERM DEBT, net of current
portion............................ 21 1,225 1,058 965
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY:
Common stock, no par value;
5,000 shares authorized,
1,000 issued and
outstanding................... 1 1 1 1
Retained earnings............... 639 1,045 1,991 2,262
--------- --------- ------------ ---------
Total shareholders'
equity............. 640 1,046 1,992 2,263
--------- --------- ------------ ---------
Total liabilities and
shareholders'
equity............. $ 7,717 $ 9,327 $7,354 $ 7,919
========= ========= ============ =========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-30
<PAGE>
ATLAS COMFORT SERVICES USA, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS
SIX MONTHS ENDED
YEAR ENDED JUNE 30, ENDED MARCH 31,
------------------------------- DECEMBER 31, --------------------
1994 1995 1996 1996 1996 1997
--------- --------- --------- ------------ --------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
REVENUES............................. $ 21,848 $ 22,444 $ 29,174 $ 15,545 $ 6,207 $ 6,115
COST OF SERVICES..................... 19,657 19,635 25,449 12,508 5,456 4,866
--------- --------- --------- ------------ --------- ---------
Gross profit..................... 2,191 2,809 3,725 3,037 751 1,249
SELLING, GENERAL AND ADMINISTRATIVE
EXPENSES........................... 2,086 2,166 2,843 1,432 631 753
--------- --------- --------- ------------ --------- ---------
Income from operations........... 105 643 882 1,605 120 496
OTHER INCOME (EXPENSE):
Interest expense................. (156) (168) (185) (107) (51) (54)
Other............................ 2 28 (11) 78 -- 17
--------- --------- --------- ------------ --------- ---------
Income (loss) before income taxes,
extraordinary item, and cumulative
effect of a change in accounting
principle.......................... (49) 503 686 1,576 69 459
Provision for income taxes
(benefit).......................... (2) 199 280 630 28 188
--------- --------- --------- ------------ --------- ---------
Income (loss) before extraordinary
item and cumulative effect of a
change in accounting principle..... (47) 304 406 946 41 271
Extraordinary item -- gain on
extinguishment of debt, net of
deferred taxes of $167,000 (Note
5)................................. 273 -- -- -- -- --
--------- --------- --------- ------------ --------- ---------
Income before cumulative effect of a
change in accounting principle..... 226 304 406 946 41 271
Cumulative effect on prior years of a
change in accounting for income
taxes (Note 7)..................... 141 -- -- -- -- --
--------- --------- --------- ------------ --------- ---------
NET INCOME........................... $ 367 $ 304 $ 406 $ 946 $ 41 $ 271
========= ========= ========= ============ ========= =========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-31
<PAGE>
ATLAS COMFORT SERVICES USA, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT FOR SHARE INFORMATION)
<TABLE>
<CAPTION>
COMMON STOCK TOTAL
------------------ RETAINED SHAREHOLDERS'
SHARES AMOUNT EARNINGS EQUITY
------- ------- --------- -------------
<S> <C> <C> <C> <C>
BALANCE, December 31, 1993........... 1,000 $ 1 $ (32) $ (31)
Net income...................... -- -- 367 367
------- ------- --------- -------------
BALANCE, June 30, 1994............... 1,000 1 335 336
Net income...................... -- -- 304 304
------- ------- --------- -------------
BALANCE, June 30, 1995............... 1,000 1 639 640
Net income...................... -- -- 406 406
------- ------- --------- -------------
BALANCE, June 30, 1996............... 1,000 1 1,045 1,046
Net income...................... -- -- 946 946
------- ------- --------- -------------
BALANCE, December 31, 1996........... 1,000 1 1,991 1,992
Net income (unaudited).......... -- -- 271 271
------- ------- --------- -------------
BALANCE, March 31, 1997
(unaudited)........................ 1,000 $ 1 $ 2,262 $ 2,263
======= ======= ========= =============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-32
<PAGE>
ATLAS COMFORT SERVICES USA, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS
SIX MONTHS ENDED
YEAR ENDED JUNE 30, ENDED MARCH 31,
------------------------------- DECEMBER 31, --------------------
1994 1995 1996 1996 1996 1997
--------- --------- --------- ------------ --------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income....................... $ 367 $ 304 $ 406 $ 946 $ 41 $ 271
Adjustments to reconcile net
income to net cash
provided by (used in) operating
activities --
Depreciation and
amortization.............. 104 124 92 84 27 33
Cumulative effect of a
change in accounting
principle................. (141) -- -- -- -- --
Extraordinary gain on
extinguishment of debt.... (440) -- -- -- -- --
Deferred income tax
provision................. 167 (196) 54 36 -- --
Changes in operating assets
and liabilities --
(Increase) decrease in --
Accounts receivable......... (1,672) 148 (1,514) 1,481 816 (693)
Inventories................. (264) (554) (315) 230 (460) 94
Costs and estimated earnings
in excess of billings on
uncompleted contracts..... (145) (266) 369 5 317 362
Prepaid expenses and other
current assets............ 121 (14) 13 (55) 124 26
Increase (decrease) in --
Accounts payable and accrued
expenses.................. 1,320 (417) (227) (1,049) (135) (146)
Income tax payable.......... -- 363 27 362 (259) 184
Billings in excess of costs
and estimated earnings on
uncompleted contracts..... 585 437 834 (1,424) (445) 47
--------- --------- --------- ------------ --------- ---------
Net cash provided by (used
in) operating
activities................ 2 (71) (261) 616 26 178
--------- --------- --------- ------------ --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property and
equipment...................... (139) (67) (121) (50) (96) (131)
--------- --------- --------- ------------ --------- ---------
Net cash used in investing
activities................ (139) (67) (121) (50) (96) (131)
--------- --------- --------- ------------ --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings on line of
credit......................... 400 100 100 (600) 240 200
Principal payments on notes
payable to affiliates.......... (38) (261) (1,219) (50) (23) (23)
Borrowings on notes payable to
affiliates..................... 1,202 100 -- 3 -- --
Principal payments on long-term
debt........................... (1,067) (14) (150) (176) (29) (95)
Borrowings on long-term debt..... 41 -- 1,689 15 315 19
Additions to (principal payments
on) capital lease
obligations.................... (29) (37) (74) (48) (9) 107
--------- --------- --------- ------------ --------- ---------
Net cash provided by (used
in) financing
activities................ 509 (112) 346 (856) 494 208
--------- --------- --------- ------------ --------- ---------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS................... 372 (250) (36) (290) 424 255
--------- --------- --------- ------------ --------- ---------
CASH AND CASH EQUIVALENTS, beginning
of period.......................... 305 677 427 391 -- 101
--------- --------- --------- ------------ --------- ---------
CASH AND CASH EQUIVALENTS, end of
period............................. $ 677 $ 427 $ 391 $ 101 $ 424 $ 356
========= ========= ========= ============ ========= =========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
Cash paid for --
Income Taxes..................... $ -- $ 30 $ 200 $ 224 $ 200 $ --
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-33
<PAGE>
ATLAS COMFORT SERVICES USA, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BUSINESS AND ORGANIZATION:
Atlas Comfort Services USA, Inc., a Texas corporation, and its subsidiary
(the "Company") is a leading provider of HVAC installation services for
apartment complexes, condominiums and hotels in the United States and also
provides maintenance, repair and replacement of HVAC systems. Atlas primarily
operates in the southwest, northeast, and the mid-Atlantic regions of the United
States.
The Company and its shareholders intend to enter into a definitive
agreement with Comfort Systems USA, Inc. ("Comfort Systems"), pursuant to
which all outstanding shares of the Company's common stock will be exchanged for
cash and shares of Comfort Systems common stock concurrently with the
consummation of the initial public offering (the "Offering") of the common
stock of Comfort.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
BASIS OF PRESENTATION
The consolidated financial statements include the accounts and results of
operations of the Company and its subsidiary which are under common control and
management of two individuals. All significant intercompany transactions and
balances have been eliminated in combination.
INTERIM FINANCIAL INFORMATION
The interim consolidated financial statements as of March 31, 1997, and for
the three months ended March 31, 1996 and 1997, are unaudited, and certain
information and footnote disclosures, normally included in financial statements
prepared in accordance with generally accepted accounting principles, have been
omitted. In the opinion of management, all adjustments, consisting only of
normal recurring adjustments, necessary to fairly present the financial
position, results of operations and cash flows with respect to the consolidated
interim financial statements, have been included. The results of operations for
the interim periods are not necessarily indicative of the results for the entire
fiscal year.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments purchased with an
original maturity of three months or less to be cash equivalents.
INVENTORIES
Inventories consist of duct materials, air conditioning equipment,
refrigeration supplies and accessories held for use in the ordinary course of
business and are stated at the lower of cost or market using the first-in,
first-out (FIFO) method.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost, and depreciation is computed
using the straight-line method over the estimated useful lives of the assets.
Leasehold improvements are capitalized and amortized over the lesser of the life
of the lease or the estimated useful life of the asset.
Expenditures for repairs and maintenance are charged to expense when
incurred. Expenditures for major renewals and betterments, which extend the
useful lives of existing equipment, are capitalized and depreciated. Upon
retirement or disposition of property and equipment, the cost and related
accumulated depreciation are removed from the accounts and any resulting gain or
loss is recognized in the statements of operations.
F-34
<PAGE>
ATLAS COMFORT SERVICES USA, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
REVENUE RECOGNITION
The Company recognizes revenue when services are performed except when work
is being performed under a construction contract. Revenues from construction
contracts are recognized on the percentage-of-completion method measured by the
percentage of costs incurred to total estimated costs for each contract.
Provisions for the total estimated losses on uncompleted contracts are made in
the period in which such losses are determined. Changes in job performance, job
conditions, estimated profitability and final contract settlements may result in
revisions to costs and income and are recognized in the period in which the
revisions are determined.
The balances billed but not paid by customers pursuant to retainage
provisions in construction contracts will be due upon completion of the
contracts and acceptance by the customer. Based on the Company's experience with
similar contracts in recent years, the retention balance will be billed and
collected in the upcoming fiscal year.
WARRANTY COSTS
The Company warrants labor for the first year after installation on new air
conditioning and heating units. The Company generally warrants labor for 30 days
after servicing of existing air conditioning and heating units. A reserve for
warranty costs is recorded upon completion of installation or service.
INCOME TAXES
The Company follows the liability method of accounting for income taxes in
accordance with Statement of Financial Accounting Standards (SFAS) No. 109.
Under this method, deferred income taxes are recorded based upon the differences
between the financial reporting and tax bases of assets and liabilities and are
measured using the enacted tax rates and laws that will be in effect when the
underlying assets or liabilities are recovered or settled.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires the use of estimates and assumptions by
management in determining the reported amounts of assets and liabilities and
disclosures of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
GOODWILL
Goodwill, in the amount of $33,000, represents the excess of cost over the
fair value of net assets acquired and is amortized using the straight-line
method over 40 years. The Company assesses the recoverability of its goodwill
whenever adverse events occur and believes that no material impairment exists.
NEW ACCOUNTING PRONOUNCEMENTS
Effective July 1, 1996, the Company adopted SFAS No. 121, "Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed
Of." Accordingly, in the event that facts and circumstances indicate that
property and equipment, and intangible or other assets may be impaired, an
evaluation of recoverability would be performed. If an evaluation is required,
the estimated future undiscounted cash flows associated with the asset are
compared to the asset's carrying amount to determine if a write-down to market
value is necessary. Adoption of this standard did not have a material effect on
the financial position or results of operations of the Company.
F-35
<PAGE>
ATLAS COMFORT SERVICES USA, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
3. PROPERTY AND EQUIPMENT:
Property and equipment consist of the following (dollars in thousands):
<TABLE>
<CAPTION>
ESTIMATED JUNE 30,
USEFUL LIVES -------------------- DECEMBER 31,
IN YEARS 1995 1996 1996
------------ --------- --------- ------------
<S> <C> <C> <C> <C>
Transportation equipment............. 5 $ 741 $ 987 $1,043
Machinery and equipment.............. 5 116 140 137
Leasehold improvements............... 3 28 28 28
Furniture and fixtures............... 5 266 286 212
--------- --------- ------------
Less -- Accumulated depreciation and
amortization....................... (920) (957) (921)
--------- --------- ------------
Property and equipment,
net..................... $ 231 $ 484 $ 499
========= ========= ============
</TABLE>
4. DETAIL OF CERTAIN BALANCE SHEET ACCOUNTS (IN THOUSANDS):
Activity in the Company's allowance for doubtful accounts consists of the
following:
JUNE 30,
-------------------- DECEMBER 31,
1995 1996 1996
--------- --------- ------------
Balance at beginning of year......... $ 60 $ 60 $ 60
Additions to costs and expenses...... 75 77 42
Deductions for uncollectible
receivables written off and
recoveries......................... (75) (77) (2)
--------- --------- ------------
$ 60 $ 60 $ 100
========= ========= ============
Accounts payable and accrued expenses consist of the following:
JUNE 30,
-------------------- DECEMBER 31,
1995 1996 1996
--------- --------- ------------
Accounts payable, trade.............. $ 2,935 $ 2,409 $1,582
Accrued compensation and benefits.... 197 231 163
Accrued warranty expense............. 250 300 310
Other accrued expenses............... 140 355 191
--------- --------- ------------
$ 3,522 $ 3,295 $2,246
========= ========= ============
F-36
<PAGE>
ATLAS COMFORT SERVICES USA, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Installation contracts in progress are as follows:
JUNE 30,
-------------------- DECEMBER 31,
1995 1996 1996
--------- --------- ------------
Costs incurred on contracts in
progress........................... $ 11,884 $ 12,526 $ 12,643
Estimated earnings, net of losses.... 2,666 2,589 2,582
--------- --------- ------------
14,550 15,115 15,225
Less -- Billings to date............. 14,615 16,381 15,072
--------- --------- ------------
$ (65) $ (1,266) $ 153
========= ========= ============
Costs and estimated earnings in
excess of billings on uncompleted
contracts.......................... 1,050 681 676
Billings in excess of costs and
estimated earnings on uncompleted
contracts.......................... (1,115) (1,947) (523)
--------- --------- ------------
$ (65) $ (1,266) $ 153
========= ========= ============
5. DEBT:
LINE OF CREDIT
The Company has a $700,000 revolving line-of-credit facility with a bank at
the prime lending rate plus 1 percent with interest payable monthly. This credit
facility is secured by the Company's cash, accounts receivable, inventory, and
unpledged property and equipment. The credit facility is guaranteed by two of
the Company's officers and is also secured by investment accounts of certain
affiliates. The credit facility had an outstanding balance of $500,000,
$600,000, and $0 at June 30, 1995 and 1996 and December 31, 1996, respectively,
and matures in January 1998. The Company paid approximately $8,000, $33,000 and
$35,000 of interest relating to the revolving credit line for the years ended
June 30, 1994, 1995 and 1996 and $18,500 for the six months ended December 31,
1996.
NOTES PAYABLE TO FINANCIAL INSTITUTIONS
Long-term debt is summarized as follows:
JUNE 30,
-------------------- DECEMBER 31,
1995 1996 1996
--------- --------- ------------
(IN THOUSANDS)
Note payable to a financial
institution with interest at prime
plus 1%, payable in monthly
installments of $26,667 plus
interest through January 1999, when
the entire balance of unpaid
principal and accrued interest
shall be due and payable........... $ -- $ 1,467 $1,306
Vehicle notes with interest at rates
ranging from 7.9% to 9.4%, payable
in monthly installments through
March 2001......................... 30 106 108
--------- --------- ------------
30 1,573 1,414
Less -- Current maturities........... 9 348 356
--------- --------- ------------
$ 21 $ 1,225 $1,058
========= ========= ============
The note payable to a financial institution is secured by cash, accounts
receivable, inventory, property and equipment, and the personal guarantee of the
two shareholders. In addition, investment accounts of the shareholders and of
certain affiliates of the shareholders are pledged as collateral for the note.
The Company paid interest of $3,000, $3,000 and $73,500 for the years ended June
30, 1994, 1995 and 1996, respectively, and $73,000 for the six months ended
December 31, 1996.
F-37
<PAGE>
ATLAS COMFORT SERVICES USA, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
In September 1993, the Company and a bank reached a settlement agreement in
which the bank released the Company from its total obligation of approximately
$1,500,000 related to a revolving line of credit, installment notes, equipment
notes and related accrued interest, for a lump sum payment of $1,100,000. The
payment was funded by the proceeds from the notes payable to affiliates
mentioned below. This early extinguishment of debt generated a gain aggregating
$440,000. The Company paid approximately $77,000 in interest during the year
ended June 30, 1994 related to these extinguished notes.
NOTES PAYABLE TO AFFILIATES
Notes payable to affiliates are summarized as follows:
JUNE 30,
-------------------- DECEMBER 31,
1995 1996 1996
--------- --------- ------------
(IN THOUSANDS)
Note payable to a related party in
monthly installments of $5,500
including interest at 10% through
March 1998, collateralized by stock
of the Company..................... $ 159 $ 105 $ 78
Unsecured note payable to an
affiliate in monthly installments
of $2,500 including interest at 6%
through September 1996............. 326 -- --
Notes payable to Company officers in
monthly installments of $4,812
including interest at 10% through
June 1999.......................... 186 146 127
Notes payable to Company officers
with interest due monthly at the
prime rate through September 1996,
secured by accounts receivable,
certain property and equipment, and
intangible assets.................. 700 -- --
Unsecured note payable to Company
officers with interest and any
unpaid principal balance due August
8, 1995, at the rate of 9%......... 100 -- --
--------- --------- ------------
1,471 251 205
Less -- Current maturities........... 200 102 107
--------- --------- ------------
$ 1,271 $ 149 $ 98
========= ========= ============
The Company paid interest of $116,400, $112,600 and $68,000 related to
notes payable to affiliates for the years ended June 30, 1994, 1995 and 1996,
respectively, and $12,600 for the six months ended December 31, 1996.
The aggregate maturities of notes payable to financial institutions and
affiliates are as follows (in thousands):
Year ending December 31,
1997............................ $ 463
1998............................ 424
1999............................ 718
2000............................ 13
2001 and thereafter............. 1
---------
$ 1,619
=========
F-38
<PAGE>
ATLAS COMFORT SERVICES USA, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
6. LEASES:
The Company leases vehicles and warehouse facilities under capital and
operating leases expiring through October, 2000. Total rent expense related to
operating leases amounted to $95,000, $143,000 and $180,000 for the years ended
June 30, 1994, 1995 and 1996, respectively, and $60,000 for the six months ended
December 31, 1996.
Future minimum lease payments for capital and noncancelable operating
leases are as follows (in thousands):
NONCANCELABLE
CAPITAL OPERATING
LEASES LEASES
------- -------------
Year ended December 31,
1997............................ $ 117 $ 142
1998............................ 98 23
1999............................ 44 --
2000............................ 6 --
------- -------------
Total minimum lease payments.... 265 165
Amounts representing interest... 43
-------
Present value of net minimum
lease payments................ 222
Less -- Current portion......... 101
-------
Long-term obligation............ $ 121
=======
7. INCOME TAXES (IN THOUSANDS):
Federal and state income taxes are as follows:
<TABLE>
<CAPTION>
SIX MONTHS
YEAR ENDED JUNE 30, ENDED
------------------------------- DECEMBER 31,
1994 1995 1996 1996
--------- --------- --------- ------------
<S> <C> <C> <C> <C>
Federal --
Current......................... $ (2) $ 331 $ 193 $ 504
Deferred........................ 141 (164) 43 28
State --
Current......................... -- 64 34 90
Deferred........................ 26 (32) 10 8
--------- --------- --------- ------------
$ 165 $ 199 $ 280 $ 630
========= ========= ========= ============
</TABLE>
F-39
<PAGE>
ATLAS COMFORT SERVICES USA, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Actual income tax expense differs from income tax expense computed by
applying the U.S. federal statutory corporate rate of 34 percent to income
(loss) before income taxes as follows:
<TABLE>
<CAPTION>
SIX MONTHS
YEAR ENDED JUNE 30, ENDED
------------------------------- DECEMBER 31,
1994 1995 1996 1996
--------- --------- --------- ------------
<S> <C> <C> <C> <C>
Provision at the statutory rate...... $ (16) $ 171 $ 233 $ 536
Increase resulting from --
Permanent differences, mainly
meals and entertainment....... 164 7 19 29
State income tax, net of benefit
for federal deduction......... 17 21 28 65
--------- --------- --------- ------------
$ 165 $ 199 $ 280 $ 630
========= ========= ========= ============
</TABLE>
Deferred income tax provisions result from temporary differences in the
recognition of income and expenses for financial reporting purposes and for tax
purposes. The tax effects of these temporary differences, representing deferred
tax assets and liabilities, result principally from the following:
JUNE 30,
-------------------- DECEMBER 31,
1995 1996 1996
--------- --------- ------------
Accounting for long-term contracts... $ 159 $ 74 $ (11)
Warranty reserves.................... 100 123 127
Inventory............................ 32 38 40
Allowance for doubtful accounts...... 36 30 51
Other accrued expenses not deducted
for tax purposes................... 25 62 90
Bases differences on property and
equipment and capital lease
accounting......................... (30) (58) (64)
--------- --------- ------------
Net deferred tax assets.............. $ 322 $ 269 $ 233
========= ========= ============
The net deferred tax assets and liabilities are comprised of the following:
JUNE 30,
-------------------- DECEMBER 31,
1995 1996 1996
--------- --------- ------------
Deferred tax assets --
Current......................... $ 209 $ 240 $ 293
Long-term....................... 221 171 149
--------- --------- ------------
Total...................... 430 411 442
--------- --------- ------------
Deferred tax liabilities --
Current......................... (54) (76) (148)
Long-term....................... (54) (66) (61)
--------- --------- ------------
Total...................... (108) (142) (209)
--------- --------- ------------
Net deferred income tax
assets.................. $ 322 $ 269 $ 233
========= ========= ============
The Company adopted the provisions of SFAS No. 109 in fiscal year 1994
resulting in a cumulative effect of a change in accounting principle of
$141,000.
8. RELATED-PARTY TRANSACTIONS:
Two shareholders lease to the Company the main office facility. Total
payments made under this lease agreement amounted to $90,000 for each of the
years ended June 30, 1994, 1995 and 1996, respectively, and $45,000 for the six
months ended December 31, 1996. The Company is in the process of entering into
F-40
<PAGE>
ATLAS COMFORT SERVICES USA, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
an agreement with these shareholders to lease land on which a new facility will
be built. This lease agreement is anticipated to have a twenty year term.
9. COMMITMENTS AND CONTINGENCIES:
LITIGATION
The Company is involved in legal actions arising in the ordinary course of
business. Management does not believe the outcome of such legal action will have
a material adverse effect on the Company's financial position or consolidated
results of operations.
INSURANCE
The Company carries a broad range of insurance coverage, including general
and business auto liability, commercial property, workers' compensation and a
general umbrella policy. The Company has not incurred significant claims or
losses on any of its insurance policies.
10. EMPLOYEE BENEFIT PLAN
The Company sponsors a Profit Sharing and Savings Plan (the "Plan") which
covers substantially all employees. The employees who participate in the Plan
may contribute 1 percent to 20 percent of their base compensation, and the
Company may make discretionary matching contributions. The Company did not make
any contributions for the years ended December 31, 1994 and 1995. The Company
made $18,248 in contributions for the year ended June 30, 1996 and $12,667 for
the six months ended December 31, 1996.
11. FINANCIAL INSTRUMENTS:
The Company's financial instruments consist of cash and cash equivalents,
notes receivable, notes payable, a line of credit and long-term debt. The
Company believes that the carrying value of these instruments on the
accompanying balance sheet approximates their fair value.
12. SIGNIFICANT CUSTOMERS AND VENDORS:
Significant customers are those that account for greater than ten percent
of the Company's revenues. For the year ended June 30, 1996 and the six months
ended December 31, 1996, one customer, a publicly traded Real Estate Investment
Trust, accounted for 14% and 20% of the Company's revenues, respectively.
Receivables outstanding from this customer represented 13% and 12% of the
Company's trade and retainage receivables as of June 30, 1996 and December 31,
1996, respectively. In addition, one of the Company's shareholders has less than
1% ownership in this customer.
During the years ended June 30, 1994, 1995 and 1996 and the six months
ended December 31, 1996, two vendors accounted for 12% and 11%; 29% and 17%; 20%
and 17%; and 15% and 12% of the Company's purchases, respectively.
13. EVENT SUBSEQUENT TO DATE OF AUDITORS' REPORT OF INDEPENDENT PUBLIC
ACCOUNTANTS (UNAUDITED):
In March 1997, the Company and its shareholders entered into a definitive
agreement with a wholly-owned subsidiary of Comfort Systems providing for the
merger of the Company with the subsidiary of Comfort Systems.
Concurrently with the merger, the Company will enter into agreements with
the shareholders to lease land and buildings used in the Company's operations
for negotiated amounts and terms.
F-41
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Tri-City Mechanical, Inc.:
We have audited the accompanying balance sheets of Tri-City Mechanical,
Inc. as of December 31, 1995 and 1996, and the related statements of operations,
shareholders' equity and cash flows for each of the three years in the period
ended December 31, 1996. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free 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 financial statements referred to above present fairly,
in all material respects, the financial position of Tri-City Mechanical, Inc. as
of December 31, 1995 and 1996, and the results of its operations and its cash
flows for each of the three years in the period ended December 31, 1996 in
conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Houston, Texas
March 7, 1997
F-42
<PAGE>
TRI-CITY MECHANICAL, INC.
BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE INFORMATION)
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------- MARCH 31
1995 1996 1997
------------ ------------ ------------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents....... $ 2,551 $1,958 $2,665
Restricted cash................. 383 325 328
Investments..................... -- 493 500
Accounts Receivable --
Trade, net of allowance of
$130, $30 and $30,
respectively............ 4,495 3,734 3,774
Retainage.................. 831 756 728
Other receivables.......... 2 11 66
Inventories..................... 1,183 762 218
Costs and estimated earnings in
excess of billings on
uncompleted contracts......... 306 288 380
Prepaid expenses and other
current assets................ 1 12 2
------------ ------------ ------------
Total current assets....... 9,752 8,339 8,661
PROPERTY AND EQUIPMENT, net.......... 508 656 643
------------ ------------ ------------
Total assets............... $ 10,260 $8,995 $9,304
============ ============ ============
<CAPTION>
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable and accrued
expenses...................... $ 2,683 $2,179 $2,408
Billings in excess of costs and
estimated earnings on
uncompleted contracts......... 2,207 667 435
------------ ------------ ------------
Total current
liabilities............. 4,890 2,846 2,843
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY:
Common stock, $10 par 2,500
shares authorized, 2,500
issued and outstanding........ 25 25 25
Additional paid-in capital...... 105 105 105
Retained earnings............... 5,240 6,019 6,331
------------ ------------ ------------
Total shareholders'
equity.................. 5,370 6,149 6,461
------------ ------------ ------------
Total liabilities and
shareholders' equity.... $ 10,260 $8,995 $9,304
============ ============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-43
<PAGE>
TRI-CITY MECHANICAL, INC.
STATEMENTS OF OPERATIONS
(IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
-------------------------------------------- --------------------
1994 1995 1996 1996 1997
------------ ------------ ------------ --------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
REVENUES............................. $ 16,883 $ 25,030 $ 24,237 $ 6,482 $ 6,791
COST OF SERVICES..................... 14,271 19,298 18,561 5,082 5,946
------------ ------------ ------------ --------- ---------
Gross profit.................... 2,612 5,732 5,676 1,400 845
SELLING, GENERAL AND ADMINISTRATIVE
EXPENSES........................... 2,219 3,193 3,903 1,026 567
------------ ------------ ------------ --------- ---------
Income from operations.......... 393 2,539 1,773 374 278
OTHER INCOME (EXPENSE):
Interest expense................ (2) (1) -- -- --
Interest income................. 50 132 152 43 25
Other........................... 24 81 89 18 9
------------ ------------ ------------ --------- ---------
NET INCOME........................... $ 465 $ 2,751 $ 2,014 $ 435 $ 312
============ ============ ============ ========= =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-44
<PAGE>
TRI-CITY MECHANICAL, INC.
STATEMENTS OF SHAREHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE INFORMATION)
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL TOTAL
---------------- PAID-IN RETAINED SHAREHOLDERS'
SHARES AMOUNT CAPITAL EARNINGS EQUITY
------ ------ ---------- -------- --------------
<S> <C> <C> <C> <C> <C>
BALANCE, December 31, 1993........... 2,500 $ 25 $ 105 $ 2,577 $ 2,707
Distributions to shareholders... -- -- -- (338) (338)
Net income...................... -- -- -- 465 465
------ ------ ---------- -------- --------------
BALANCE, December 31, 1994........... 2,500 25 105 2,704 2,834
Distributions to shareholders... -- -- -- (215) (215)
Net income...................... -- -- -- 2,751 2,751
------ ------ ---------- -------- --------------
BALANCE, December 31, 1995........... 2,500 25 105 5,240 5,370
Distributions to shareholders... -- -- -- (1,235) (1,235)
Net income...................... -- -- -- 2,014 2,014
------ ------ ---------- -------- --------------
BALANCE, December 31, 1996........... 2,500 25 105 6,019 6,149
Net income (unaudited).......... -- -- -- 312 312
------ ------ ---------- -------- --------------
BALANCE, March 31, 1997
(unaudited)........................ 2,500 $ 25 $ 105 $ 6,331 $ 6,461
====== ====== ========== ======== ==============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-45
<PAGE>
TRI-CITY MECHANICAL, INC.
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS
ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
------------------------------- --------------------
1994 1995 1996 1996 1997
--------- --------- --------- --------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income......................... $ 465 $ 2,751 $ 2,014 $ 435 $ 312
Adjustments to reconcile net income
to net cash provided by (used
in) operating activities --
Depreciation.................... 131 134 102 36 26
Deferred income taxes........... (218) -- -- -- --
Loss (gain) on sale of property
and equipment................. -- 1 (10) -- --
Changes in operating assets and
liabilities --
(Increase) decrease in --
Restricted cash............ (73) (75) 58 (22) (3)
Accounts receivable........ (231) (1,306) 827 1,048 (67)
Inventories................ (329) (801) 421 1,037 544
Costs in excess of billings
and estimated earnings
on uncompleted
contracts............... 17 (90) 18 (146) (92)
Prepaid expenses and other
current assets.......... (14) 28 (11) (10) 10
Increase (decrease) in --
Accounts payable and
accrued expenses........ 864 519 (504) (393) 229
Billings in excess of costs
and estimated earnings
on uncompleted
contracts............... 1,360 508 (1,540) (1,234) (232)
--------- --------- --------- --------- ---------
Net cash provided by
operating
activities......... 1,972 1,669 1,375 751 727
--------- --------- --------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of property and
equipment....................... -- 18 22 -- --
Additions of property and
equipment....................... (311) (157) (262) (6) (13)
Purchase of investment............. -- -- (493) -- (7)
--------- --------- --------- --------- ---------
Net cash used in
investing
activities......... (311) (139) (733) (6) (20)
--------- --------- --------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Decrease in payable to
shareholders.................... (210) -- -- -- --
Borrowings on line of credit....... 19 1 -- -- --
Payments on line of credit......... (17) (15) -- -- --
Distributions to shareholders...... (338) (215) (1,235) -- --
--------- --------- --------- --------- ---------
Net cash used in
financing
activities......... (546) (229) (1,235) -- --
--------- --------- --------- --------- ---------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS................... 1,115 1,301 (593) 745 707
CASH AND CASH EQUIVALENTS, beginning
of period.......................... 135 1,250 2,551 2,551 1,958
--------- --------- --------- --------- ---------
CASH AND CASH EQUIVALENTS, end of
period............................. $ 1,250 $ 2,551 $ 1,958 $ 3,296 $ 2,665
========= ========= ========= ========= =========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
Cash paid for --
Interest........................ $ 2 $ 1 $ -- $ -- $ --
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-46
<PAGE>
TRI-CITY MECHANICAL, INC.
NOTES TO FINANCIAL STATEMENTS
1. BUSINESS AND ORGANIZATION:
Tri-City Mechanical, Inc., an Arizona corporation, (the "Company")
focuses on providing "design and build" installation services and maintenance,
repair and replacement of HVAC systems primarily for large commercial and
industrial facilities, as well as process piping for industrial facilities.
Tri-City primarily operates in Arizona, California and Nevada.
The Company and its shareholders intend to enter into a definitive
agreement with Comfort Systems USA, Inc. ("Comfort Systems") pursuant to which
all outstanding shares of the Company's common stock will be exchanged for cash
and shares of Comfort Systems common stock concurrently with the consummation of
the initial public offering (the "Offering") of the common stock of Comfort
Systems.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
INTERIM FINANCIAL INFORMATION
The interim financial statements as of March 31, 1997, and for the three
months ended March 31, 1996 and 1997, are unaudited, and certain information and
footnote disclosures, normally included in financial statements prepared in
accordance with generally accepted accounting principles, have been omitted. In
the opinion of management, all adjustments, consisting only of normal recurring
adjustments, necessary to fairly present the financial position, results of
operations and cash flows with respect to the interim financial statements, have
been included. The results of operations for the interim periods are not
necessarily indicative of the results for the entire fiscal year.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments purchased with an
original maturity of three months or less to be cash equivalents.
RESTRICTED CASH
The Company also maintains restricted cash which consists of certificates
of deposit. These certificates of deposit are held in a joint checking account
between the contractors and Tri-City for the retainage balance due from
contractors at the completion of the job.
INVENTORIES
Inventories consist of duct materials, air conditioning equipment,
refrigeration supplies and accessories held for use in the ordinary course of
business and are stated at the lower of cost or market using the first-in,
first-out (FIFO) method.
INVESTMENTS
The Company has adopted Statement of Financial Accounting Standards (SFAS)
No. 115, "Accounting for Certain Investments in Debt and Equity Securities,"
which requires that investments in debt securities and marketable equity
securities be designated as trading, held-to-maturity or available-for-sale. At
December 31, 1996, investments have been categorized as held-to-maturity, are
stated at cost, and are classified in the balance sheet as current assets.
Investments at December 31, 1996 consist of U.S. Treasury Bills.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost, and depreciation is computed
using the straight-line method over the estimated useful lives of the assets.
Leasehold improvements are capitalized and amortized over the lesser of the life
of the lease or the estimated useful life of the asset.
F-47
<PAGE>
TRI-CITY MECHANICAL, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Expenditures for repairs and maintenance are charged to expense when
incurred. Expenditures for major renewals and betterments, which extend the
useful lives of existing equipment, are capitalized and depreciated. Upon
retirement or disposition of property and equipment, the cost and related
accumulated depreciation are removed from the accounts and any resulting gain or
loss is recognized in the statement of operations.
REVENUE RECOGNITION
The Company recognizes revenue when services are performed except when work
is being performed under a construction contract. Revenues from construction
contracts are recognized on the percentage-of-completion method measured by the
percentage of costs incurred to total estimated costs for each contract.
Provisions for the total estimated losses on uncompleted contracts are made in
the period in which such losses are determined. Changes in job performance, job
conditions, estimated profitability and final contract settlements may result in
revisions to costs and income and their effects are recognized in the period in
which the revisions are determined.
The balances billed but not paid by customers pursuant to retainage
provisions in construction contracts will be due upon completion of the
contracts and acceptance by the customer. Based on the Company's experience with
similar contracts in recent years, the retention balance will be billed and
collected in the upcoming fiscal year.
WARRANTY COSTS
The Company warrants labor for the first year after installation on new air
conditioning and heating systems. The Company generally warrants labor for 30
days after servicing of existing air conditioning and heating systems. A reserve
for warranty costs is recorded upon completion of installation or service.
INCOME TAXES
The Company has elected S Corporation status as defined by the Internal
Revenue Code, whereby the Company is not subject to taxation for federal
purposes. Under S Corporation status, the shareholders report their share of the
Company's taxable earnings or losses in their personal tax returns. The Company
will terminate its S Corporation status concurrently with the effective date of
the Offering.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires the use of estimates and assumptions by
management in determining the reported amounts of assets and liabilities and
disclosures of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
NEW ACCOUNTING PRONOUNCEMENT
Effective January 1, 1996, the Company adopted Statement of Financial
Accounting Standards (SFAS) No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of." Accordingly, in
the event that facts and circumstances indicate that property and equipment may
be impaired, an evaluation of recoverability would be performed. If an
evaluation is required, the estimated future undiscounted cash flows associated
with the asset is compared to the asset's carrying amount to determine if a
write-down to market value is necessary. Adoption of this standard did not have
a material effect on the financial position or results of operations of the
Company.
F-48
<PAGE>
TRI-CITY MECHANICAL, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
3. PROPERTY AND EQUIPMENT:
Property and equipment consist of the following (dollars in thousands):
ESTIMATED DECEMBER 31,
USEFUL LIVES --------------------
IN YEARS 1995 1996
------------ --------- ---------
Transportation equipment............. 5 $ 521 $ 623
Machinery and equipment.............. 10 639 680
Computer and telephone equipment..... 5 121 157
Leasehold improvements............... 5 48 48
Furniture and fixtures............... 6 54 54
--------- ---------
1,383 1,562
Less -- Accumulated depreciation..... (875) (906)
--------- ---------
Property and equipment, net..... $ 508 $ 656
========= =========
4. DETAIL OF CERTAIN BALANCE SHEET ACCOUNTS:
Activity in the Company's allowance for doubtful accounts consists of the
following (in thousands):
DECEMBER 31,
-------------------------------
1994 1995 1996
--------- --------- ---------
Balance at beginning of year......... $ 100 $ 130 $ 130
Additions to costs and expenses...... 184 1 48
Deductions for uncollectible
receivables written off and
recoveries......................... (154) (1) (148)
--------- --------- ---------
$ 130 $ 130 $ 30
========= ========= =========
Accounts payable and accrued expenses consist of the following (in
thousands):
DECEMBER 31,
--------------------
1995 1996
--------- ---------
Accounts payable, trade................. $ 2,178 $ 1,749
Accrued compensation and benefits....... 181 97
Warranty reserve........................ 301 278
Other accrued expenses.................. 23 55
--------- ---------
$ 2,683 $ 2,179
========= =========
F-49
<PAGE>
TRI-CITY MECHANICAL, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Installation contracts in progress are as follows (in thousands):
DECEMBER 31,
--------------------
1995 1996
--------- ---------
Costs incurred on contracts in
progress........................... $ 14,659 $ 8,615
Estimated earnings, net of losses.... 3,865 2,471
--------- ---------
18,524 11,086
Less -- Billings to date............. 20,425 11,465
--------- ---------
$ (1,901) $ (379)
========= =========
Costs and estimated earnings in
excess of billings on
uncompleted contracts.............. $ 306 $ 288
Billings in excess of costs and
estimated earnings on
uncompleted contracts.............. (2,207) (667)
--------- ---------
$ (1,901) $ (379)
========= =========
5. LONG-TERM DEBT:
The Company has a $1.0 million line of credit with a financial services
company. The line of credit expires October 31, 1997, and bears interest at 9
percent per annum. The line of credit is secured by a lien on accounts
receivable. There was no balance outstanding under this line of credit at
December 31, 1995 or 1996.
6. LEASES:
The Company leases facilities from a company which is wholly owned by one
of the shareholders. The lease expires June 30, 1998. The rent paid under this
related-party lease was approximately $109,000 for the year ended 1996. The
lease requires the Company to pay taxes, maintenance, insurance and certain
other operating costs of the leased property. The lease contains renewal and
termination provisions.
The Company leases vehicles for certain key members of management. The
leases expire October 1, 1999. The lease payments under these vehicle leases
were approximately $6,000, $15,000 and $16,000 for the years ended December 31,
1994, 1995 and 1996, respectively.
Future minimum lease payments for operating leases are as follows (in
thousands):
Year ending December 31 --
1997............................ $ 142
1998............................ 65
1999............................ 3
---------
$ 210
=========
7. EMPLOYEE BENEFIT PLANS:
The Company has adopted a 401(k) plan. The plan provides for the Company to
match 20 percent of the first 6 percent contributed by each employee. Total
contributions by the Company under this plan were approximately $13,000, $22,000
and $24,000 during 1994, 1995 and 1996, respectively. Amounts due to this plan
were approximately $ --, $ -- and $4,000 for the years ended December 31, 1994,
1995 and 1996, respectively.
F-50
<PAGE>
TRI-CITY MECHANICAL, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
8. RELATED-PARTY TRANSACTIONS:
The Company provides accounting services and building maintenance at no
cost to Nothum Properties & SMAC companies which are wholly owned by the
shareholders. The estimated value of the services provided during the years
ended December 31, 1994, 1995 and 1996 was $25,000, $28,000 and $30,000,
respectively.
9. COMMITMENTS AND CONTINGENCIES:
LITIGATION
The Company is involved in legal actions arising in the ordinary course of
business. Management does not believe the outcome of such legal actions will
have a material adverse effect on the Company's financial position or results of
operations.
INSURANCE
The Company carries a broad range of insurance coverage, including general
and business auto liability, commercial property, workers' compensation and a
general umbrella policy. The Company has not incurred significant claims or
losses on any of its insurance policies.
10. FINANCIAL INSTRUMENTS:
The Company's financial instruments consist of cash and cash equivalents,
investments, and a line of credit. The Company believes that the carrying value
of these instruments on the accompanying balance sheet approximates their fair
value.
11. SALES TO SIGNIFICANT CUSTOMER:
For the years ended December 31, 1994, 1995 and 1996, a customer accounted
for approximately 17, 11 and 11 percent, respectively, of the Company's sales.
12. EVENT SUBSEQUENT TO DATE OF AUDITORS' REPORT OF INDEPENDENT PUBLIC
ACCOUNTANTS (UNAUDITED):
In March 1997, the Company and its shareholders entered into a definitive
agreement with a wholly-owned subsidiary of Comfort Systems, providing for the
merger of the Company with the subsidiary of Comfort Systems.
In connection with the merger the Company will make a cash distribution of
approximately $6,331,000 prior to the merger which represents the Company's
estimated S Corporation accumulated adjustment account. Had these transactions
been recorded at March 31, 1997, the effect on the accompanying unaudited
balance sheet would be a decrease in assets of $2,365,000, an increase in
liabilities of $3,966,000 and a decrease in shareholders' equity of $6,331,000.
Concurrently with the merger, the Company will enter into agreements with
the shareholders to lease land and buildings used in the Company's operations
for a negotiated amount and term.
Tri-City has a verbal commitment with a limited liability corporation owned
by Mr. Nothum, Jr. and his father to construct new office, operations and
warehouse facilities. The Company believes that the rent for its current and
future property does not and will not exceed fair market value.
F-51
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To S. M. Lawrence Inc.:
We have audited the accompanying combined balance sheets of S. M. Lawrence
Inc. and related company as of October 31, 1995 and 1996, and the related
combined statements of operations, shareholders' equity and cash flows for the
three years ended October 31, 1996. These combined financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these combined 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 combined financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the combined 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 combined financial statements referred to above present
fairly, in all material respects, the financial position of S. M. Lawrence Inc.
and related company as of October 31, 1995 and 1996, and the results of their
operations and their cash flows for the three years ended October 31, 1996 in
conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Houston, Texas
March 7, 1997
F-52
<PAGE>
S. M. LAWRENCE INC. AND RELATED COMPANY
COMBINED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE INFORMATION)
OCTOBER 31,
-------------------- APRIL 30,
1995 1996 1997
--------- --------- ---------
(UNAUDITED)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents.......... $ 680 $ 327 $ --
Accounts receivable --
Trade......................... 1,457 2,493 1,748
Retainage..................... 454 896 1,249
Other receivables............. 1 1 --
Note receivable from shareholder... 50 75 76
Inventories........................ 215 253 277
Costs and estimated earnings in
excess of billings on
uncompleted contracts............ 66 358 539
Prepaid expenses and other current
assets........................... 39 61 204
--------- --------- ---------
Total current assets..... 2,962 4,464 4,093
PROPERTY AND EQUIPMENT, net............. 459 644 721
OTHER NONCURRENT ASSETS................. 138 132 184
--------- --------- ---------
Total assets............. $ 3,559 $ 5,240 $ 4,998
========= ========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Line of credit..................... $ 10 $ -- $ --
Note payable to affiliate.......... -- -- --
Accounts payable and accrued
expenses......................... 1,153 2,737 1,127
Income tax payable................. -- -- 368
Billings in excess of costs and
estimated earnings on
uncompleted contracts............ 299 344 790
--------- --------- ---------
Total current
liabilities........... 1,462 3,081 2,285
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY:
Common stock, no par value, 3,000
shares authorized, 1,480 shares
issued and outstanding........... 161 161 161
Treasury stock, at cost............ (15) (15) (15)
Retained earnings.................. 1,951 2,013 2,567
--------- --------- ---------
Total shareholders'
equity................ 2,097 2,159 2,713
--------- --------- ---------
Total liabilities and
shareholders'
equity................ $ 3,559 $ 5,240 $ 4,998
========= ========= =========
The accompanying notes are an integral part of these combined financial
statements.
F-53
<PAGE>
S.M. LAWRENCE INC. AND RELATED COMPANY
COMBINED STATEMENTS OF OPERATIONS
(IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTHS
ENDED
YEARS ENDED OCTOBER 31, APRIL 30,
------------------------------- --------------------
1994 1995 1996 1996 1997
--------- --------- --------- --------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
REVENUES................................ $ 12,758 $ 12,568 $ 17,163 $ 6,736 $ 8,563
COST OF SERVICES........................ 9,797 9,142 12,211 4,958 6,139
--------- --------- --------- --------- ---------
Gross profit....................... 2,961 3,426 4,952 1,778 2,424
SELLING, GENERAL AND ADMINISTRATIVE
EXPENSES.............................. 2,849 3,477 4,885 1,976 1,630
--------- --------- --------- --------- ---------
Income (loss) from operations......... 112 (51) 67 (198) 794
OTHER INCOME (EXPENSE):
Interest income, net.................. 32 55 47 -- (3)
Other................................. (41) 34 8 16 133
--------- --------- --------- --------- ---------
INCOME BEFORE INCOME TAXES.............. 103 38 122 (182) 924
PROVISION FOR INCOME TAXES.............. 50 30 60 (73) 370
--------- --------- --------- --------- ---------
NET INCOME.............................. $ 53 $ 8 $ 62 $ (109) $ 554
========= ========= ========= ========= =========
</TABLE>
The accompanying notes are an integral part of these combined financial
statements.
F-54
<PAGE>
S.M. LAWRENCE INC. AND RELATED COMPANY
COMBINED STATEMENTS OF SHAREHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE INFORMATION)
<TABLE>
<CAPTION>
COMMON STOCK TOTAL
------------------ RETAINED TREASURY SHAREHOLDERS'
SHARES AMOUNT EARNINGS STOCK EQUITY
--------- ------ --------- --------- -------------
<S> <C> <C> <C> <C> <C>
BALANCE, October 31, 1993............ 1,480 $ 161 $ 1,890 $ (15) $ 2,036
Net income...................... -- -- 53 -- 53
--------- ------ --------- --------- -------------
BALANCE, October 31, 1994............ 1,480 161 1,943 (15) 2,089
Net income...................... -- -- 8 -- 8
--------- ------ --------- --------- -------------
BALANCE, October 31, 1995............ 1,480 161 1,951 (15) 2,097
Net income...................... -- -- 62 -- 62
--------- ------ --------- --------- -------------
BALANCE, October 31, 1996............ 1,480 161 2,013 (15) 2,159
Net income (unaudited).......... -- -- 554 -- 554
--------- ------ --------- --------- -------------
BALANCE, April 30, 1997
(unaudited)........................ 1,480 $ 161 $ 2,567 $ (15) $ 2,713
========= ====== ========= ========= =============
</TABLE>
The accompanying notes are an integral part of these combined financial
statements.
F-55
<PAGE>
S.M. LAWRENCE INC. AND RELATED COMPANY
COMBINED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTHS
ENDED
YEARS ENDED OCTOBER 31, APRIL 30,
------------------------------- --------------------
1994 1995 1996 1996 1997
--------- --------- --------- --------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss).................. $ 53 $ 8 $ 62 $ (109) $ 554
Adjustments to reconcile net income
(loss) to net cash provided by
(used in) operating
activities --
Depreciation and amortization... 263 121 200 86 109
Gain on sale of property and
equipment..................... -- -- -- (1) (120)
Changes in operating assets and
liabilities
(Increase) decrease in --
Accounts receivable........ 262 203 (1,502) (479) 393
Inventories................ (18) (26) (38) 32 (24)
Costs and estimated
earnings in excess of
billings on uncompleted
contracts............... 42 26 (292) (77) (181)
Prepaid expenses and other
assets.................. 46 (13) 3 (92) (143)
Increase (decrease) in --.....
Accounts payable and
accrued expenses........ (156) 143 1,584 469 (1,242)
Billings in excess of costs
on uncompleted
contracts............... 33 (171) 45 204 446
--------- --------- --------- --------- ---------
Net cash provided by
(used in) operating
activities......... 525 291 62 33 (208)
--------- --------- --------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to cash surrender value
of insurance.................... (38) (45) (19) 15 (52)
Purchases to property and
equipment, net.................. (74) (380) (386) (163) (67)
--------- --------- --------- --------- ---------
Net cash used in
investing
activities......... (112) (425) (405) (148) (119)
--------- --------- --------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments on note receivable from
shareholder..................... -- (2) (10) (25) --
Proceeds received on note from
shareholder..................... -- 12 -- -- --
Payments on note payable to
shareholder..................... (181) -- -- -- --
--------- --------- --------- --------- ---------
Net cash provided by
(used in)
financing
activities......... (181) 10 (10) (25) --
--------- --------- --------- --------- ---------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS................... 232 (124) (353) (140) (327)
CASH AND CASH EQUIVALENTS, beginning
of period.......................... 572 804 680 730 327
--------- --------- --------- --------- ---------
CASH AND CASH EQUIVALENTS, end of
period............................. $ 804 $ 680 $ 327 $ 590 $ --
========= ========= ========= ========= =========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
Cash paid for --
Interest........................ $ 14 $ -- $ 5 $ -- $ 3
Income taxes.................... -- 16 14 -- --
</TABLE>
The accompanying notes are an integral part of these combined financial
statements.
F-56
<PAGE>
S.M. LAWRENCE INC. AND RELATED COMPANY
NOTES TO COMBINED FINANCIAL STATEMENTS
1. BUSINESS AND ORGANIZATION:
S.M. Lawrence Inc., a Tennessee corporation (the "Company") focuses on
providing "design and build" installation services and process piping
primarily for industrial facilities and maintenance, repair and replacement of
commercial and industrial HVAC systems. S.M. Lawrence primarily operates in
Tennessee and the immediately surrounding states.
The Company and its shareholders intend to enter into a definitive
agreement with Comfort Systems USA, Inc. ("Comfort Systems") pursuant to which
all outstanding shares of the Company's common stock will be exchanged for cash
and shares of Comfort Systems common stock concurrently with the consummation of
the initial public offering (the "Offering") of the common stock of Comfort
Systems.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
BASIS OF PRESENTATION
The financial statements include the accounts and results of operations of
S.M. Lawrence Inc. and Lawrence Services, Inc. which are under common control
and management of two individuals. All significant intercompany transactions and
balances have been eliminated in combination.
INTERIM FINANCIAL INFORMATION
The interim combined financial statements as of January 31, 1997, and for
the three months ended January 31, 1996 and 1997, are unaudited, and certain
information and footnote disclosures, normally included in financial statements
prepared in accordance with generally accepted accounting principles, have been
omitted. In the opinion of management, all adjustments, consisting only of
normal recurring adjustments, necessary to fairly present the financial
position, results of operations and cash flows with respect to the combined
interim financial statements, have been included. The results of operations for
the interim periods are not necessarily indicative of the results for the entire
fiscal year.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments purchased with an
original maturity of three months or less to be cash equivalents.
INVENTORIES
Inventories consist of duct materials, air conditioning equipment,
refrigeration supplies and accessories held for use in the ordinary course of
business and are stated at the lower of cost or market using the first-in,
first-out (FIFO) method.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost, and depreciation is computed
using an accelerated method of depreciation. Leasehold improvements are
capitalized and amortized over the lesser of the life of the lease or the
estimated useful life of the asset.
Expenditures for repairs and maintenance are charged to expense when
incurred. Expenditures for major renewals and betterments, which extend the
useful lives of existing equipment, are capitalized and depreciated. Upon
retirement or disposition of property and equipment, the cost and related
accumulated depreciation are removed from the accounts and any resulting gain or
loss is recognized in the statements of operations.
REVENUE RECOGNITION
The Company recognizes revenue when services are performed except when work
is being performed under a construction contract. Revenues from construction
contracts are recognized on the percentage-of-
F-57
<PAGE>
S.M. LAWRENCE INC. AND RELATED COMPANY
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
completion method measured by the percentage of costs incurred to total
estimated costs for each contract. Provisions for the total estimated losses on
uncompleted contracts are made in the period in which such losses are
determined. Changes in job performance, job conditions, estimated profitability
and final contract settlements may result in revisions to costs and income and
their effects are recognized in the period in which the revisions are
determined.
The balances billed but not paid by customers pursuant to retainage
provisions in construction contracts will be due upon completion of the
contracts and acceptance by the customer. Based on the Company's experience with
similar contracts in recent years, the retention balance will be billed and
collected in the upcoming fiscal year.
WARRANTY COSTS
The Company warrants labor and parts for one year after installation of new
air conditioning and heating systems. A reserve for warranty costs is recorded
upon completion of installation or service.
INCOME TAXES
The Company follows the liability method of accounting for income taxes in
accordance with Statement of Financial Accounting Standards (SFAS) No. 109.
Under this method, deferred income taxes are recorded based upon the differences
between the financial reporting and tax bases of assets and liabilities and are
measured using the enacted tax rates and laws that will be in effect when the
underlying assets or liabilities are recovered or settled.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires the use of estimates and assumptions by
management in determining the reported amounts of assets and liabilities and
disclosures of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
NEW ACCOUNTING PRONOUNCEMENT
Effective January 1, 1996, the Company adopted SFAS No. 121, "Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed
Of." Accordingly, in the event that facts and circumstances indicate that
property and equipment, and intangible or other assets may be impaired, an
evaluation of recoverability would be performed. If an evaluation is required,
the estimated future undiscounted cash flows associated with the asset are
compared to the asset's carrying amount to determine if a write-down to market
value is necessary. Adoption of this standard did not have a material effect on
the financial position or results of operations of the Company.
F-58
<PAGE>
S.M. LAWRENCE INC. AND RELATED COMPANY
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
3. PROPERTY AND EQUIPMENT:
Property and equipment consist of the following (dollars in thousands):
ESTIMATED OCTOBER 31,
USEFUL LIVES --------------------
IN YEARS 1995 1996
------------ --------- ---------
Transportation equipment............. 5 $ 774 $ 907
Machinery and equipment.............. 7 648 677
Furniture and fixtures............... 5 145 210
Leasehold improvements............... 32 122 231
Construction in process.............. 81 --
--------- ---------
1,770 2,025
Less -- Accumulated depreciation and
amortization....................... (1,311) (1,381)
--------- ---------
Property and equipment,
net..................... $ 459 $ 644
========= =========
4. DETAIL OF CERTAIN BALANCE SHEET ACCOUNTS:
Accounts payable and accrued expenses consist of the following (in
thousands):
OCTOBER 31,
--------------------
1995 1996
--------- ---------
Accounts payable, trade.............. $ 620 $ 1,560
Accrued compensation and benefits.... 466 1,091
Other accrued expenses............... 67 86
--------- ---------
$ 1,153 $ 2,737
========= =========
Installation contracts in progress are as follows (in thousands):
OCTOBER 31,
--------------------
1995 1996
--------- ---------
Costs incurred on contracts in
progress........................... $ 13,475 $ 15,503
Estimated earnings, net of losses.... 4,193 5,641
--------- ---------
17,668 21,144
Less -- Billings to date............. 17,901 21,130
--------- ---------
$ (233) $ 14
========= =========
Costs and estimated earnings in
excess of billings on
uncompleted contracts.............. $ 66 $ 358
Billings in excess of costs and
estimated earnings on
uncompleted contracts.............. (299) (344)
--------- ---------
$ (233) $ 14
========= =========
5. LINE OF CREDIT:
The Company had an unsecured bank line of credit at October 31, 1995 and
1996, with an outstanding balance of $0 for all years. The available balance was
$800,000 for 1995 and $850,000 for 1996. The line of credit is secured by
guarantees and is payable upon demand. Interest is payable on the line of credit
at prime plus 1 percent.
F-59
<PAGE>
S.M. LAWRENCE INC. AND RELATED COMPANY
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
6. LEASES:
The Company leases facilities from a company which is owned by one of the
shareholders. The lease is for a one-year period and is renewed annually. For
each year ended October 31, 1994, 1995 and 1996, the rent expense under this
related-party lease was $110,400.
7. INCOME TAXES:
Federal and state income taxes are as follows (in thousands):
OCTOBER 31,
-------------------------------------
1994 1995 1996
----------- ----------- -----------
Federal --
Current............................ $ 25 $ 24 $ 54
Deferred........................... 17 1 (3)
State --
Current............................ 5 4 10
Deferred........................... 3 1 (1)
--- --- ---
$ 50 $ 30 $ 60
=== === ===
Actual income tax expense differs from income tax expense computed by
applying the U.S. federal statutory corporate tax rate of 34 percent to income
before income taxes for 1994 and 1995 and 35 percent for 1996 as follows (in
thousands):
OCTOBER 31,
-------------------------------------
1994 1995 1996
----------- ----------- -----------
Provision at the statutory rate......... $ 35 $ 13 $ 39
Increase resulting from --
State income tax, net of benefits
for federal deduction............ 5 3 6
Other.............................. 10 14 15
--- --- ---
$ 50 $ 30 $ 60
=== === ===
Deferred income tax provisions result from temporary differences in the
recognition of income and expenses for financial reporting purposes and for tax
purposes. The tax effects of these temporary differences representing deferred
tax assets and liabilities result principally from the following (in thousands):
OCTOBER 31,
------------------------
1995 1996
----------- -----------
Accruals and reserves not deductible
until paid............................ $ (1) $ 2
----------- -----------
Net deferred income tax assets
(liabilities)......................... $ (1) $ 2
=========== ===========
F-60
<PAGE>
S.M. LAWRENCE INC. AND RELATED COMPANY
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
The net deferred tax assets and liabilities are comprised of the following
(in thousands):
OCTOBER 31,
------------------------
1995 1996
----------- -----------
Deferred tax assets --
Current............................ $ -- $ 2
----------- -----------
Total......................... -- 2
----------- -----------
Deferred tax liabilities --
Current............................ (1) --
----------- -----------
Total......................... (1) --
----------- -----------
Net deferred income tax assets
(liabilities).............. $ (1) $ 2
=========== ===========
8. RELATED-PARTY TRANSACTIONS:
The Company loans one of the shareholders money annually. In 1994, the
shareholder signed a promissory note for $44,695 to be paid on demand, accruing
interest at eight percent. The entire balance remained outstanding at year-end
1994. The entire note was repaid during fiscal year 1995. In fiscal year 1995,
the shareholder signed a promissory note for $50,435 to be paid on demand,
accruing interest at eight percent. The entire amount remained outstanding at
year-end 1995. The entire note was repaid during fiscal year 1996. In 1996, the
shareholder signed a promissory note for $75,435 to be paid on demand, accruing
interest at eight percent. The entire balance remained outstanding at year-end
1996.
The Company entered into a non-compete agreement with a former major
shareholder on November 1, 1991 for $542,562. Under this agreement, the former
shareholder agreed not to compete with the Company for a period of 36 months
beginning with November 1, 1991. The principal to be paid was recorded as an
asset and was fully amortized over 36 months. The last payment of $180,854 was
made during fiscal 1994.
In September 1995, the Company entered into an agreement to purchase
equipment from a related party. The terms of the agreement included a $2,776
cash down payment and a note payable due in one year for $11,852. Payments on
the note were $1,975 and $9,877 during 1995 and 1996, respectively.
9. COMMITMENTS AND CONTINGENCIES:
LITIGATION
The Company is involved in legal actions arising in the ordinary course of
business. Management does not believe the outcome of such legal actions will
have a material adverse effect on the Company's financial position or results of
operations.
INSURANCE
The Company carries a broad range of insurance coverage, including general
and business auto liability, commercial property, workers' compensation and a
general umbrella policy. The Company has not incurred significant claims or
losses on any of its insurance policies.
The Company has adopted a partially self-funded medical plan. Under this
plan, the Company pays up to $20,000 per year per employee. The Company's
insurance copay pays the remaining amount. For the years ended December 31,
1994, 1995, and 1996 the Company contributed $102,647, $82,866 and $143,788,
respectively. For claims incurred but not yet reported the Company accrued
$25,000 for the years ended December 31, 1995 and 1996.
F-61
<PAGE>
S.M. LAWRENCE INC. AND RELATED COMPANY
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
10. EMPLOYEE BENEFIT PLANS:
The Company has adopted a 401(k) retirement plan which provides for 100
percent matching contribution by the Company, up to a maximum liability of 5
percent of each participating employee's annual compensation. The Company has
the right to make additional discretionary contributions. Total contributions by
the Company under this plan to provide contributions and pay expenses were
$57,434, $141,105 and $368,377 during 1994, 1995, and 1996, respectively.
Amounts due to this plan were approximately $117,508 and $397,000 for the years
ended December 31, 1995 and 1996, respectively.
11. FINANCIAL INSTRUMENTS:
The Company's financial instruments consist of cash and cash equivalents,
notes receivable, investments, notes payable and a line of credit. The Company
believes that the carrying value of these instruments on the accompanying
balance sheet approximates their fair value.
12. SALES TO SIGNIFICANT CUSTOMER:
During 1996, one customer accounted for approximately 19 percent of the
Company's sales.
13. SUBSEQUENT EVENT:
In December 1996, the Company entered into an agreement to purchase a
one-third interest in an investment. The investment is a partnership and will
own an aircraft, available for use by any of the partners. The Company's cost
for this investment was $100,000. In connection with the agreement, the Company
signed a note payable to the partnership on December 31, 1996 for $100,000 with
interest of 7 percent. This note was fully paid in 1997.
14. EVENT SUBSEQUENT TO DATE OF AUDITORS' REPORT OF INDEPENDENT PUBLIC
ACCOUNTANTS (UNAUDITED):
In March 1997, the Company and its shareholders entered into a definitive
agreement with a wholly-owned subsidiary of Comfort Systems, providing for the
merger of the Company with the subsidiary of Comfort Systems.
Concurrently with the merger, the Company will enter into agreements with
the shareholders to lease land and buildings used in the Company's operations
for a negotiated amount and term.
F-62
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Accurate Air Systems, Inc.:
We have audited the accompanying balance sheets of Accurate Air Systems,
Inc. as of June 30, 1995, December 31, 1995 and 1996, and the related statements
of operations, shareholder's equity and cash flows for each of the years ended
June 30, 1994 and 1995, for the six months ended December 31, 1995, and for the
year ended December 31, 1996. These financial statements are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free 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 financial statements referred to above present fairly,
in all material respects, the financial position of Accurate Air Systems, Inc.,
as of June 30, 1995, December 31, 1995 and 1996, and the results of their
operations and their cash flows for the years ended June 30, 1994 and 1995, for
the six months ended December 31, 1995, and for the year ended December 31, 1996
in conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Houston, Texas
March 7, 1997
F-63
<PAGE>
ACCURATE AIR SYSTEMS, INC.
BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE INFORMATION)
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31, DECEMBER 31, MARCH 31,
1995 1995 1996 1997
-------- ------------ ------------ ------------
(UNAUDITED)
<S> <C> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents............. $ 50 $ 33 $ 79 $ 104
Accounts receivable --
Trade, net of allowance of $70,
$70, $33 and $28,
respectively.................. 1,385 1,671 1,778 2,035
Retainage........................ 550 321 725 267
Other receivables................ 8 16 18 85
Inventories........................... 122 129 104 141
Costs and estimated earnings in excess
of billings on uncompleted
contracts.......................... 275 212 231 228
Prepaid expenses and other current
assets............................. 181 81 -- --
-------- ------------ ------------ ------------
Total current assets............. 2,571 2,463 2,935 2,860
PROPERTY AND EQUIPMENT, net............. 804 1,014 925 932
DEFERRED TAX ASSET...................... 14 -- -- --
-------- ------------ ------------ ------------
Total assets..................... $3,389 $3,477 $3,860 $3,792
======== ============ ============ ============
LIABILITIES AND SHAREHOLDER'S EQUITY
CURRENT LIABILITIES:
Current maturities of long-term
debt............................... $ 88 $ 109 $ 42 $ 16
Accounts payable and accrued
expenses........................... 1,707 1,355 1,236 1,197
Line of credit........................ 374 600 500 700
Note payable -- shareholder........... -- -- 630 630
Billings in excess of costs and
estimated earnings on uncompleted
contracts.......................... 229 206 312 97
-------- ------------ ------------ ------------
Total current liabilities........ 2,398 2,270 2,720 2,640
LONG-TERM DEBT, net of current
maturities............................ 56 175 133 149
COMMITMENTS AND CONTINGENCIES
SHAREHOLDER'S EQUITY:
Common stock $1 par, 250,000 shares
authorized, 1,000 shares issued and
outstanding........................ 1 1 1 1
Retained earnings..................... 934 1,031 1,006 1,002
-------- ------------ ------------ ------------
Total shareholder's equity....... 935 1,032 1,007 1,003
-------- ------------ ------------ ------------
Total liabilities and
shareholder's equity.......... $3,389 $3,477 $3,860 $3,792
======== ============ ============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-64
<PAGE>
ACCURATE AIR SYSTEMS, INC.
STATEMENTS OF OPERATIONS
(IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS
YEARS ENDED JUNE 30, SIX MONTHS ENDED
ENDED YEAR ENDED MARCH 31,
-------------------- DECEMBER 31, DECEMBER 31, --------------------
1994 1995 1995 1996 1996 1997
-------- -------- ------------ ------------ --------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
REVENUES............................. $9,763 $ 12,171 $5,585 $ 16,806 $ 3,161 $ 2,642
COSTS OF SERVICES.................... 7,204 8,998 4,312 13,270 2,450 2,095
-------- -------- ------------ ------------ --------- ---------
Gross profit.................... 2,559 3,173 1,273 3,536 711 547
SELLING, GENERAL AND ADMINISTRATIVE
EXPENSES............................. 2,681 2,960 1,131 3,037 684 526
-------- -------- ------------ ------------ --------- ---------
Income (Loss) from
operations.................... (122) 213 142 499 27 21
OTHER INCOME/(EXPENSE):
Interest expense................ (21) (48) (41) (80) (20) (32)
Other........................... (9) (9) (4) 14 23 7
-------- -------- ------------ ------------ --------- ---------
INCOME (LOSS) BEFORE INCOME TAXES.... (152) 156 97 433 30 (4)
-------- -------- ------------ ------------ --------- ---------
PROVISION (BENEFIT) FOR INCOME
TAXES................................ (54) 60 -- -- -- --
-------- -------- ------------ ------------ --------- ---------
NET INCOME (LOSS).................... $ (98) $ 96 $ 97 $ 433 $ 30 $ (4)
======== ======== ============ ============ ========= =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-65
<PAGE>
ACCURATE AIR SYSTEMS, INC.
STATEMENTS OF SHAREHOLDER'S EQUITY
(IN THOUSANDS, EXCEPT SHARE INFORMATION)
<TABLE>
<CAPTION>
COMMON STOCK TOTAL
----------------- RETAINED SHAREHOLDER'S
SHARES AMOUNT EARNINGS EQUITY
------ ------ -------- -------------
<S> <C> <C> <C> <C>
BALANCE, June 30, 1993............... 1,000 $ 1 $ 941 $ 942
Net loss........................ -- -- (98) (98)
------ ------ -------- -------------
BALANCE, June 30, 1994............... 1,000 1 843 844
Distribution to shareholder..... -- -- (5) (5)
Net income...................... -- -- 96 96
------ ------ -------- -------------
BALANCE, June 30, 1995............... 1,000 1 934 935
Net income...................... -- -- 97 97
------ ------ -------- -------------
BALANCE, December 31, 1995........... 1,000 1 1,031 1,032
Distributions to shareholder.... -- -- (458) (458)
Net income...................... -- -- 433 433
------ ------ -------- -------------
BALANCE, December 31, 1996........... 1,000 $ 1 $1,006 $ 1,007
Net loss (unaudited)............ -- -- (4) (4)
------ ------ -------- -------------
BALANCE, March 31, 1997
(unaudited)........................ 1,000 $ 1 $1,002 $ 1,003
====== ====== ======== =============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-66
<PAGE>
ACCURATE AIR SYSTEMS, INC.
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS
YEAR ENDED JUNE 30, SIX MONTHS ENDED
ENDED YEAR ENDED MARCH 31,
-------------------- DECEMBER 31, DECEMBER 31, --------------------
1994 1995 1995 1996 1996 1997
--------- --------- ------------ ------------ --------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss).................. $ (98) $ 96 $ 97 $ 433 $ 30 $ (4)
Adjustments to reconcile net income
(loss) to net cash
provided by (used in) operating
activities --
Depreciation and amortization... 128 124 85 186 31 36
Deferred income tax provision... (150) (70) 81 -- -- --
Changes in operating assets and
liabilities --
(Increase) decrease in --
Accounts receivable........ 127 (395) (66) (513) (458) 134
Costs and estimated
earnings in excess of
billings on uncompleted
contracts................. (90) (58) 63 (19) (60) 3
Prepaid expenses and other
current assets............ (1) (44) 31 81 78 --
Inventories................ (22) (16) (7) 25 (9) (37)
Increase (decrease) in --
Accounts payable and
accrued expenses.......... 365 419 (350) (119) 176 (39)
Billings in excess of costs
and estimated earnings
on uncompleted
contracts............... 64 119 (22) 106 71 (215)
--------- --------- ------------ ------------ --------- ---------
Net cash provided by (used in)
operating activities........ 323 175 (88) 180 (141) (122)
--------- --------- ------------ ------------ --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Sales (purchase) of property and
equipment......................... (100) (347) (295) (97) 16 (43)
--------- --------- ------------ ------------ --------- ---------
Net cash provided by (used in)
investing activities........ (100) (347) (295) (97) 16 (43)
--------- --------- ------------ ------------ --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings of long-term debt....... -- 183 192 -- -- --
Payments of long-term debt......... (186) (39) (52) (109) (29) (10)
Borrowings of short-term debt...... -- -- -- 630 -- --
Borrowings on line of credit....... 50 -- 226 -- 160 200
Payments on line of credit......... -- (76) -- (100) -- --
Distributions to shareholder....... -- (5) -- (458) -- --
--------- --------- ------------ ------------ --------- ---------
Net cash provided by (used in)
financing activities........ (136) 63 366 (37) 131 190
--------- --------- ------------ ------------ --------- ---------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS................... 87 (109) (17) 46 6 25
CASH AND CASH EQUIVALENTS, beginning
of period.......................... 72 159 50 33 33 79
--------- --------- ------------ ------------ --------- ---------
CASH AND CASH EQUIVALENTS, end of
period............................. $ 159 $ 50 $ 33 $ 79 $ 39 $ 104
========= ========= ============ ============ ========= =========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
Cash paid for --
Interest........................ $ 21 $ 48 $ 41 $ 79 $ 8 $ 33
Income taxes.................... 53 34 -- -- -- --
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-67
<PAGE>
ACCURATE AIR SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
1. BUSINESS AND ORGANIZATION:
Accurate Air Systems, Inc., a Texas corporation, (the "Company") focuses
on providing "design and build" installation services and maintenance, repair
and replacement of HVAC systems for commercial facilities. Accurate primarily
operates in Texas and Oklahoma.
The Company and its shareholder intend to enter into a definitive agreement
with Comfort Systems USA, Inc. ("Comfort Systems") pursuant to which all
outstanding shares of the Company's common stock will be exchanged for cash and
shares of Comfort Systems common stock concurrently with the consummation of the
initial public offering (the "Offering") of the common stock of Comfort
Systems.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
CHANGE IN FISCAL YEAR END
Effective July 1, 1995, the Company changed its fiscal year end from June
30 to December 31. The statements of operations, shareholder's equity and cash
flows for the six months ended December 31, 1995 are presented in the
accompanying financial statements. The results of operations for the six month
period are not necessarily indicative of the results for a full year period.
INTERIM FINANCIAL INFORMATION
The interim financial statements as of March 31, 1997, and for the three
months ended March 31, 1996 and 1997, are unaudited, and certain information and
footnote disclosures, normally included in financial statements prepared in
accordance with generally accepted accounting principles, have been omitted. In
the opinion of management, all adjustments, consisting only of normal recurring
adjustments, necessary to fairly present the financial position, results of
operations and cash flows with respect to the interim financial statements, have
been included. The results of operations for the interim periods are not
necessarily indicative of the results for the entire fiscal year.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments purchased with an
original maturity of three months or less to be cash equivalents.
INVENTORIES
Inventories consist of duct materials, air conditioning equipment,
refrigeration supplies and accessories held for use in the ordinary course of
business and are stated at the lower of cost or market using the
weighted-average method.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost, and depreciation is computed
using the straight-line method over the estimated useful lives of the assets.
Leasehold improvements are capitalized and amortized over the lesser of the life
of the lease or the estimated useful life of the asset.
Expenditures for repairs and maintenance are charged to expense when
incurred. Expenditures for major renewals and betterments, which extend the
useful lives of existing equipment, are capitalized and depreciated. Upon
retirement or disposition of property and equipment, the cost and related
accumulated depreciation are removed from the accounts and any resulting gain or
loss is recognized in the statement of operations.
REVENUE RECOGNITION
The Company recognizes revenue when services are performed except when work
is being performed under a construction contract. Revenues from construction
contracts are recognized on the percentage-of-
F-68
<PAGE>
ACCURATE AIR SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
completion method measured by the percentage of costs incurred to total
estimated costs for each contract. Provisions for the total estimated losses on
uncompleted contracts are made in the period in which such losses are
determined. Changes in job performance, job conditions, estimated profitability
and final contract settlements may result in revisions to costs and income and
their effects are recognized in the period in which the revisions are
determined.
The balances billed but not paid by customers pursuant to retainage
provisions in construction contracts will be due upon completion of the
contracts and acceptance by the customer. Based on the Company's experience with
similar contracts in recent years, the retention balance will be billed and
collected in the upcoming fiscal year.
WARRANTY COSTS
The Company warrants labor for the first year after installation on new air
conditioning and heating systems. The Company generally warrants labor for 90
days after the servicing of existing air conditioning and heating systems. A
reserve for warranty costs is recorded upon completion of installation or
service.
INCOME TAXES
Effective July 1, 1995, the Company elected S Corporation status as defined
by the Internal Revenue Code whereby the Company is not subject to taxation for
federal purposes. Under S Corporation status, each shareholder reports his share
of the Company's taxable earnings or losses in his personal federal and state
tax returns. The balance in the deferred tax liability account at July 1, 1995
was credited to income during the six month period ended December 31, 1995.
Prior to July 1, 1995, the Company followed the liability method of
accounting for income taxes in accordance with Statement of Financial Accounting
Standards (SFAS) No. 109. Under this method, deferred income taxes were recorded
based upon differences between the financial reporting and tax bases of assets
and liabilities and were measured using the enacted tax rates and laws that
would have been in effect when the underlying assets or liabilities were
recovered or settled.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires the use of estimates and assumptions by
management in determining the reported amounts of assets and liabilities and
disclosures of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
NEW ACCOUNTING PRONOUNCEMENT
Effective January 1, 1996, the Company adopted SFAS No. 121, "Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed
Of." Accordingly, in the event that facts and circumstances indicate that
property and equipment, and intangible or other assets may be impaired, an
evaluation of recoverability would be performed. If an evaluation is required,
the estimated future undiscounted cash flows associated with the asset are
compared to the asset's carrying amount to determine if a write-down to market
value is necessary. Adoption of this standard did not have a material effect on
the financial position or results of operations of the Company.
F-69
<PAGE>
ACCURATE AIR SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
3. PROPERTY AND EQUIPMENT:
Property and equipment consist of the following (dollars in thousands):
<TABLE>
<CAPTION>
ESTIMATED DECEMBER 31,
USEFUL LIVES JUNE 30, --------------------
IN YEARS 1995 1995 1996
------------ -------- --------- ---------
<S> <C> <C> <C> <C>
Land................................. -- $ 200 $ 200 $ 200
Buildings............................ 31.5 205 213 213
Transportation equipment............. 5 414 336 241
Machinery and equipment.............. 5 - 7 262 477 510
Leasehold improvements............... 15 - 18 57 60 61
Furniture and fixtures............... 5 - 7 74 122 133
-------- --------- ---------
Less -- Accumulated depreciation and
amortization....................... (408) (394) (433)
-------- --------- ---------
Property and equipment, net..... $ 804 $ 1,014 $ 925
======== ========= =========
</TABLE>
4. DETAIL OF CERTAIN BALANCE SHEET ACCOUNTS (IN THOUSANDS):
Activity in the Company's allowance for doubtful accounts consist of the
following:
DECEMBER 31,
JUNE 30, --------------------
1995 1995 1996
-------- --- ---------
Balance at beginning of year......... $ 57 $ 70 $ 70
Additions to costs and expenses...... 19 -- --
Deductions for uncollectible
receivables written off and
recoveries......................... (6) -- (37)
--- --- ---------
$ 70 $ 70 $ 33
=== === =========
Accounts payable and accrued expenses consist of the following:
DECEMBER 31,
JUNE 30, --------------------
1995 1995 1996
-------- --------- ---------
Accounts payable, trade.............. $ 537 $ 871 $ 685
Accrued compensation and benefits.... 509 179 288
Other accrued expenses............... 575 243 190
Warranty reserve..................... 86 62 73
-------- --------- ---------
$1,707 $ 1,355 $ 1,236
======== ========= =========
Installation contracts in progress are as follows:
DECEMBER 31,
JUNE 30, --------------------
1995 1995 1996
-------- --------- ---------
Costs incurred on contracts in
progress............................. $4,113 $ 2,468 $ 5,514
Estimated earnings, net of losses.... 1,428 726 1,760
Less -- Billings to date............. 5,495 3,188 7,355
-------- --------- ---------
$ 46 $ 6 $ (81)
======== ========= =========
Costs and estimated earnings in
excess of billings on uncompleted
contracts.......................... $ 275 $ 212 $ 231
Billings in excess of costs and
estimated earnings on uncompleted
contracts.......................... (229) (206) (312)
-------- --------- ---------
$ 46 $ 6 $ (81)
======== ========= =========
F-70
<PAGE>
ACCURATE AIR SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
5. SHORT-TERM DEBT:
On October 15, 1996, the Company executed a renewal and extension of its
revolving line of credit with its bank. The new agreement provides for maximum
borrowings of up to $900,000 with interest payable monthly on the amount
outstanding at the rate of prime plus one percent, not to exceed 18 percent. The
agreement provides that the Company may borrow up to 70 percent of its accounts
receivable that are less than sixty days past due. The revolving line of credit
is secured by accounts receivable and the personal guaranty of the sole
shareholder, and requires the Company to maintain certain minimum tangible net
worth and cash flow ratios. Balances outstanding relating to the line are
approximately $374,000, $600,000, and $500,000 as of June 30, 1995, and December
31, 1995 and 1996, respectively. The Company was in compliance with all
covenants at each applicable year end.
On December 27, 1996, the Company borrowed $630,000 from the Company's
shareholder. Interest is payable monthly at a rate of 9 percent on the
outstanding balance. The note matures on June 30, 1997. The entire balance was
outstanding as of December 31, 1996.
6. LONG-TERM DEBT:
DECEMBER 31,
JUNE 30, --------------------
1995 1995 1996
-------- --------- ---------
(IN THOUSANDS)
Note payable, secured by real estate,
payable in twenty-four installments
of $2,540 including interest at
9.50% per annum with the final
payment due January 28, 1997....... $ 44 $ 31 $ --
Notes payable, secured by
transportation and operating
equipment, monthly installments of
various amounts, including interest
at rates ranging from 9.00% to
9.75% per annum until 1997......... 100 69 21
Note payable, secured by operating
equipment, payable in thirty-five
installments of $3,177 including
interest at a rate of prime plus
one percent. A final payment of
$128,696 due on August 1, 1998..... -- 184 154
-------- --------- ---------
144 284 175
Less -- Current maturities........... 88 109 42
-------- --------- ---------
$ 56 $ 175 $ 133
======== ========= =========
The aggregate maturities of long-term debt as of December 31, 1996, are as
follows (in thousands):
1997................................. $ 42
1998................................. 133
---------
$ 175
=========
7. LEASES:
The Company leases facilities from a company which is partially owned by
the shareholder. The lease expires in April 1999. The rent paid under this
related-party lease was approximately $15,000, $60,000, $30,000 and $60,000 for
the years ended June 30, 1994 and 1995, the six months ended December 31, 1995
and the year ended December 31, 1996 respectively. The Company also leased a
facility from a third party, which expired on December 31, 1996. The rent paid
under this lease was approximately $12,000, $12,000, $6,000 and $13,200 for the
years ended June 30, 1994 and 1995, the six months ended December 31, 1995, and
the year ended December 31, 1996, respectively. The leases require the Company
to pay taxes, maintenance, insurance and certain other operating costs of the
leased properties.
F-71
<PAGE>
ACCURATE AIR SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
The Company also leases vehicles for operations which expire in 1998. The
payments under these vehicle leases were approximately $--, $1,400, $26,000 and
$94,000 for the years ended June 30, 1994 and 1995, the six months ended
December 31, 1995 and the year ended December 31, 1996, respectively.
Future minimum lease payments for operating leases are as follows (in
thousands):
DECEMBER 31,
1996
------------
Year Ended
1997............................... $ 197
1998............................... 60
1999............................... 15
------------
$ 272
============
8. INCOME TAXES (IN THOUSANDS):
Federal and state income taxes are as follows:
YEAR ENDED JUNE 30,
--------------------
1994 1995
--------- ---------
Federal --
Current............................ $ (37) $ 111
Deferred........................... (9) (60)
State --
Current............................ (7) 20
Deferred........................... (1) (11)
--------- ---------
$ (54) $ 60
========= =========
Actual income tax expense differs from income tax expense computed by
applying the U.S. federal statutory corporate tax rate of 34 percent to income
before income taxes as follows:
YEAR ENDED JUNE 30,
--------------------
1994 1995
--------- ---------
Provision at the statutory rate......... $ (52) $ 53
Increase (decrease) resulting from --
State income tax, net of benefit
for federal deduction............. (2) 6
Other.............................. -- 1
--------- ---------
$ (54) $ 60
========= =========
F-72
<PAGE>
ACCURATE AIR SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Deferred income tax provisions result from temporary differences in the
recognition of income and expenses for financial reporting purposes and for tax
purposes. The tax effects of these temporary differences representing deferred
tax assets and liabilities result principally from the following:
JUNE 30,
1995
--------
Depreciation and amortization........ $ 14
Accruals and reserves not deductible
until paid......................... 121
State taxes.......................... (4)
Cash to accrual adjustments.......... (50)
--------
Net deferred income tax assets....... $ 81
========
The net deferred tax assets and liabilities are comprised of the following:
JUNE 30,
1995
--------
Deferred tax assets --
Current......................... $ 114
Long-term....................... 14
--------
Total...................... 128
--------
Deferred tax liabilities --
Current......................... 47
Long-term....................... --
--------
Total...................... 47
--------
Net deferred income tax
assets................. $ 81
========
9. COMMITMENTS AND CONTINGENCIES:
LITIGATION
The Company is involved in legal actions arising in the ordinary course of
business. Management does not believe the outcome of such legal actions will
have a material adverse effect on the Company's financial position or results of
operations.
INSURANCE
The Company carries a broad range of insurance coverage, including general
and business auto liability, commercial property, workers' compensation and a
general umbrella policy. The Company has not incurred significant claims or
losses on any of its insurance policies.
Effective January 1, 1995, the Company became self-insured for medical
claims up to $30,000 per year per covered individual per event. Claims in excess
of these amounts are covered by a stop-loss policy. The Company has recorded
reserves for self-insured claims based on estimated claims incurred through June
30, 1995, six months ended December 31, 1995 and the year ended December 31,
1996.
10. EMPLOYEE BENEFIT PLANS:
The Company has adopted a 401(k) plan which provides for 10 percent
matching contributions by the Company, up to a maximum of 6 percent of each
participating employee's annual compensation. The Company has the right to make
additional discretionary contributions. Employees become 100 percent vested in
the employer's contribution after 7 years of service. Total contributions by the
Company under
F-73
<PAGE>
ACCURATE AIR SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
this plan to provide contributions and pay expenses were approximately $118,000,
$131,000, $12,000 and $199,000 during the years ended June 30, 1994 and 1995,
the six months ended December 31, 1995 and the year ended December 31, 1996,
respectively. Amounts due to this plan were approximately $109,000, $--and
$173,000 for the year ended June 30, 1995, the six months ended December 31,
1995 and the year ended December 31, 1996, respectively.
The Company also adopted a discretionary profit-sharing plan under which
the Company may contribute up to 25 percent of a participant's compensation, up
to a maximum contribution of $30,000. Employees become 100 percent vested in the
employer's contributions after 7 years of service. The Company's contributions
and administrative expenses were approximately $5,000, $8,000, $-- and $--, for
the years ended June 30, 1994 and 1995, and six months ended December 31, 1995
and the year ended December 31, 1996, respectively.
11. FINANCIAL INSTRUMENTS:
The Company's financial instruments consist of cash and cash equivalents,
notes payable, a line of credit, and debt. The Company believes that the
carrying value of these instruments on the accompanying balance sheet
approximates their fair value.
12. CAPITAL STOCK:
In addition to the 250,000 authorized shares of $1 par value voting common
stock, the Company has the following classes of authorized capital stock. None
of these three classes have been issued.
SHARES PAR
AUTHORIZED VALUE
----------- ------
Nonvoting Common..................... 250,000 $ 1
Voting Preferred..................... 250,000 $ 1
Nonvoting Preferred.................. 250,000 $ 1
13. SALES TO SIGNIFICANT CUSTOMERS:
For the years ended June 30, 1994 and 1995, the six months ended December
31, 1995, and year ended December 31, 1996 one customer accounted for
approximately 12, 25, 13, and 0 percent, respectively, of the Company's revenue.
14. EVENT SUBSEQUENT TO DATE OF AUDITORS' REPORT OF INDEPENDENT PUBLIC
ACCOUNTANTS (UNAUDITED):
In March 1997, the Company and its shareholder entered into a definitive
agreement with a wholly-owned subsidiary of Comfort Systems, providing for the
merger of the Company with the subsidiary of Comfort Systems.
In connection with the merger, the Company will dividend certain assets to
the shareholder, consisting of land, buildings, and automobiles, with a total
carrying value of approximately $370,000 as of March 31, 1997. Had this
adjustment been recorded at March 31, 1997, the effect on the accompanying
unaudited balance sheet would be a decrease in shareholder's equity of $370,000.
Concurrently with the merger, the Company will enter into new agreements
with a company partially owned by the shareholder to lease land and buildings
owned by such party used in the Company's operations for a negotiated amount and
term.
F-74
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Eastern Heating and Cooling, Inc.:
We have audited the accompanying balance sheet of Eastern Heating and
Cooling, Inc., as of December 31, 1996, and the related statements of
operations, shareholder's equity and cash flows for the year then ended. 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 Eastern Heating and Cooling,
Inc., as of December 31, 1996, and the results of its operations and its cash
flows for the year then ended in conformity with generally accepted accounting
principles.
ARTHUR ANDERSEN LLP
Houston, Texas
March 7, 1997
F-75
<PAGE>
EASTERN HEATING AND COOLING, INC.
BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE INFORMATION)
DECEMBER 31, MARCH 31,
1996 1997
------------ ------------
(UNAUDITED)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents....... $ 83 $ 131
Accounts receivable --
Trade, net of allowance of
$25 and $25,
respectively............ 1,214 813
Retainage.................. 43 83
Other receivables.......... 13 27
Inventories..................... 100 97
Costs and estimated earnings in
excess of billings on
uncompleted contracts......... 66 48
------------ ------------
Total current
assets............. 1,519 1,199
PROPERTY AND EQUIPMENT, net.......... 604 607
OTHER NONCURRENT ASSETS.............. 144 174
------------ ------------
Total assets.......... $2,267 $1,980
============ ============
LIABILITIES AND SHAREHOLDER'S EQUITY
CURRENT LIABILITIES:
Current maturities of long-term
debt........................... $ 302 $ 302
Accounts payable and accrued
expenses....................... 826 759
Line of credit.................. 140 305
Billings in excess of costs and
estimated earnings on
uncompleted contracts.......... 102 53
------------ ------------
Total current
liabilities........ 1,370 1,419
LONG-TERM DEBT, net of current
maturities......................... 431 353
COMMITMENTS AND CONTINGENCIES
SHAREHOLDER'S EQUITY:
Common stock, no par value, 200
shares authorized, 100 shares
issued and outstanding......... 50 50
Retained earnings............... 416 158
------------ ------------
Total shareholder's
equity............. 466 208
------------ ------------
Total liabilities and
shareholder's
equity............. $2,267 $1,980
============ ============
The accompanying notes are an integral part of these financial statements.
F-76
<PAGE>
EASTERN HEATING AND COOLING, INC.
STATEMENTS OF OPERATIONS
(IN THOUSANDS)
THREE MONTHS
ENDED
YEAR ENDED MARCH 31,
DECEMBER 31, --------------------
1996 1996 1997
------------ --------- ---------
(UNAUDITED)
REVENUES............................. $ 7,944 $ 1,525 $ 1,284
COST OF SERVICES..................... 5,276 973 805
------------ --------- ---------
Gross profit.................... 2,668 552 479
SELLING, GENERAL AND ADMINISTRATIVE
EXPENSES........................... 2,237 532 582
------------ --------- ---------
Income (loss) from operations... 431 20 (103)
OTHER INCOME (EXPENSE):
Interest expense................ (87) (19) (20)
Other........................... 40 -- --
------------ --------- ---------
NET INCOME (LOSS).................... $ 384 $ 1 $ (123)
============ ========= =========
The accompanying notes are an integral part of these financial statements.
F-77
<PAGE>
EASTERN HEATING AND COOLING, INC.
STATEMENTS OF SHAREHOLDER'S EQUITY
(IN THOUSANDS, EXCEPT SHARE INFORMATION)
<TABLE>
<CAPTION>
COMMON STOCK TOTAL
---------------- RETAINED SHAREHOLDER'S
SHARES AMOUNT EARNINGS EQUITY
------ ------ -------- -------------
<S> <C> <C> <C> <C>
BALANCE, December 31, 1995........... 100 $ 50 $ 356 $ 406
Distributions to shareholder.... -- -- (324) (324)
Net income...................... -- -- 384 384
------ ------ -------- -------------
BALANCE, December 31, 1996........... 100 $ 50 $ 416 $ 466
Distributions to shareholder
(unaudited)................... -- -- (135) (135)
Net loss (unaudited)............ -- -- (123) (123)
------ ------ -------- -------------
BALANCE, March 31, 1997
(unaudited)........................ 100 $ 50 $ 158 $ 208
====== ====== ======== =============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-78
<PAGE>
EASTERN HEATING AND COOLING, INC.
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
THREE MONTHS ENDED
YEAR ENDED MARCH 31,
DECEMBER 31, --------------------
1996 1996 1997
------------ --------- ---------
(UNAUDITED)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss).................. $ 384 $ 1 $ (123)
Adjustments to reconcile net income
to net cash provided by operating
activities --
Depreciation and amortization.... 144 31 40
Gain on sale of property and
equipment...................... (31) -- --
Changes in operating assets and
liabilities --
(Increase) decrease in --
Accounts receivable......... (434) (119) 347
Inventories................. 4 (1) 2
Costs and estimated earnings
in excess of billings on
uncompleted contracts..... 123 (60) 19
Other noncurrent assets..... 80 3 (32)
Increase (decrease) in --
Accounts payable and accrued
expenses.................. 246 114 (67)
Billings in excess of costs
and estimated earnings on
uncompleted contracts..... 10 36 (48)
------------ --------- ---------
Net cash provided by
operating
activities............ 526 5 138
------------ --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of property and
equipment........................ 38 -- --
Additions of property and
equipment........................ (262) (3) (42)
------------ --------- ---------
Net cash used in
investing
activities............ (224) (3) (42)
------------ --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings of long-term debt....... 208 -- --
Payments of long-term debt......... (280) (69) (78)
Borrowings on line of credit....... 140 181 165
Distributions to shareholder....... (325) (80) (135)
------------ --------- ---------
Net cash provided by
(used in) financing
activities............ (257) 32 (48)
------------ --------- ---------
NET INCREASE IN CASH AND CASH
EQUIVALENTS........................ 45 34 48
CASH AND CASH EQUIVALENTS, beginning
of period.......................... 38 38 83
------------ --------- ---------
CASH AND CASH EQUIVALENTS, end of
period............................. $ 83 $ 72 $ 131
============ ========= =========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
Cash paid for --
Interest......................... $ 52 $ 19 $ 20
The accompanying notes are an integral part of these financial statements.
F-79
<PAGE>
EASTERN HEATING AND COOLING, INC.
NOTES TO FINANCIAL STATEMENTS
1. BUSINESS AND ORGANIZATION:
Eastern Heating and Cooling, Inc., a New York corporation, (the
"Company") focuses on providing "design and build" installation and
maintenance, repair and replacement of HVAC systems for commercial and
industrial facilities. Eastern also offers continuous monitoring and control
systems for commercial facilities. Eastern primarily operates in the area within
a 75 mile radius of Albany, New York.
The Company and its shareholder intends to enter into a definitive
agreement with Comfort Systems USA, Inc. ("Comfort Systems") pursuant to which
all outstanding shares of the Company's common stock will be exchanged for cash
and shares of Comfort Systems common stock concurrently with the consummation of
the initial public offering (the "Offering") of the common stock of Comfort
Systems.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
INTERIM FINANCIAL INFORMATION
The interim financial statements as of March 31, 1997, and for the three
months ended March 31, 1996 and 1997, are unaudited, and certain information and
footnote disclosures, normally included in financial statements prepared in
accordance with generally accepted accounting principles, have been omitted. In
the opinion of management, all adjustments, consisting only of normal recurring
adjustments, necessary to fairly present the financial position, results of
operations and cash flows with respect to the interim financial statements, have
been included. The results of operations for the interim periods are not
necessarily indicative of the results for the entire fiscal year.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments purchased with an
original maturity of three months or less to be cash equivalents.
INVENTORIES
Inventories consist of parts and supplies held for use in the ordinary
course of business and are stated at the lower of cost or market using the
first-in, first-out (FIFO) method.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost, and depreciation is computed
using the straight-line method over the estimated useful lives of the assets.
Leasehold improvements are capitalized and amortized over the lesser of the life
of the lease or the estimated useful life of the asset.
Expenditures for repairs and maintenance are charged to expense when
incurred. Expenditures for major renewals and betterments, which extend the
useful lives of existing equipment, are capitalized and depreciated. Upon
retirement or disposition of property and equipment, the cost and related
accumulated depreciation are removed from the accounts and any resulting gain or
loss is recognized in the statement of operations.
REVENUE RECOGNITION
The Company recognizes revenue when services are performed except when work
is being performed under a construction contract. Revenues from construction
contracts are recognized on the percentage-of-completion method measured by the
percentage of costs incurred to total estimated costs for each contract.
Provisions for the total estimated losses on uncompleted contracts are made in
the period in which such losses are determined. Changes in job performance, job
conditions, estimated profitability and final contract settlements may result in
revisions to costs and income and their effects are recognized in the period in
which the revisions are determined.
F-80
<PAGE>
EASTERN HEATING AND COOLING, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
The balances billed but not paid by customers pursuant to retainage
provision in construction contracts will be due upon completion of the contracts
and acceptance by the customer. Based on the Company's experience with similar
contracts in recent years, the retention balance will be billed and collected in
the upcoming fiscal year.
WARRANTY COSTS
The Company warrants labor for the first year after installation on new air
conditioning and heating systems. The Company generally warrants labor for 30
days after servicing of existing air conditioning and heating systems. A reserve
for warranty costs is recorded upon completion of installation or service.
INCOME TAXES
The Company has elected S Corporation status as defined by the Internal
Revenue Code, whereby the Company is not subject to taxation for federal
purposes. Under S Corporation status, the shareholder reports his share of the
Company's taxable earnings or losses in his personal tax returns. The Company
will terminate its S Corporation status concurrently with the effective date of
this Offering.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires the use of estimates and assumptions by
management in determining the reported amounts of assets and liabilities and
disclosures of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
NEW ACCOUNTING PRONOUNCEMENT
Effective January 1, 1996, the Company adopted Statement of Financial
Accounting Standards (SFAS) No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of." Accordingly, in
the event that facts and circumstances indicate that property and equipment, and
intangible or other assets may be impaired, an evaluation of recoverability
would be performed. If an evaluation is required, the estimated future
undiscounted cash flows associated with the asset are compared to the asset's
carrying amount to determine if a write-down to market value is necessary.
Adoption of this standard did not have a material effect on the financial
position or results of operations of the Company.
3. PROPERTY AND EQUIPMENT:
Property and equipment consist of the following (dollars in thousands):
ESTIMATED
USEFUL LIVES DECEMBER 31,
IN YEARS 1996
------------ ------------
Transportation equipment............. 7 $ 957
Machinery and equipment.............. 10 54
Computer and telephone equipment..... 3-5 6
Leasehold improvements............... 20 36
Furniture and fixtures............... 7-10 126
------------
1,179
Less -- Accumulated depreciation and
amortization....................... (575)
------------
Property and equipment, net..... $ 604
============
F-81
<PAGE>
EASTERN HEATING AND COOLING, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
4. DETAIL OF CERTAIN BALANCE SHEET ACCOUNTS:
Activity in the Company's allowance for doubtful accounts consists of the
following (in thousands):
DECEMBER 31,
1996
------------
Balance at beginning of year......... $ 16
Additions to costs and expenses...... 25
Deductions for uncollectible
receivables written off and
recoveries......................... (16)
------------
$ 25
============
Accounts payable and accrued expenses consist of the following (in
thousands):
DECEMBER 31,
1996
------------
Accounts payable, trade.............. $ 611
Accrued compensation and benefits.... 120
Other accrued expenses............... 95
------------
$ 826
============
Installation contracts in progress are as follows (in thousands):
DECEMBER 31,
1996
------------
Costs incurred on contracts in
progress........................... $ 749
Estimated earnings, net of losses.... 235
------------
984
Less -- Billings to date............. 1,020
------------
$ (36)
============
Costs and estimated earnings in
excess of billings on uncompleted
contracts.......................... $ 66
Billings in excess of costs and
estimated earnings on uncompleted
contracts.......................... (102)
------------
$ (36)
============
5. LONG-TERM DEBT:
Long-term debt consists of the following:
The Company has a term note payable to a financial institution with an
outstanding balance of approximately $133,000 at December 31, 1996. The term
note matures in April 1999, and bears interest at prime plus 2 percent (10.25
percent at December 31, 1996) which is payable along with principal of $4,583
monthly. The note is secured by substantially all assets of the Company and is
guaranteed by the Company's shareholder.
The Company has various installment notes with several financial
institutions which are secured by transportation equipment. The terms of the
notes range from 48 months to 60 months with monthly payments of principal and
interest of approximately $12,300. The notes bear interest at rates ranging from
6.5 percent to 10.5 percent and mature from 1997 to 2001.
The Company has a note payable to its former owner with an outstanding
balance of $288,444 at December 31, 1996. The note payable was calculated using
an implied interest rate of 9 percent. The note
F-82
<PAGE>
EASTERN HEATING AND COOLING, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
payable is due in installments of $159,385 on January 1, 1997 and $168,948 on
January 1, 1998, including interest.
The aggregate maturities of long-term debt as of December 31, 1996, are as
follows (in thousands):
Year ending December 31 --
1997............................ $ 302
1998............................ 296
1999............................ 85
2000............................ 42
2001............................ 8
---------
$ 733
=========
6. LINE OF CREDIT:
The Company has a $500,000 line of credit with a financial services
company. The line of credit is due on demand and bears interest at prime plus 1
percent per annum (9.25 percent at December 31, 1996). The line of credit is
secured by substantially all assets of the Company. The balance outstanding
under this line of credit at December 31, 1996 was $140,000.
7. LEASES:
The Company leases a facility from a company which is 50 percent owned by
the Company's shareholder. The lease expires in December 1999. The rent paid
under this related-party lease was approximately $50,000 for the year ended
December 31, 1996.
Additionally, the Company rents other facilities from non-related parties.
Future minimum lease payments under non-cancellable operating leases are as
follows (in thousands):
Year Ended December 31 --
1997............................... $ 55
1998............................... 55
1999............................... 50
------------
$ 160
============
8. COMMITMENTS AND CONTINGENCIES:
LITIGATION
The Company is involved in legal actions arising in the ordinary course of
business. Management does not believe the outcome of such legal actions will
have a material adverse effect on the Company's financial position or results of
operations.
INSURANCE
The Company carries a broad range of insurance coverage, including general
and business auto liability, commercial property, workers' compensation and a
general umbrella policy. The Company has not incurred significant claims or
losses on any of its insurance policies.
F-83
<PAGE>
EASTERN HEATING AND COOLING, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
9. FINANCIAL INSTRUMENTS:
The Company's financial instruments consist of cash and cash equivalents,
investments, notes payable, a line of credit, and debt. The Company believes
that the carrying value of these instruments on the accompanying balance sheet
approximates their fair value.
10. SALES TO SIGNIFICANT CUSTOMER:
During 1996, one customer accounted for approximately 12 percent of the
Company's sales.
11. SUBSEQUENT EVENT:
Effective January 2, 1997, an affiliate of the Company acquired the
business and certain operating assets of RECC, Inc., a New York corporation.
This affiliate agreed to pay $10,000 over a period of one year.
12. EVENT SUBSEQUENT TO DATE OF AUDITORS' REPORT OF INDEPENDENT PUBLIC
ACCOUNTANTS (UNAUDITED):
In March 1997, the Company and its shareholder entered into a definitive
agreement with a wholly-owned subsidiary of Comfort Systems, providing for the
merger of the Company with the subsidiary of Comfort Systems.
As of March 31, 1997, the Company distributed $135,000 from the accumulated
adjustment account. In connection with the merger, the Company will make
additional cash distributions of approximately $158,000 prior to the merger
which represents the Company's estimated S Corporation accumulated adjustment
account. Had these transactions been recorded at March 31, 1997, the effect on
the accompanying unaudited balance sheet would be an increase in liabilities of
$158,000 and a decrease in shareholder's equity of $158,000.
Concurrently with the merger, the Company will enter into agreements with
the shareholders to lease land and buildings used in the Company's operations
for a negotiated amount and term.
Eastern intends to enter into a 10-year lease with 60 Loudonville Road
Associates for a new building and terminate the existing lease. Eastern has
agreed to install the HVAC systems in the new building at a price which the
Company believes to be at a fair market value. The Company's annual rental in
the new building will be at fair market value, as determined by appraisal.
F-84
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Contract Service, Inc.:
We have audited the accompanying balance sheets of Contract Service, Inc.,
as of December 31, 1995 and 1996, and the related statements of operations,
shareholders' equity and cash flows for the three years ended December 31, 1996.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits 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 financial statements referred to above present fairly,
in all material respects, the financial position of Contract Service, Inc., as
of December 31, 1995 and 1996, and the results of their operations and their
cash flows for the three years ended December 31, 1996 in conformity with
generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Houston, Texas
March 7, 1997
F-85
<PAGE>
CONTRACT SERVICE, INC.
BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE INFORMATION)
DECEMBER 31,
-------------------- MARCH 31,
1995 1996 1997
--------- --------- -----------
(UNAUDITED)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents.......... $ 116 $ 207 $ 103
Accounts receivable --
Trade, net of allowance of
$11, $22 and $21,
respectively............... 651 680 681
Retainage..................... 10 26 41
Inventories........................ 306 362 491
Costs and estimated earnings in
excess of billings on uncompletedX
contracts........................ 104 110 129
Prepaid expenses and other current
assets........................... 11 4 4
--------- --------- -----------
Total current assets.......... 1,198 1,389 1,449
PROPERTY AND EQUIPMENT, net............. 549 642 690
OTHER NONCURRENT ASSETS................. 14 16 15
--------- --------- -----------
Total assets.................. $ 1,761 $ 2,047 $ 2,154
========= ========= ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Current maturities of long-term
debt............................. $ 100 $ 100 $ 101
Accounts payable and accrued
expenses......................... 576 691 657
Billings in excess of costs and
estimated earnings on uncompleted
contracts........................ 149 136 218
--------- --------- -----------
Total current liabilities..... 825 927 976
LONG-TERM DEBT, net of current
maturities............................ 263 429 434
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY:
Common stock, $1 par value, 20,000
shares authorized, 8,946 shares
issued and outstanding........... 9 9 9
Retained earnings.................. 664 682 735
--------- --------- -----------
Total shareholders' equity.... 673 691 744
--------- --------- -----------
Total liabilities and
shareholders' equity....... $ 1,761 $ 2,047 $ 2,154
========= ========= ===========
The accompanying notes are an integral part of these financial statements.
F-86
<PAGE>
CONTRACT SERVICE, INC.
STATEMENTS OF OPERATIONS
(IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS
ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
------------------------------- --------------------
1994 1995 1996 1996 1997
--------- --------- --------- --------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
REVENUES................................ $ 6,502 $ 6,361 $ 7,842 $ 1,369 $ 1,562
COST OF SERVICES........................ 4,393 4,413 5,201 926 1,045
--------- --------- --------- --------- ---------
Gross profit............. 2,109 1,948 2,641 443 517
SELLING, GENERAL AND ADMINISTRATIVE
EXPENSES.............................. 1,228 1,500 1,660 368 458
--------- --------- --------- --------- ---------
Income from operations... 881 448 981 75 59
OTHER INCOME (EXPENSE):
Interest expense................... (5) (9) (29) (9) (15)
Other.............................. 29 38 51 13 9
--------- --------- --------- --------- ---------
NET INCOME.............................. $ 905 $ 477 $ 1,003 $ 79 $ 53
========= ========= ========= ========= =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-87
<PAGE>
CONTRACT SERVICE, INC.
STATEMENTS OF SHAREHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE INFORMATION)
<TABLE>
<CAPTION>
COMMON STOCK TOTAL
------------------- RETAINED SHAREHOLDERS'
SHARES AMOUNT EARNINGS EQUITY
--------- ------ -------- --------------
<S> <C> <C> <C> <C>
BALANCE, December 31, 1993........... 8,946 $ 9 $ 660 $ 669
Distributions to shareholders... -- -- (911) (911)
Net income...................... -- -- 905 905
--------- ------ -------- --------------
BALANCE, December 31, 1994........... 8,946 9 654 663
Distributions to shareholders... -- -- (467) (467)
Net income...................... -- -- 477 477
--------- ------ -------- --------------
BALANCE, December 31, 1995........... 8,946 9 664 673
Distributions to shareholders... -- -- (985) (985)
Net income...................... -- -- 1,003 1,003
--------- ------ -------- --------------
BALANCE, December 31, 1996........... 8,946 9 682 691
Net income (unaudited).......... -- -- 53 53
--------- ------ -------- --------------
BALANCE, March 31, 1997
(unaudited)........................ 8,946 $ 9 $ 735 $ 744
========= ====== ======== ==============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-88
<PAGE>
CONTRACT SERVICE, INC.
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS
ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
------------------------------- --------------------
1994 1995 1996 1996 1997
--------- --------- --------- --------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income......................... $ 905 $ 477 $ 1,003 $ 79 $ 53
Adjustments to reconcile net income
to net cash provided by (used in)
operating activities --
Depreciation..................... 97 120 138 28 33
Gain (loss) on sale of property
and equipment................... 8 (5) -- -- --
Changes in operating assets and
liabilities --
(Increase) decrease in --
Accounts receivable......... (219) (96) (45) 177 (16)
Inventories................. 20 (49) (57) (54) (129)
Costs and estimated earnings
in excess of billings on
uncompleted contracts...... (44) 35 (6) 8 (19)
Prepaid expenses and other
current assets............. (9) (2) 7 2 --
Other noncurrent assets..... (8) 5 (2) (11) 1
Increase (decrease) in --
Accounts payable and accrued
expenses................... (27) (3) 115 (32) (34)
Billings in excess of costs
and estimated earnings on
uncompleted contracts..... 12 17 (13) (28) 82
--------- --------- --------- --------- ---------
Net cash provided by (used in)
operating activities.......... 735 499 1,140 169 (29)
--------- --------- --------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of property and
equipment......................... -- 6 -- 1 --
Additions of property and
equipment......................... (138) (199) (230) (107) (81)
--------- --------- --------- --------- ---------
Net cash used in investing
activities.................... (138) (193) (230) (106) (81)
--------- --------- --------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings of long-term debt....... 102 201 166 -- 6
Distributions to shareholders...... (911) (467) (985) -- --
Collections of advances to officers
and shareholders.................. 86 -- -- -- --
--------- --------- --------- --------- ---------
Net cash provided by (used in)
financing activities.......... (723) (266) (819) -- 6
--------- --------- --------- --------- ---------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS................... (126) 40 91 63 (104)
CASH AND CASH EQUIVALENTS, beginning
of period.......................... 202 76 116 116 207
--------- --------- --------- --------- ---------
CASH AND CASH EQUIVALENTS, end of
period............................. $ 76 $ 116 $ 207 $ 179 $ 103
========= ========= ========= ========= =========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
Cash paid for --
Interest......................... $ 6 $ 30 $ 41 $ 9 $ 15
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-89
<PAGE>
CONTRACT SERVICE, INC.
NOTES TO FINANCIAL STATEMENTS
1. BUSINESS AND ORGANIZATION:
Contract Service, Inc., a Utah corporation, (the "Company") focuses on
providing comprehensive maintenance, repair and replacement of HVAC systems for
commercial and residential facilities primarily in Utah.
The Company and its shareholders intend to enter into a definitive
agreement with Comfort Systems USA, Inc. ("Comfort Systems"), pursuant to
which all outstanding shares of the Company's common stock will be exchanged for
cash and shares of Comfort Systems common stock concurrently with the
consummation of the initial public offering (the "Offering") of the common
stock of Comfort Systems.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
INTERIM FINANCIAL INFORMATION
The interim financial statements as of March 31, 1997, and for the three
months ended March 31, 1996 and 1997, are unaudited, and certain information and
footnote disclosures, normally included in financial statements prepared in
accordance with generally accepted accounting principles, have been omitted. In
the opinion of management, all adjustments, consisting only of normal recurring
adjustments, necessary to fairly present the financial position, results of
operations and cash flows with respect to the interim financial statements, have
been included. The results of operations for the interim periods are not
necessarily indicative of the results for the entire fiscal year.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments purchased with an
original maturity of three months or less to be cash equivalents.
INVENTORIES
Inventories consist of duct materials, air conditioning equipment,
refrigeration supplies and accessories held for use in the ordinary course of
business and are stated at the lower of cost or market using the first-in,
first-out (FIFO) method.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost, and depreciation is computed
using the straight-line method over the estimated useful lives of the assets.
Expenditures for repairs and maintenance are charged to expense when
incurred. Expenditures for major renewals and betterments, which extend the
useful lives of existing equipment, are capitalized and depreciated. Upon
retirement or disposition of property and equipment, the cost and related
accumulated depreciation are removed from the accounts and any resulting gain or
loss is recognized in the statement of operations.
REVENUE RECOGNITION
The Company recognizes revenue when services are performed except when work
is being performed under a construction contract. Revenues from construction
contracts are recognized on the percentage-of-completion method measured by the
percentage of costs incurred to total estimated costs for each contract.
Provisions for the total estimated losses on uncompleted contracts are made in
the period in which such losses are determined. Changes in job performance, job
conditions, estimated profitability and final contract settlements may result in
revisions to costs and income and are recognized in the period in which the
revisions are determined.
F-90
<PAGE>
CONTRACT SERVICE, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
The balances billed but not paid by customers pursuant to retainage
provisions in construction contracts will be due upon completion of the
contracts and acceptance by the customer. Based on the Company's experience with
similar contracts in recent years, the retention balance will be billed and
collected in the upcoming fiscal year.
WARRANTY COSTS
The Company warrants labor for the first year after installation of new air
conditioning and heating units. The Company generally warrants labor for 30 days
after the servicing of existing air conditioning and heating units. A reserve
for warranty costs is recorded upon completion of installation or service.
INCOME TAXES
The Company has elected S Corporation status as defined by the Internal
Revenue Code, whereby the Company is not subject to taxation for federal
purposes. Under S Corporation status, the shareholders report their share of the
Company's taxable earnings or losses in their personal tax returns. The Company
will terminate its S Corporation status concurrently with the effective date of
the Offering.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires the use of estimates and assumptions by
management in determining the reported amounts of assets and liabilities and
disclosures of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
NEW ACCOUNTING PRONOUNCEMENT
Effective January 1, 1996, the Company adopted Statement of Financial
Accounting Standards (SFAS) No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of." Accordingly, in
the event that facts and circumstances indicate that property and equipment, and
intangible or other assets may be impaired, an evaluation of recoverability
would be performed. If an evaluation is required, the estimated future
undiscounted cash flows associated with the asset are compared to the asset's
carrying amount to determine if a write-down to market value is necessary.
Adoption of this standard did not have a material effect on the financial
position or results of operations of the Company.
3. PROPERTY AND EQUIPMENT:
Property and equipment consist of the following (dollars in thousands):
<TABLE>
<CAPTION>
ESTIMATED
USEFUL LIVES DECEMBER 31, DECEMBER 31,
IN YEARS 1995 1996
------------ ------------ ------------
<S> <C> <C> <C>
Transportation equipment............. 5-10 $ 690 $ 907
Machinery and equipment.............. 5-30 126 127
Furniture and fixtures............... 5-20 178 189
------------ ------------
Less -- Accumulated depreciation..... (445) (581)
------------ ------------
Property and equipment, net..... $ 549 $ 642
============ ============
</TABLE>
F-91
<PAGE>
CONTRACT SERVICE, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
4. DETAIL OF CERTAIN BALANCE SHEET ACCOUNTS:
Activity in the Company's allowance for doubtful accounts consists of the
following (in thousands):
DECEMBER 31,
--------------------
1995 1996
--------- ---------
Balance at beginning of year......... $ 11 $ 11
Additions to costs and expenses...... 18 26
Deductions for uncollectible
receivables written off and
recoveries......................... (18) (15)
--------- ---------
$ 11 $ 22
========= =========
Accounts payable and accrued expenses consist of the following (in
thousands):
DECEMBER 31,
--------------------
1995 1996
--------- ---------
Accounts payable, trade.............. $ 242 $ 256
Accrued compensation................. 219 312
Other accrued expenses............... 115 123
--------- ---------
$ 576 $ 691
========= =========
Installation contracts in progress are as follows (in thousands):
DECEMBER 31,
--------------------
1995 1996
--------- ---------
Costs incurred on contracts in
progress............................. $ 1,998 $ 2,534
Estimated earnings, net of losses.... 741 978
--------- ---------
2,739 3,512
Less -- Billings to date............. 2,784 3,538
--------- ---------
$ (45) $ (26)
========= =========
Costs and estimated earnings in
excess
of billings on uncompleted
contracts.......................... $ 104 $ 110
Billings in excess of costs and
estimated
earnings on uncompleted
contracts.......................... (149) (136)
--------- ---------
$ (45) $ (26)
========= =========
5. LONG-TERM DEBT:
Long-term debt consists of ten unsecured promissory notes to the Company's
shareholders of which two are demand notes. All notes, except the demand notes,
are due 10 years from the date of the note. The notes bear an interest rate of
10 percent. Monthly interest payments are made to the shareholders with the
principal due at the date of maturity.
F-92
<PAGE>
CONTRACT SERVICE, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
The aggregate maturities of long-term debt are as follows (in thousands):
Year ending December 31,
1997................................. $ 100
1998................................. --
1999................................. --
2000................................. --
2001................................. --
Thereafter........................... 429
---------
$ 529
=========
6. LEASES:
The Company leases its facilities from a company owned by its two
shareholders. The lease is currently on a month-to-month basis. The rent paid
under this related-party lease was approximately $66,000, $106,000 and $120,000
for the years ended December 31, 1994, 1995 and 1996, respectively.
Future minimum lease payments for operating leases are as follows (in
thousands):
Year ending December 31,
1997............................ $ 120
1998............................ 120
1999............................ 120
2000............................ 120
2001............................ 120
---------
$ 600
=========
7. RELATED-PARTY TRANSACTIONS:
At December 31, 1994, 1995 and 1996, the Company held notes payable to the
shareholders in the amount of $162,000, $363,000 and $529,000, respectively.
(See Note 5.) The notes bear interest at 10 percent. Interest paid during the
years ended December 31, 1994, 1995 and 1996 related to these loans was $6,000,
$29,000 and $41,000, respectively.
8. COMMITMENTS AND CONTINGENCIES:
LITIGATION
The Company is involved in legal actions arising in the ordinary course of
business. Management does not believe the outcome of such legal action will have
a material adverse effect on the Company's financial position or results of
operations.
INSURANCE
The Company carries a broad range of insurance coverage, including general
and business auto liability, commercial property, workers' compensation and a
general umbrella policy. The Company has not incurred significant claims or
losses on any of its insurance policies.
F-93
<PAGE>
CONTRACT SERVICE, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
9. EMPLOYEE BENEFIT PLAN:
Beginning January 1, 1994, the Company adopted a 401(k) plan. The plan
allows employees to contribute a portion of their gross wages into the plan as a
salary deferral and requires the Company to match 25 percent of the employee
contribution up to 5 percent of employee's gross wages. The Company's matching
contributions for the years ended December 31, 1995 and 1996 were $17,000 and
$19,000 respectively.
The Company has also adopted a cafeteria plan pursuant to Section 125 of
the Internal Revenue Code that covers all employees from 90 days after the
commencement of employment. Under this plan, the employees may reduce their
compensation to fund medical, dental and dependent care/day care benefits. The
funds withheld are used to pay actual claims or medical insurance, based on the
employees' elections.
10. FINANCIAL INSTRUMENTS:
The Company's financial instruments consist of cash and cash equivalents,
and debt. The Company believes that the carrying value of these instruments on
the accompanying balance sheet approximates their fair value.
11. EVENT SUBSEQUENT TO DATE OF AUDITORS' REPORT OF INDEPENDENT PUBLIC
ACCOUNTANTS (UNAUDITED):
In March 1997, the Company and its shareholders entered into a definitive
agreement with a wholly-owned subsidiary of Comfort Systems, providing for the
merger of the Company with the subsidiary of Comfort Systems.
In connection with the merger, the Company will make a cash distribution of
approximately $735,000 prior to the merger which represents the Company's
estimated S Corporation accumulated adjustment account. Had these transactions
been recorded at March 31, 1997, the effect on the accompanying unaudited
balance sheet would be a decrease in assets of $97,000 and an increase in
liabilities of $832,000 and a decrease in shareholders' equity of $735,000.
F-94
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Tech Heating and Air Conditioning, Inc.:
We have audited the accompanying combined balance sheets of Tech Heating
and Air Conditioning, Inc., and related company as of December 31, 1995 and
1996, and the related combined statements of operations, shareholders' equity
and cash flows for the years then ended. These combined financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these combined 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 combined financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the combined 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 combined financial statements referred to above present
fairly, in all material respects, the combined financial position of Tech
Heating and Air Conditioning, Inc., and related company as of December 31, 1995
and 1996, and the combined results of their operations and their cash flows for
the years then ended in conformity with generally accepted accounting
principles.
ARTHUR ANDERSEN LLP
Houston, Texas
March 7, 1997
F-95
<PAGE>
TECH HEATING AND AIR CONDITIONING, INC.,
AND RELATED COMPANY
COMBINED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE INFORMATION)
DECEMBER 31,
-------------------- MARCH 31,
1995 1996 1997
--------- --------- -----------
(UNAUDITED)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents.......... $ 313 $ 611 $ 249
Accounts receivable --
Trade, net of allowance of
$45, $40 and $45,
respectively............... 1,244 1,723 1,216
Retainage..................... 92 48 --
Other receivables............. -- 7 20
Inventories........................ 67 208 193
Prepaid expenses and other current
assets........................... 7 33 20
--------- --------- -----------
Total current assets..... 1,723 2,630 1,698
PROPERTY AND EQUIPMENT, net............. 368 500 484
--------- --------- -----------
Total assets............. $ 2,091 $ 3,130 $ 2,182
========= ========= ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Current maturities of long-term
debt............................... $ -- $ 62 $ 69
Accounts payable and accrued
expenses........................... 1,048 757 701
Line of credit..................... 88 190 900
--------- --------- -----------
Total current
liabilities.............. 1,136 1,009 1,670
LONG-TERM DEBT, net of current
maturities.............................. 48 60 32
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY:
Common stock, no par value, 1,000
shares authorized, 500 shares
issued........................... 1 1 1
Treasury stock..................... (3) (3) (3)
Retained earnings.................. 909 2,063 482
--------- --------- -----------
Total shareholders'
equity................... 907 2,061 480
--------- --------- -----------
Total liabilities and
shareholders' equity..... $ 2,091 $ 3,130 $ 2,182
========= ========= ===========
The accompanying notes are an integral part of these combined financial
statements.
F-96
<PAGE>
TECH HEATING AND AIR CONDITIONING, INC.,
AND RELATED COMPANY
COMBINED STATEMENTS OF OPERATIONS
(IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS
YEAR ENDED DECEMBER ENDED
31, MARCH 31,
-------------------- --------------------
1995 1996 1996 1997
--------- --------- --------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C>
REVENUES................................ $ 6,960 $ 7,537 $ 1,075 $ 1,656
COST OF SERVICES........................ 4,212 3,996 639 1,034
--------- --------- --------- ---------
Gross profit....................... 2,748 3,541 436 622
SELLING, GENERAL AND ADMINISTRATIVE
EXPENSES.............................. 1,800 1,861 390 565
--------- --------- --------- ---------
Income from operations............. 948 1,680 46 57
OTHER INCOME (EXPENSE):
Interest expense................... (12) (18) (3) (10)
Other.............................. 20 31 6 11
--------- --------- --------- ---------
NET INCOME.............................. $ 956 $ 1,693 $ 49 $ 58
========= ========= ========= =========
</TABLE>
The accompanying notes are an integral part of these combined financial
statements.
F-97
<PAGE>
TECH HEATING AND AIR CONDITIONING, INC.,
AND RELATED COMPANY
COMBINED STATEMENTS OF SHAREHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE INFORMATION)
<TABLE>
<CAPTION>
COMMON STOCK TOTAL
---------------- TREASURY RETAINED SHAREHOLDERS'
SHARES AMOUNT STOCK EARNINGS EQUITY
------ ------ -------- -------- -------------
<S> <C> <C> <C> <C> <C>
BALANCE, December 31, 1994.............. 500 $ 1 $ (3) $ 575 $ 573
Distributions to shareholders...... -- -- -- (622) (622)
Net income......................... -- -- -- 956 956
------ ------ --- -------- -------------
BALANCE, December 31, 1995.............. 500 1 (3) 909 907
Distributions to shareholders...... -- -- -- (539) (539)
Net income......................... -- -- -- 1,693 1,693
------ ------ --- -------- -------------
BALANCE, December 31, 1996.............. 500 1 (3) 2,063 2,061
Distributions to shareholders
(unaudited)...................... -- -- -- (1,639) (1,639)
Net income (unaudited)............. -- -- -- 58 58
------ ------ --- -------- -------------
BALANCE, March 31, 1997 (unaudited)..... 500 $ 1 $ (3) $ 482 $ 480
====== ====== === ======== =============
</TABLE>
The accompanying notes are an integral part of these combined financial
statements.
F-98
<PAGE>
TECH HEATING AND AIR CONDITIONING, INC.,
AND RELATED COMPANY
COMBINED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS
YEAR ENDED ENDED
DECEMBER 31, MARCH 31,
-------------------- --------------------
1995 1996 1996 1997
--------- --------- --------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income......................... $ 956 $ 1,693 $ 49 $ 58
Adjustments to reconcile net income
to net cash provided by (used
in) operating activities --
Depreciation.................... 89 142 31 38
Changes in operating assets and
liabilities --
(Increase) decrease in --
Accounts receivable........ 581 (442) (48) 542
Inventories................ (42) (141) 1 15
Prepaid expenses and other
current assets.......... 7 (26) (6) 13
Increase (decrease) in --
Accounts payable and
accrued expenses........ (513) (291) (312) (56)
--------- --------- --------- ---------
Net cash provided by
(used in) operating
activities......... 1,078 935 (285) 610
--------- --------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions of property and
equipment....................... (127) (274) (59) (22)
--------- --------- --------- ---------
Net cash used in
investing
activities......... (127) (274) (59) (22)
--------- --------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings on line of credit....... 76 102 18 710
Borrowings on long-term debt....... -- 205 203 --
Payments on long-term debt......... (100) (131) -- (21)
Distributions to shareholders...... (622) (539) (15) (1,639)
--------- --------- --------- ---------
Net cash provided by
(used in) financing
activities......... (646) (363) 206 (950)
--------- --------- --------- ---------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS................... 305 298 (138) (362)
CASH AND CASH EQUIVALENTS, beginning
of period.......................... 8 313 313 611
--------- --------- --------- ---------
CASH AND CASH EQUIVALENTS, end of
period............................. $ 313 $ 611 $ 175 $ 249
========= ========= ========= =========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
Cash paid for --
Interest........................ $ 12 $ 18 $ 3 $ 8
</TABLE>
The accompanying notes are an integral part of these combined financial
statements.
F-99
<PAGE>
TECH HEATING AND AIR CONDITIONING, INC.
AND RELATED COMPANY
NOTES TO COMBINED FINANCIAL STATEMENTS
1. BUSINESS AND ORGANIZATION:
Tech Heating and Air Conditioning, Inc., an Ohio corporation, and related
company (collectively, the "Company") focuses on providing "design and
build" installation and services, maintenance, repair and replacement of HVAC
systems for commercial and industrial facilities. Tech also offers continuous
monitoring and control services for commercial facilities. The Company's
customers are primarily in the greater Cleveland, Ohio area.
The Company and its shareholders intend to enter into a definitive
agreement with Comfort Systems, USA, Inc. ("Comfort Systems") pursuant to
which all outstanding shares of the Company's common stock will be exchanged for
cash and shares of Comfort Systems common stock concurrently with the
consummation of the initial public offering (the "Offering") of the common
stock of Comfort Systems.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
BASIS OF PRESENTATION
The combined financial statements include the accounts and results of
operations of Tech Heating and Air Conditioning, Inc., and its related company,
Tech Mechanical which are under common control and management of two
individuals. All significant intercompany transactions and balances have been
eliminated in combination.
INTERIM FINANCIAL INFORMATION
The interim combined financial statements as of March 31, 1997, and for the
three months ended March 31, 1996 and 1997, are unaudited, and certain
information and footnote disclosures, normally included in financial statements
prepared in accordance with generally accepted accounting principles, have been
omitted. In the opinion of management, all adjustments, consisting only of
normal recurring adjustments, necessary to fairly present the financial
position, results of operations and cash flows with respect to the combined
interim financial statements, have been included. The results of operations for
the interim periods are not necessarily indicative of the results for the entire
fiscal year.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments purchased with an
original maturity of three months or less to be cash equivalents.
INVENTORIES
Inventories consist of duct materials, air conditioning equipment,
refrigeration supplies and accessories held for use in the ordinary course of
business and are stated at the lower of cost or market using the first-in,
first-out (FIFO) method.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost, and depreciation is computed
using the straight-line method over the estimated useful lives of the assets.
Expenditures for repairs and maintenance are charged to expense when
incurred. Expenditures for major renewals and betterments, which extend the
useful lives of existing equipment, are capitalized and depreciated. Upon
retirement or disposition of property and equipment, the cost and related
accumulated depreciation are removed from the accounts and any resulting gain or
loss is recognized in the combined statements of operations.
F-100
<PAGE>
TECH HEATING AND AIR CONDITIONING, INC.
AND RELATED COMPANY
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
REVENUE RECOGNITION
The Company recognizes revenue when services are performed except when work
is being performed under a construction contract. Revenues from construction
contracts are recognized on the percentage-of-completion method measured by the
percentage of costs incurred to total estimated costs for each contract.
Provisions for the total estimated losses on uncompleted contracts are made in
the period in which such losses are determined. Changes in job performance, job
conditions, estimated profitability and final contract settlements may result in
revisions to costs and income and their effects are recognized in the period in
which the revisions are determined.
The balances billed but not paid by customers pursuant to retainage
provisions in construction contracts will be due upon completion of the
contracts and acceptance by the customer. Based on the Company's experience with
similar contracts in recent years, the retention balance will be billed and
collected in the upcoming fiscal year.
WARRANTY COSTS
The Company warrants labor for the first year after installation of new air
conditioning and heating systems. The Company generally warrants labor for 30
days after the servicing of existing air conditioning and heating systems. A
reserve for warranty costs is recorded upon completion of installation or
service.
INCOME TAXES
The Company has elected S Corporation status as defined by the Internal
Revenue Code, whereby the Company is not subject to taxation for federal
purposes. Under S Corporation status, the shareholders report their share of the
Company's taxable earnings or losses in their personal tax returns. The Company
will terminate its S Corporation status concurrently with the effective date of
the Offering.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires the use of estimates and assumptions by
management in determining the reported amounts of assets and liabilities and
disclosures of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
NEW ACCOUNTING PRONOUNCEMENT
Effective January 1, 1996, the Company adopted Statement of Financial
Accounting Standards (SFAS) No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of." Accordingly, in
the event that facts and circumstances indicate that property and equipment may
be impaired, an evaluation of recoverability would be performed. If an
evaluation is required, the estimated future undiscounted cash flows associated
with the asset are compared to the asset's carrying amount to determine if a
write-down to market value is necessary. Adoption of this standard did not have
a material effect on the financial position or combined results of operations of
the Company.
F-101
<PAGE>
TECH HEATING AND AIR CONDITIONING, INC.
AND RELATED COMPANY
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
3. PROPERTY AND EQUIPMENT:
Property and equipment consist of the following (dollars in thousands):
ESTIMATED DECEMBER 31,
USEFUL LIVES --------------------
IN YEARS 1995 1996
------------ --------- ---------
Transportation equipment................ 5 $ 462 $ 553
Machinery and equipment................. 7 61 159
Computer and telephone equipment........ 5 107 190
Furniture and fixtures.................. 5-7 145 128
--------- ---------
Less -- Accumulated depreciation........ (407) (530)
--------- ---------
Property and equipment, net........ $ 368 $ 500
========= =========
4. DETAIL OF CERTAIN BALANCE SHEET ACCOUNTS:
Activity in the Company's allowance for doubtful accounts consists of the
following (in thousands):
DECEMBER 31,
--------------------
1995 1996
--- ---
Balance at beginning of year............ $ 25 $ 45
Additions to costs and expenses......... 20 --
Deductions for uncollectible receivables
written off and recoveries............ -- (5)
--- ---
$ 45 $ 40
=== ===
Accounts payable and accrued expenses consist of the following (in
thousands):
DECEMBER 31,
--------------------
1995 1996
--------- ---------
Accounts payable, trade................. $ 428 $ 388
Accrued compensation and benefits....... 337 226
Other accrued expenses.................. 283 143
--------- ---------
$ 1,048 $ 757
========= =========
At December 31, 1995 and 1996 billings to customers generally equalled work
performed which resulted in no costs and estimated earnings in excess of
billings or billings in excess of costs and estimated earnings on uncompleted
contracts.
F-102
<PAGE>
TECH HEATING AND AIR CONDITIONING, INC.
AND RELATED COMPANY
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
5. LONG-TERM DEBT AND NOTES PAYABLE:
Long-term debt consists of installment notes payable for transportation
equipment. The debt is secured by the related transportation equipment. The
terms of the notes range from 24 months to 36 months with monthly payments of
principal and interest of approximately $8,000. The notes bear interest at rates
ranging from 7.5 percent to 9.95 percent.
The aggregate maturities of long-term debt as of December 31, 1996, are as
follows (in thousands):
Year ending December 31 --
1997............................... $ 252
1998............................... 55
1999............................... 5
---------
$ 312
=========
The Company has a $1,500,000 line of credit with a financial services
company. The line of credit expires in July 1997 and bears interest at prime
plus .25 percent per annum (8.5 percent at December 31, 1996). The line of
credit is secured by a lien on accounts receivable and inventory and is
guaranteed by the shareholders. There was $190,000 outstanding under this line
of credit at December 31, 1996.
6. LEASES:
The Company leases facilities from a company which is partially owned by
one of the shareholders. The lease expires in April of 2000. The rent paid under
this related-party lease was approximately $84,000 for the year ended December
31, 1996. The lease requires the Company to pay taxes, maintenance, insurance
and certain other operating costs of the leased property. The lease contains
renewal provisions.
The Company leases a vehicle for a key member of management. The lease
payments under this vehicle lease totaled approximately $6,700 for the year
ended December 31, 1996.
Future minimum lease payments for operating leases are as follows (in
thousands):
Year ending December 31
1997............................ $ 100
1998............................ 91
1999............................ 86
2000............................ 28
---------
$ 305
=========
7. EMPLOYEE BENEFIT PLANS:
The Company has adopted a retirement plan which qualifies under Section
401(k) of the Internal Revenue Code. The Company has the right to make
discretionary contributions. Total contributions by the Company under this plan
were approximately $18,000 and $12,000 for 1995 and 1996, respectively.
8. FINANCIAL INSTRUMENTS:
The Company's financial instruments consist of cash and cash equivalents
and debt. The Company believes that the carrying value of these instruments on
the accompanying balance sheet approximates their fair value.
F-103
<PAGE>
TECH HEATING AND AIR CONDITIONING, INC.
AND RELATED COMPANY
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
9. COMMITMENTS AND CONTINGENCIES:
LITIGATION
The Company is involved in legal actions arising in the ordinary course of
business. Management does not believe the outcome of such legal actions will
have a material adverse effect on the Company's financial position or combined
results of operations.
INSURANCE
The Company carries a broad range of insurance coverage, including general
and business auto liability, commercial property, workers' compensation and a
general umbrella policy. The Company has not incurred significant claims or
losses on any of its insurance policies.
10. EVENT SUBSEQUENT TO DATE OF AUDITORS' REPORT OF INDEPENDENT PUBLIC
ACCOUNTANTS (UNAUDITED):
In March 1997, the Company and its shareholders entered into a definitive
agreement with a wholly-owned subsidiary of Comfort Systems, providing for the
merger of the Company with the subsidiary of Comfort Systems.
As of March 31, 1997, the Company distributed $1,639,000 from the
accumulated adjustment account and increased borrowings on the line of credit of
$900,000 with the remainder paid from cash on hand. In connection with the
merger, the Company will make additional cash distributions of approximately
$482,000 prior to the merger which represents the Company's estimated S
Corporation accumulated adjustment account. Had these transactions been recorded
at March 31, 1997, the effect on the accompanying unaudited balance sheet would
have been a decrease in assets of $149,000, an increase in liabilities of
$333,000 and a decrease in shareholders' equity of $482,000.
Concurrently with the merger, the Company will enter into agreements with
the shareholders to lease land and buildings used in the Company's operations
for a negotiated amount and term.
F-104
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Seasonair, Inc.:
We have audited the accompanying balance sheet of Seasonair, Inc. as of
December 31, 1996, and the related statements of operations, shareholders'
equity and cash flows for the year then ended. 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 Seasonair, Inc., as of
December 31, 1996, and the results of its operations and its cash flows for the
year then ended in conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Houston, Texas
March 7, 1997
F-105
<PAGE>
SEASONAIR, INC.
BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE INFORMATION)
DECEMBER 31, MARCH 31,
1996 1997
------------ ------------
(UNAUDITED)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents.......... $ 69 $ 221
Accounts receivable --
Trade, net of allowance of $
-- and $9, respectively.... 961 869
Retainage..................... 17 44
Other receivables............. -- 40
Inventories........................ 190 187
Costs on uncompleted contracts in
excess of billings................ 75 89
Deferred tax asset................. 104 104
Prepaid expenses and other current
assets............................ 96 49
------------ ------------
Total current assets..... 1,512 1,603
PROPERTY AND EQUIPMENT, net............. 63 61
OTHER NONCURRENT ASSETS................. 83 110
------------ ------------
Total assets............. $1,658 $1,774
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Line of credit..................... $-- $ 65
Current maturities of long-term
debt.............................. 34 26
Accounts payable and accrued
expenses.......................... 810 866
Billings in excess of costs and
estimated earnings on uncompleted
contracts......................... 156 134
------------ ------------
Total current
liabilities.......... 1,000 1,091
LONG-TERM DEBT, net of current
maturities............................ 76 77
DEFERRED TAX LIABILITY.................. 17 17
COMMITMENTS AND CONTINGENCIES...........
SHAREHOLDERS' EQUITY:
Common stock, no par value,
2,000,000 shares authorized,
1,244,000 shares issued and
outstanding....................... 78 78
Additional paid-in capital......... 1 1
Retained earnings.................. 721 745
Treasury stock..................... (235) (235)
------------ ------------
Total shareholders'
equity............... 565 589
------------ ------------
Total liabilities and
shareholders'
equity............... $1,658 $1,774
============ ============
The accompanying notes are an integral part of these financial statements.
F-106
<PAGE>
SEASONAIR, INC.
STATEMENTS OF OPERATIONS
(IN THOUSANDS)
THREE MONTHS
ENDED
YEAR ENDED MARCH 31,
DECEMBER 31, --------------------
1996 1996 1997
------------ --------- ---------
(UNAUDITED)
REVENUES................................ $ 6,737 $ 1,128 $ 1,831
COST OF SERVICES........................ 4,006 586 1,165
------------ --------- ---------
Gross profit.................. 2,731 542 666
SELLING, GENERAL AND ADMINISTRATIVE
EXPENSES.............................. 2,597 604 644
------------ --------- ---------
Income (loss) from
operations................. 134 (62) 22
OTHER INCOME (EXPENSE):
Interest expense................... (21) (5) (3)
Other.............................. 82 6 28
------------ --------- ---------
INCOME BEFORE INCOME TAXES.............. 195 (61) 47
PROVISION FOR INCOME TAXES.............. 69 -- 23
------------ --------- ---------
NET INCOME (LOSS)....................... $ 126 $ (61) $ 24
============ ========= =========
The accompanying notes are an integral part of these financial statements.
F-107
<PAGE>
SEASONAIR, INC.
STATEMENTS OF SHAREHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE INFORMATION)
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL TOTAL
--------------------- PAID-IN RETAINED TREASURY SHAREHOLDERS'
SHARES AMOUNT CAPITAL EARNINGS STOCK EQUITY
------------ ------ ---------- --------- --------- -------------
<S> <C> <C> <C> <C> <C> <C>
BALANCE, December 31, 1995........... 1,214,724 $ 78 $ 1 $ 632 $ (269) $ 442
Sales of treasury stock......... 29,503 -- -- -- 34 34
Distributions to shareholders... -- -- -- (37) -- (37)
Net income...................... -- -- -- 126 -- 126
--
------------ ------ --------- --------- -------------
BALANCE, December 31, 1996........... 1,244,227 78 1 721 (235) 565
Purchase of treasury stock...... (266) -- -- -- -- --
Net income (unaudited).......... -- -- -- 24 -- 24
--
------------ ------ --------- --------- -------------
BALANCE, March 31, 1997
(unaudited)..................... 1,243,961 $ 78 $ 1 $ 745 $ (235) $ 589
============ ====== == ========= ========= =============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-108
<PAGE>
SEASONAIR, INC.
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
THREE MONTHS
ENDED
YEAR ENDED MARCH 31,
DECEMBER 31, --------------------
1996 1996 1997
------------ --------- ---------
(UNAUDITED)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss).................. $ 126 $ (61) $ 24
Adjustments to reconcile net income
(loss) to net cash provided by
(used in)
operating activities
Depreciation.................... (54) 5 5
Gain on sale of property and
equipment..................... (4) -- --
Changes in operating assets and
liabilities --
(Increase) decrease in --
Accounts receivable........ 49 282 25
Inventories................ (35) (6) 3
Prepaid expenses and other
current assets.......... (171) (37) 47
Costs of uncompleted
contracts in excess of
billings................ 58 (65) (14)
Other noncurrent assets.... (71) -- (27)
Increase (decrease) in --
Accounts payable and
accrued expenses........ (74) (76) 56
Billings in excess of costs
on uncompleted
contracts............... (23) 12 (22)
Deferred tax liability..... 30 -- --
------------ --------- ---------
Net cash provided by
(used in) operating
activities......... (169) 54 97
------------ --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of property
and equipment................. 71 (8) (3)
------------ --------- ---------
Net cash provided by
(used in) investing
activities......... 71 (8) (3)
------------ --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings on line of credit.... -- -- 65
Payments of long-term debt...... (105) (82) (7)
Distributions to shareholders... (37) -- --
Cash received for sale of
treasury shares............... 34 (1) --
------------ --------- ---------
Net cash provided by
(used in) financing
activities......... (108) (83) 58
------------ --------- ---------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS................... (206) (37) 152
CASH AND CASH EQUIVALENTS, beginning
of period.......................... 275 275 69
------------ --------- ---------
CASH AND CASH EQUIVALENTS, end of
period............................. $ 69 $ 238 $ 221
============ ========= =========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
Cash paid for --
Interest................... $ 22 $ 3 $ 5
Income taxes............... 163 30 40
The accompanying notes are an integral part of these financial statements.
F-109
<PAGE>
SEASONAIR, INC.
NOTES TO FINANCIAL STATEMENTS
1. BUSINESS AND ORGANIZATION:
Seasonair, Inc., a Maryland corporation, (the "Company") focuses on
providing installation services and maintenance, repair and replacement of HVAC
systems for light commercial facilities. Seasonair primarily operates in
Maryland, the District of Columbia and Virginia.
The Company and its shareholders intend to enter into a definitive
agreement with Comfort Systems, USA, Inc. ("Comfort Systems") pursuant to
which all outstanding shares of the Company's common stock will be exchanged for
cash and shares of Comfort Systems common stock concurrently with the
consummation of the initial public offering (the "Offering") of the common
stock of Comfort Systems.
INTERIM FINANCIAL INFORMATION
The interim financial statements as of March 31, 1997, and for the three
months ended March 31, 1996 and 1997, are unaudited, and certain information and
footnote disclosures, normally included in financial statements prepared in
accordance with generally accepted accounting princples, have been omitted. In
the opinion of management, all adjustments, consisting only of normal recurring
adjustments, necessary to fairly present the financial position, results of
operations and cash flows with respect to the interim financial statements, have
been included. The results of operations for the interim periods are not
necessarily indicative of the results for the entire fiscal year.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments purchased with an
original maturity of three months or less to be cash equivalents.
INVENTORIES
Inventories consist of duct materials, air conditioning equipment,
refrigeration supplies and accessories held for use in the ordinary course of
business and are stated at the lower of cost or market using the
weighted-average method.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost, and depreciation is computed
using an accelerated method over the estimated useful lives of the assets.
Leasehold improvements are capitalized and amortized over the lesser of the life
of the lease or the estimated useful life of the asset.
Expenditures for repairs and maintenance are charged to expense when
incurred. Expenditures for major renewals and betterments, which extend the
useful lives of existing equipment, are capitalized and depreciated. Upon
retirement or disposition of property and equipment, the cost and related
accumulated depreciation are removed from the accounts and any resulting gain or
loss is recognized in the statement of operations.
REVENUE RECOGNITION
The Company recognizes revenue when services are performed except when work
is being performed under a construction contract. Revenue from construction
contracts is recognized on the completed-contract method. This method is used
because the typical contract is completed within a twelve-month period, and the
Company's current financial position and results of operations do not vary
significantly from those which would result from use of the
percentage-of-completion method. A contract is considered complete when all
costs except insignificant items have been incurred, and the installation is
operating according to specifications or has been accepted by the customer.
F-110
<PAGE>
SEASONAIR, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
The balances billed but not paid by customers pursuant to retainage
provision in construction contracts will be due upon completion of the contracts
and acceptance by the customer. Based on the Company's experience with similar
contracts in recent years, the retention balance will be billed and collected in
the upcoming fiscal year.
Contract costs include all direct equipment, material, labor, and
subcontract costs. Provisions for estimated losses on uncompleted contracts are
made in the period in which such losses are determined.
WARRANTY COSTS
The Company warrants labor for the first year after installation on new air
conditioning and heating systems. The Company generally warrants labor for 30
days after servicing of existing air conditioning and heating systems. A reserve
for warranty costs is recorded upon completion of installation or service.
INCOME TAXES
The Company follows the liability method of accounting for income taxes in
accordance with Statement of Financial Accounting Standards (SFAS) No. 109
"Accounting for Income Taxes". Under this method, deferred income taxes are
recorded based upon differences between the financial reporting and tax bases of
assets and liabilities and are measured using the enacted tax rates and laws
that will be in effect when the underlying assets or liabilities are recovered
or settled.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires the use of estimates and assumptions by
management in determining the reported amounts of assets and liabilities and
disclosures of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
NEW ACCOUNTING PRONOUNCEMENT
Effective January 1, 1996, the Company adopted SFAS No. 121, "Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed
Of." Accordingly, in the event that facts and circumstances indicate that
property and equipment and intangible or other assets may be impaired, an
evaluation of recoverability would be performed. If an evaluation is required,
the estimated future undiscounted cash flows associated with the asset are
compared to the asset's carrying amount to determine if a write-down to market
value is necessary. Adoption of this standard did not have a material effect on
the financial position or results of operations of the Company.
3. PROPERTY AND EQUIPMENT:
Property and equipment consist of the following (dollars in thousands):
ESTIMATED
USEFUL LIVES DECEMBER 31,
IN YEARS 1996
------------ ------------
Transportation equipment............. 5 $ 17
Machinery and equipment.............. 5 208
Leasehold improvements............... 39 15
Furniture and fixtures............... 7 16
------------
256
Less -- Accumulated depreciation and
amortization....................... (193)
------------
Property and equipment, net..... $ 63
============
F-111
<PAGE>
SEASONAIR, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
4. DETAIL OF CERTAIN BALANCE SHEET ACCOUNTS:
Activity in the Company's allowance for doubtful accounts consist of the
following (in thousands):
DECEMBER 31,
1996
------------
Balance at beginning of year............ $ --
Additions to costs and expenses......... 5
Deductions for uncollectible receivables
written off and recoveries............ (5)
---
$ --
===
Accounts payable and accrued expenses consist of the following (in
thousands):
DECEMBER 31,
1996
------------
Accounts payable, trade.............. $ 353
Accrued compensation and benefits.... 321
Warranty reserve..................... 37
Other................................ 99
------------
$ 810
============
5. LONG-TERM DEBT:
Long-term debt consists of two notes payable to officers and an installment
note payable for transportation equipment, which is secured by the related
transportation equipment. The terms of the notes range from 51 months to 80
months with monthly payments of principal and interest of approximately $3,598.
The notes bear interest at rates ranging from 10 percent to 12.7 percent.
The aggregate maturities of long-term debt as of December 31, 1996, are as
follows (in thousands):
Year ending December 31 --
1997............................... $ 34
1998............................... 37
1999............................... 38
2000............................... 1
---------
$ 110
=========
The Company has a $150,000 line of credit with a financial services
company. The line of credit expires August 5, 1997, and bears interest at prime
plus one percent per annum. There was no balance outstanding under this line of
credit at December 31, 1996.
6. LEASES:
The Company leases facilities from a partnership which is partially owned
by one of the shareholders. The lease expires in October, 2006. The rent paid
under this lease was approximately $62,640 for the year ended December 31, 1996.
The lease requires the Company to pay taxes, maintenance, insurance and certain
other operating costs of the leased property.
The Company leases vehicles for operations. The payments under these
vehicle leases were approximately $189,000 for the year ended December 31, 1996.
F-112
<PAGE>
SEASONAIR, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Future minimum lease payments for operating leases are as follows (in
thousands):
Year ending December 31 --
1997............................... $ 241
1998............................... 202
1999............................... 158
2000............................... 105
2001............................... 65
---------
$ 771
=========
7. INCOME TAXES:
Federal and state income taxes for the year ended December 31, 1996, are as
follows (in thousands):
Federal --
Current............................ $ 50
Deferred........................... 7
State --
Current............................ 11
Deferred........................... 1
---
$ 69
===
Actual income tax expense for the year ended December 31, 1996, differs
from income tax expense computed by applying the U.S. federal statutory
corporate tax rate of 35% to income before income taxes as follows (in
thousands):
Provision at the statutory rate......... $ 68
Increase (decrease) resulting from --
State income tax, net of benefits
for federal deduction............. 8
Other.............................. (7)
---
$ 69
===
Deferred income tax provisions result from temporary differences in the
recognition of income and expenses for financial reporting purposes and for tax
purposes. The tax effects of these temporary differences representing deferred
tax assets and liabilities as of December 31, 1996, result principally from the
following (in thousands):
Depreciation and amortization........... $ (18)
Accruals and reserves not deductible
until paid............................ 110
State taxes............................. (5)
---------
Net deferred income tax asset........... $ 87
=========
F-113
<PAGE>
SEASONAIR, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
The net deferred tax assets and liabilities at December 31, 1996, are comprised
of the following (in thousands):
Deferred tax assets --
Current............................ $ 104
Long-term.......................... --
---------
Total......................... 104
---------
Deferred tax liabilities --
Current............................ --
Long-term.......................... 17
---------
Total......................... 17
---------
Net deferred income tax
asset...................... $ 87
=========
8. COMMITMENTS AND CONTINGENCIES:
LITIGATION
The Company is involved in legal actions arising in the ordinary course of
business. Management does not believe the outcome of such legal action will have
a material adverse effect on the Company's financial position or results of
operations.
INSURANCE
The Company carries a broad range of insurance coverage, including general
and business auto liability, commercial property, workers' compensation and a
general umbrella policy. The Company has not incurred significant claims or
losses on any of its insurance policies.
9. EMPLOYEE BENEFIT PLAN:
The Company has a 401(k) profit-sharing plan which provides for the Company
to match employee contributions up to a maximum of $260 per person per year as
well as an employee stock ownership plan. Total contributions for both plans by
the Company under the plan were approximately $80,000 for purchase of treasury
stock for the employee stock ownership plan, and $5,000 for the 401(k) plan for
the year ended December 31, 1996.
10. FINANCIAL INSTRUMENTS:
The Company's financial instruments consist of cash and cash equivalents,
notes receivable, investments, notes payable, and debt. The Company believes
that the carrying value of these instruments on the accompanying balance sheet
approximates their fair value.
11. EVENT SUBSEQUENT TO DATE OF AUDITORS' REPORT OF INDEPENDENT PUBLIC
ACCOUNTANTS (UNAUDITED):
In March 1997, the Company and its shareholders entered into a definitive
agreement with a wholly-owned subsidiary of Comfort Systems, providing for the
exchange of shares by the Company with the subsidiary of Comfort Systems. A
total of 70,197 shares will be exchanged for cash and distributed to the
employee stock ownership plan.
F-114
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Western Building Services, Inc.:
We have audited the accompanying balance sheets of Western Building
Services, Inc. as of December 31, 1995 and 1996, and the related statements of
operations, shareholders' equity and cash flows for the years then ended. 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 financial statements referred to above present fairly,
in all material respects, the financial position of Western Building Services,
Inc. as of December 31, 1995 and 1996, and the results of their operations and
cash flows for the years then ended in conformity with generally accepted
accounting principles.
ARTHUR ANDERSEN LLP
Houston, Texas
March 7, 1997
F-115
<PAGE>
WESTERN BUILDING SERVICES, INC.
BALANCE SHEETS
(IN THOUSANDS, EXCEPT FOR SHARE INFORMATION)
DECEMBER 31,
-------------------- MARCH 31,
1995 1996 1997
--------- --------- -----------
(UNAUDITED)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents.......... $ -- $ 177 $ 34
Accounts receivable --
Trade......................... 726 661 513
Retainage on uncompleted
contracts.................. 78 183 128
Other receivables............. 133 3 6
Inventories........................ 71 86 86
Costs and estimated earnings in
excess of billings on
uncompleted contracts............ 65 26 91
Prepaid expenses and other current
assets........................... 31 30 9
--------- --------- -----------
Total current assets..... 1,104 1,166 867
PROPERTY AND EQUIPMENT, net............. 150 191 189
OTHER NONCURRENT ASSETS................. 22 129 174
--------- --------- -----------
Total assets............. $ 1,276 $ 1,486 $ 1,230
========= ========= ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Line of credit..................... $ 231 $ -- $ --
Notes payable...................... -- 6 --
Current maturities of long-term
debt............................. 86 73 78
Current portion of capital
leases........................... 17 21 19
Accounts payable and accrued
expenses......................... 732 556 437
Billings in excess of costs and
estimated earnings on
uncompleted contracts............ 76 151 21
--------- --------- -----------
Total current
liabilities........... 1,142 807 555
LONG-TERM DEBT, net of current
maturities............................ 179 261 241
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY:
Common Stock, $.10 par value,
4,000,000 shares authorized,
2,600 and 2,700 shares issued and
outstanding...................... 1 1 1
Additional paid-in capital......... 61 62 62
Retained earnings (deficit)........ (107) 355 371
--------- --------- -----------
Total shareholders'
equity (deficit)...... (45) 418 434
--------- --------- -----------
Total liabilities and
shareholders'
equity................ $ 1,276 $ 1,486 $ 1,230
========= ========= ===========
The accompanying notes are an integral part of these financial statements.
F-116
<PAGE>
WESTERN BUILDING SERVICES, INC.
STATEMENTS OF OPERATIONS
(IN THOUSANDS)
YEAR ENDED THREE MONTHS ENDED
DECEMBER 31, MARCH 31,
-------------------- --------------------
1995 1996 1996 1997
--------- --------- --------- ---------
(UNAUDITED)
REVENUES............................ $ 4,112 $ 6,494 $ 1,185 $ 1,072
COST OF SERVICES.................... 3,408 4,662 857 812
--------- --------- --------- ---------
Gross profit................... 704 1,832 328 260
SELLING, GENERAL AND ADMINISTRATIVE
EXPENSES.......................... 855 1,088 232 231
--------- --------- --------- ---------
Income (loss) from operations.. (151) 744 96 29
OTHER INCOME (EXPENSE):
Interest expense............... (35) (51) (11) (11)
Other.......................... 6 (21) (1) (2)
--------- --------- --------- ---------
NET INCOME (LOSS)................... $ (180) $ 672 $ 84 $ 16
========= ========= ========= =========
The accompanying notes are an integral part of these financial statements.
F-117
<PAGE>
WESTERN BUILDING SERVICES, INC.
STATEMENTS OF SHAREHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE INFORMATION)
<TABLE>
<CAPTION>
TOTAL
COMMON STOCK ADDITIONAL RETAINED SHAREHOLDERS'
---------------- PAID-IN EARNINGS EQUITY
SHARES AMOUNT CAPITAL (DEFICIT) (DEFICIT)
------ ------ ---------- --------- -------------
<S> <C> <C> <C> <C> <C>
BALANCE, December 31, 1994........... 2,600 $ 1 $ 61 $ 73 $ 135
Net loss........................ -- -- -- (180) (180)
------ ------ --- --------- -------------
BALANCE, December 31, 1995........... 2,600 1 61 (107) (45)
Distributions to shareholders... -- -- -- (210) (210)
Net income...................... -- -- -- 672 672
Common stock issuance........... 100 -- 1 -- 1
------ ------ --- --------- -------------
BALANCE, December 31, 1996........... 2,700 1 62 355 418
Net income (unaudited).......... -- -- -- 16 16
------ ------ --- --------- -------------
BALANCE, March 31, 1997
(unaudited)........................ 2,700 $ 1 $ 62 $ 371 $ 434
====== ====== === ========= =============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-118
<PAGE>
WESTERN BUILDING SERVICES, INC.
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
THREE MONTHS
YEAR ENDED ENDED
DECEMBER 31, MARCH 31,
---------------- ---------------
1995 1996 1996 1997
----- ----- ---- -----
(UNAUDITED)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss).................. $(180) $ 672 $ 84 $ 16
Adjustments to reconcile net income
to net cash provided by (used
in) operating activities --.....
Depreciation and amortization... 51 51 9 25
Changes in operating assets and
liabilities --................
(Increase) decrease in --.....
Accounts receivable........ (179) 91 23 200
Inventories................ (35) (15) -- --
Costs and estimated
earnings in excess of
billings on uncompleted
contracts............... (5) 39 65 (65)
Prepaid expenses and other
current assets.......... 5 1 (19) 21
Other noncurrent assets.... (15) (106) (90) (56)
Increase (decrease) in --.....
Accounts payable and
accrued expenses........ 186 (177) (22) (119)
Billings in excess of costs
and estimated earnings
on uncompleted
contracts............... 17 74 (50) (130)
----- ----- ---- -----
Net cash provided by
(used in) operating
activities......... (155) 630 -- (108)
----- ----- ---- -----
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of property and
equipment....................... -- 20 -- --
Additions of property and
equipment....................... (40) (113) (20) (12)
----- ----- ---- -----
Net cash used in
investing
activities......... (40) (93) (20) (12)
----- ----- ---- -----
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from sale of common
stock........................... -- 1 -- --
Borrowings of long-term debt....... 206 175 20 --
Payments of long-term debt......... (259) (96) -- (23)
Net borrowings in line of credit... 230 (230) -- --
Distributions to shareholders...... -- (210) -- --
----- ----- ---- -----
Net cash provided by
(used in) financing
activities......... 177 (360) 20 (23)
----- ----- ---- -----
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS................... (18) 177 -- (143)
CASH AND CASH EQUIVALENTS, beginning
of period.......................... 18 -- -- 177
----- ----- ---- -----
CASH AND CASH EQUIVALENTS, end of
period............................. $ -- $ 177 $-- $ 34
===== ===== ==== =====
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
Cash paid for --
Interest........................ $ 35 $ 51 $ 11 $ 11
The accompanying notes are an integral part of these financial statements.
F-119
<PAGE>
WESTERN BUILDING SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS
1. BUSINESS AND ORGANIZATION:
Western Building Services, Inc., a Colorado corporation, (the "Company")
focuses on providing "design and build" installation services and maintenance,
repair and replacement of HVAC systems for commercial facilities. Western also
offers continuous monitoring and control services for commercial facilities. The
Company primarily operates in Colorado.
The Company and its shareholders intend to enter into a definitive
agreement with Comfort Systems USA, Inc. ("Comfort Systems"), pursuant to
which all outstanding shares of the Company's common stock will be exchanged for
cash and shares of Comfort Systems common stock concurrently with the
consummation of the initial public offering (the "Offering") of the common
stock of Comfort Systems.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
INTERIM FINANCIAL INFORMATION
The interim financial statements as of March 31, 1997, and for the three
months ended March 31, 1996 and 1997, are unaudited, and certain information and
footnote disclosures, normally included in financial statements prepared in
accordance with generally accepted accounting principles, have been omitted. In
the opinion of management, all adjustments, consisting only of normal recurring
adjustments, necessary to fairly present the financial position, results of
operations and cash flows with respect to the interim financial statements, have
been included. The results of operations for the interim periods are not
necessarily indicative of the results for the entire fiscal year.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid debt investments purchased with an
original maturity of three months or less to be cash equivalents.
INVENTORIES
Inventories consist of duct materials, air conditioning equipment,
refrigeration supplies and accessories held for use in the ordinary course of
business and are stated at the lower of cost or market using the first-in,
first-out (FIFO) method.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost, and depreciation is computed
using the straight-line method over the estimated useful lives of the assets.
Leasehold improvements are capitalized and amortized over the lesser of the life
of the lease or the estimated useful life of the asset.
Expenditures for repairs and maintenance are charged to expense when
incurred. Expenditures for major renewals and betterments, which extend the
useful lives of existing equipment, are capitalized and depreciated. Upon
retirement or disposition of property and equipment, the cost and related
accumulated depreciation are removed from the accounts and any resulting gain or
loss is recognized in the statement of operations.
REVENUE RECOGNITION
The Company recognizes revenue when services are performed except when work
is being performed under a construction contract. Revenues from construction
contracts are recognized on the percentage-of-completion method measured by the
percentage of costs incurred to total estimated costs for each contract.
Provisions for the total estimated losses on uncompleted contracts are made in
the period in which such losses are determined. Changes in job performance, job
conditions, estimated profitability and final contract
F-120
<PAGE>
WESTERN BUILDING SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
settlements may result in revisions to costs and income and are recognized in
the period in which the revisions are determined.
The balances billed but not paid by customers pursuant to retainage
provision in construction contracts will be due upon completion of the contracts
and acceptance by the customer. Based on the Company's experience with similar
contracts in recent years, the retention balance will be billed and collected in
the upcoming fiscal year.
Revenues of approximately $783,000 and $2,291,000 with gross profits of
$339,000 and $874,000 were recognized by the Company in 1995 and 1996,
respectively, for energy conversions and new installations related to an
incentive program developed by the Public Service Company of Colorado (PSC). The
Demand Side Management program provided incentives for PSC customers to convert
from electric heat to gas/steam heat in order to reduce peak demand for
electricity. This program ended November 1996.
WARRANTY COSTS
The Company warrants labor for the first year after installation on new air
conditioning and heating units. The Company generally warrants labor for 30 days
after servicing of existing air conditioning and heating units. A reserve for
warranty costs is recorded upon completion of installation or service.
INCOME TAXES
The Company has elected S Corporation status as defined by the Internal
Revenue Code, whereby the Company is not subject to taxation for federal
purposes. Under S Corporation status, the shareholders report their share of the
Company's taxable earnings or losses in their personal tax returns. The Company
will terminate its S Corporation status concurrently with the effective date of
this Offering.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires the use of estimates and assumptions by
management in determining the reported amounts of assets and liabilities and
disclosures of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
NEW ACCOUNTING PRONOUNCEMENT
Effective January 1, 1996, the Company adopted Statement of Financial
Accounting Standard (SFAS) No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of." Accordingly, in
the event that facts and circumstances indicate that property and equipment, and
intangible or other assets may be impaired, an evaluation of recoverability
would be performed. If an evaluation is required, the estimated future
undiscounted cash flows associated with the asset are compared to the asset's
carrying amount to determine if a write-down to market value is necessary.
Adoption of this standard did not have a material effect on the financial
position or results of operations of the Company.
F-121
<PAGE>
WESTERN BUILDING SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
3. PROPERTY AND EQUIPMENT:
Property and equipment consist of the following (dollars in thousands):
ESTIMATED DECEMBER 31,
USEFUL LIVES --------------------
IN YEARS 1995 1996
------------ --------- ---------
Transportation equipment............. 5 $ 47 $ 47
Machinery and equipment.............. 6-7 133 68
Computer and telephone equipment..... 5 120 145
Leasehold improvements............... 3 21 71
Furniture and fixtures............... 7 28 20
--------- ---------
349 351
Less -- Accumulated depreciation and
amortization....................... (199) (160)
--------- ---------
Property and equipment, net..... $ 150 $ 191
========= =========
4. DETAIL OF CERTAIN BALANCE SHEET ACCOUNTS:
Other noncurrent assets consist of the following (in thousands):
DECEMBER 31,
--------------------
1995 1996
--------- ---------
Covenant not to compete.............. $ -- $ 75
Life insurance surrender value....... 14 27
Other noncurrent assets.............. 8 27
--------- ---------
$ 22 $ 129
========= =========
At December 31, 1996, the Company acquired the contract rights of a
competitor for $75,000 through a covenant not to compete agreement. This
agreement will be amortized over its three year term which expires at
December 31, 1999.
Accounts payable and accrued expenses consist of the following (in
thousands):
DECEMBER 31,
--------------------
1995 1996
--------- ---------
Accounts payable, trade.............. $ 403 $ 249
Accrued compensation and benefits.... 108 86
Accrued warranty expense............. 82 82
Other accrued expenses............... 139 139
--------- ---------
$ 732 $ 556
========= =========
F-122
<PAGE>
WESTERN BUILDING SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Installation contracts in progress are as follows (in thousands):
DECEMBER 31,
--------------------
1995 1996
--------- ---------
Costs incurred on contracts in
progress........................... $ 335 $ 530
Estimated earnings, net of losses.... 206 160
--------- ---------
541 690
Less -- Billings to date............. 552 815
--------- ---------
$ (11) $ (125)
========= =========
Costs and estimated earnings in
excess of billings on uncompleted
contracts.......................... $ 65 $ 26
Billings in excess of costs and
estimated earnings on uncompleted
contracts.......................... (76) (151)
--------- ---------
$ (11) $ (125)
========= =========
5. LONG-TERM DEBT:
Long-term debt consists of installment notes payable for transportation
equipment. The debt is secured by the related transportation equipment. The
terms of the notes range from 36 months to 48 months with monthly payments of
principal and interest of approximately $8,600. The notes bear interest at rates
ranging from 9 percent to 13 percent.
Long-term debt also consists of term loans and capital leases. The term
loans were issued in the amounts of $175,000 and $200,000 in 1996 and 1995,
respectively. The $175,000 term loan is secured by equipment, inventory,
accounts receivable and all contract rights. The $200,000 term loan is secured
by all inventory and equipment and bears interest at prime plus 2 percent per
annum. These term loans are also guaranteed by the Company president.
The capital leases relate to computer equipment and printers. The terms of
the leases range from 12 to 36 months. The interest rates on these leases range
from 10 to 12 percent.
The aggregate maturities of long-term debt as of December 31, 1996, are as
follows (in thousands):
Year ending December 31
1997............................ $ 85
1998............................ 89
1999............................ 98
2000............................ 89
---------
$ 361
=========
The Company has a $300,000 line of credit with a financial institution. The
line of credit expires September 28, 1997, and bears interest at prime plus 2
percent per annum. The line of credit is secured by accounts receivable and
inventory and is guaranteed by the Company president. There was no balance
outstanding under this line of credit at December 31, 1996.
6. LEASES:
The Company leases its facility from a third party, which expires in 1999.
The rent paid under this lease was approximately $43,000 and $66,500 for the
years ended December 31, 1995 and 1996. The lease requires the Company to pay
taxes, maintenance, insurance and certain other operating costs of the leased
property. The lease contains renewal provisions.
F-123
<PAGE>
WESTERN BUILDING SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
The Company leases vehicles for operating purposes. The lease payments
under these vehicle leases totaled approximately $47,000 and $71,000 for the
years ended December 31, 1995 and 1996, respectively.
Future minimum lease payments for operating leases are as follows (in
thousands):
Year ending December 31
1997............................ $ 144
1998............................ 132
1999............................ 19
---------
$ 295
=========
7. EMPLOYEE BENEFIT PLANS:
The Company has adopted a 401(k) plan which allows the Company to make
discretionary contributions and discretionary profit sharing contributions. No
contributions were made by the Company under this plan in 1995 and 1996.
However, expenses of $2,733 and $3,903 were incurred by the Company during 1995
and 1996, respectively.
8. FINANCIAL INSTRUMENTS:
The Company's financial instruments consist of cash and cash equivalents,
investments, notes payable, a line of credit, and debt. The Company believes
that the carrying value of these instruments on the accompanying balance sheet
approximates their fair value.
9. RELATED-PARTY TRANSACTIONS:
At December 31, 1995, the Company had a receivable of $109,500 due from the
president and vice president. At December 31, 1996, this balance was $173,500.
The Company offset this balance with the dividends payable of $210,315 at
December 31, 1996, resulting in a remaining dividend payable of $36,875 to two
shareholders and one director.
10. COMMITMENTS AND CONTINGENCIES:
LITIGATION
The Company is involved in legal actions arising in the ordinary course of
business. Management does not believe the outcome of such legal actions will
have a material adverse effect on the Company's financial position or results of
operations.
INSURANCE
The Company carries a broad range of insurance coverage, including general
and business auto liability, commercial property, workers' compensation and a
general umbrella policy. The Company has not incurred significant claims or
losses on any of its insurance policies.
11. EVENT SUBSEQUENT TO DATE OF AUDITORS' REPORT OF INDEPENDENT PUBLIC
ACCOUNTANTS (UNAUDITED):
In March 1997, the Company and its shareholders entered into a definitive
agreement with a wholly-owned subsidiary of Comfort Systems, providing for the
merger of the Company with the subsidiary of Comfort Systems.
In connection with the merger, the Company will make a cash distribution of
approximately $371,000 prior to the merger which represents the Company's
estimated S Corporation accumulated adjustment account. Had these transactions
been recorded at March 31, 1997, the effect on the accompanying unaudited
balance sheet would be a decrease in assets of $41,000 and an increase in
liabilities of $333,000 and a decrease in shareholders' equity of $371,000.
F-124
<PAGE>
================================================================================
NO PERSON HAS BEEN AUTHORIZED IN CONNECTION WITH THE OFFERING MADE HEREBY
TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATION NOT CONTAINED IN THIS
PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT BE
RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR ANY UNDERWRITER. THIS
PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF ANY OFFER
TO BUY ANY OF THE SECURITIES OFFERED HEREBY TO ANY PERSON OR BY ANYONE IN ANY
JURISDICTION IN WHICH IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION. NEITHER
THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY
CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THE INFORMATION CONTAINED HEREIN IS
CORRECT AS OF ANY DATE SUBSEQUENT TO THE DATE HEREOF.
------------------
TABLE OF CONTENTS
PAGE
-----
Prospectus Summary............................. 3
Risk Factors................................... 9
Price Range of Common Stock ................... 12
The Company.................................... 13
Dividend Policy................................ 15
Capitalization................................. 15
Selected Financial Data........................ 16
Management's Discussion and Analysis of
Financial Condition and Results of
Operations................................... 18
Business....................................... 37
Management..................................... 46
Certain Transactions........................... 51
Principal Stockholders......................... 55
Description of Capital Stock................... 56
Shares Eligible for Future Sale................ 59
Legal Matters.................................. 60
Experts........................................ 60
Additional Information......................... 60
Index to Financial Statements.................. F-1
8,000,000 SHARES
[LOGO]
COMFORT SYSTEMS USA, INC.
COMMON STOCK
-------------------
PROSPECTUS
-------------------
, 1997
================================================================================
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table sets forth the costs and expenses payable by the
Company in connection with the registration of the securities being registered.
In connection with future acquisitions, additional printing, legal, accounting
and miscellaneous expenses are expected to be incurred with respect to the
issuance and distribution of the securities being registered hereby. All amounts
are estimates except for the fees payable to the SEC.
AMOUNT TO BE
PAID
-------------
SEC registration fee.................... $ 43,182
Printing expenses....................... $ 10,000
Legal fees and expenses................. $ 20,000
Accounting fees and expenses............ $ 20,000
Transfer Agent's and Registrar's fees... $ 1,000
Miscellaneous........................... $ 5,818
-------------
TOTAL......................... $ 100,000
=============
ITEM 14. INDEMNIFICATION OF OFFICERS AND DIRECTORS.
The Company's Certificate of Incorporation, as amended, and Bylaws
incorporate substantially the provisions of the Delaware General Corporation Law
("DGCL") providing for indemnification of directors and officers of the
Company against expenses, judgments, fines, settlements and other amounts
actually and reasonably incurred in connection with any proceeding arising by
reason of the fact that such person is or was an officer or director of the
Company or is or was serving at the request of the Company as a director,
officer or employee of another corporation, partnership, joint venture, trust,
employee benefit plan or other enterprise.
As permitted by Section 102 of the DGCL, the Company's Certificate of
Incorporation, as amended, contains provisions eliminating a director's personal
liability for monetary damages to the Company and its stockholders arising from
a breach of a director's fiduciary duty except for liability (a) for any breach
of the director's duty of loyalty to the Company or its stockholders, (b) for
acts or omissions not in good faith or which involve intentional misconduct or a
knowing violation of law, (c) under Section 174 of the DGCL, or (d) for any
transaction from which the director derived an improper personal benefit.
Section 145 of the DGCL provides generally that a person sued as a
director, officer, employee or agent of a corporation may be indemnified by the
corporation for reasonable expenses, including attorneys' fees, if in the case
of other than derivative suits such person has acted in good faith and in a
manner such person reasonably believed to be in or not opposed to the best
interests of the corporation (and, in the case of a criminal proceeding, had no
reasonable cause to believe that such person's conduct was unlawful). In the
case of a derivative suit, an officer, employee or agent of the corporation
which is not protected by the Certificate of Incorporation may be indemnified by
the corporation for reasonable expenses, including attorneys' fees, if such
person has acted in good faith and in a manner such person reasonably believed
to be in or not opposed to the best interests of the corporation, except that no
indemnification shall be made in the case of a derivative suit in respect of any
claim as to which an officer, employee or agent has been adjudged to be liable
to the corporation unless that person is fairly and reasonably entitled to
indemnity for proper expenses. Indemnification is mandatory in the case of a
director, officer, employee, or agent who is successful on the merits in defense
of a suit against such person.
The Company has entered into Indemnity Agreements with its directors and
certain key officers pursuant to which the Company generally is obligated to
indemnify its directors and such officers to the full extent permitted by the
DGCL as described above.
II-1
<PAGE>
The Company has purchased liability insurance policies covering directors
and officers in certain circumstances.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.
On December 12, 1996, Comfort Systems issued and sold 1,000 shares of
Common Stock to Notre for a consideration of $1,000. This sale was exempt from
registration under Section 4(2) of the Securities Act, no public offering being
involved.
On January 6, 1997, Comfort Systems issued and sold shares of Common Stock
to the following parties in the amounts and for the consideration indicated.
These sales were exempt from registration under Section 4(2) of the Securities
Act: Notre -- 23,516.623 shares for a consideration of $28,699.12; Fred M.
Ferreira -- 3957.7359 shares for a consideration of $4,794.35; J. Gordon
Beittenmiller -- 825.5 shares for a consideration of $1,000.00; Reagan S.
Busbee -- 825.5 shares for a consideration of $1,000.00; S. Craig
Lemmon -- 825.5 shares for a consideration of $1,000.00; Milburn E.
Honeycutt -- 412.75 shares for a consideration of $500.00; Brian J.
Vensel -- 412.75 shares for a consideration of $500.00; Emmett E.
Moore -- 412.75 shares for a consideration of $500.00; John W.
Bouloubasis -- 412.75 shares for a consideration of $500.00; Stephen R.
Baur -- 330.2 shares for a consideration of $400.00; Shellie LePori -- 206.375
shares for a consideration of $250.00; Constance Drew -- 288.925 shares for a
consideration of $350.00; John Mercandante, Jr. -- 82.55 shares for a
consideration of $100.00; Larry Martin -- 82.55 shares for a consideration of
$100.00; Norton Family Trust -- 61.9125 shares for a consideration of $75.00;
Larry E. Jacobs -- 61.9125 shares for a consideration of $75.00; Richard T.
Howell -- 41.275 shares for a consideration of $50.00; Rod Crosby -- 41.275
shares for a consideration of $50.00; Jennifer Summerford -- 24.765 shares for a
consideration of $30.00; Infoscope Partners, Inc. -- 8.255 shares for a
consideration of $10.00; Melinda Malik -- 4.1275 shares for a consideration of
$5.00; and Steven T. Zellers -- 16.51 shares for a consideration of $20.00.
On February 25, 1997, Comfort Systems issued and sold shares of Common
Stock to the following parties in the amounts and for the consideration
indicated. These sales were exempt from registration under Section 4(2) of the
Securities Act, no public offering being involved: William George,
III -- 619.125 shares for a consideration of $750.00; J. Gordon
Beittenmiller -- 132.08 shares for a consideration of $160.00; Reagan S.
Busbee -- 132.08 shares for a consideration of $160.00; S. Craig
Lemmon -- 132.08 shares for a consideration of $160.00; Milburn E.
Honeycutt -- 66.04 shares for a consideration of $80.00; and Brian J.
Vensel -- 66.04 shares for a consideration of $80.00.
Effective March 20, 1997, Comfort Systems effected a 121.1387 to 1 stock
split on outstanding shares of Common Stock as of March 19, 1997.
Effective March 20, 1997, Comfort Systems issued and sold 2,742,912 shares
of Restricted Voting Common Stock to Notre in exchange for 2,742,912 shares of
Common Stock. This sale was exempt from registration under Section 4(2) of the
Securities Act, no public offering being involved.
On July 2, 1997, the Company issued 9,720,927 shares of its Common Stock in
connection with the Mergers of the Founding Companies. Each of these
transactions was completed without registration under the Securities Act in
reliance upon the exemption provided by Section 4(2) of the Securities Act.
II-2
<PAGE>
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) EXHIBITS
The exhibits listed below are filed as exhibits to this registration
statement and are filed manually herewith or incorporated by reference to the
statements or reports indicated below:
<TABLE>
<CAPTION>
INCORPORATED BY
REFERENCE TO THE
EXHIBIT INDICATED
BELOW AND TO THE
FILING WITH THE
COMMISSION
INDICATED BELOW
-------------------
EXHIBIT EXHIBIT FILE
NUMBER DESCRIPTION OF EXHIBITS NUMBER NUMBER
- ------------------------ ----------------------------------------------------------------------------- ------ ---------
<C> <S> <C> <C>
2.1 -- Agreement and Plan of Organization, dated as of March 18, 1997, by and among 2.1 333-24021
Comfort Systems USA, Inc., Accurate Acquisition Corp., Accurate Air Systems,
Inc. and the Stockholder named therein
2.2 -- Agreement and Plan of Organization, dated as of March 18, 1997, by and among 2.2 333-24021
Comfort Systems USA, Inc., Atlas Air Acquisition I Corp., Atlas Comfort
Services USA, Inc. and the Stockholders named therein
2.3 -- Agreement and Plan of Organization, dated as of March 18, 1997, by and among 2.3 333-24021
Comfort Systems USA, Inc., Contract Acquisition Corp., Contract Service, Inc.
and the Stockholders named therein
2.4 -- Agreement and Plan of Organization, dated as of March 18, 1997, by and among 2.4 333-24021
Comfort Systems USA, Inc., Eastern Acquisition Corp., Eastern II Acquisition
Corp., Eastern Heating & Cooling, Inc., Eastern Refrigeration Co., Inc. and
the Stockholder named therein
2.5 -- Agreement and Plan of Organization, dated as of March 18, 1997, by and among 2.5 333-24021
Comfort Systems USA, Inc., Freeway Acquisition Corp., Freeway Heating & Air
Conditioning, Inc. and the Stockholders named therein
2.6 -- Agreement and Plan of Organization, dated as of March 18, 1997, by and among 2.6 333-24021
Comfort Systems USA, Inc., Quality Acquisition Corp., Quality Air Heating &
Cooling, Inc. and the Stockholders named therein
2.7 -- Agreement and Plan of Organization, dated as of March 18, 1997, by and among 2.7 333-24021
Comfort Systems USA, Inc., S. M. Lawrence Acquisition Corp., S. M. Lawrence
II Acquisition Corp., S. M. Lawrence Company, Inc., Lawrence Service, Inc.
and the Stockholders named therein
2.8 -- Agreement and Plan of Organization, dated as of March 18, 1997, by and among 2.8 333-24021
Comfort Systems USA, Inc., Seasonair, Inc. and the Stockholders named therein
2.9 -- Agreement and Plan of Organization, dated as of March 18, 1997, by and among 2.9 333-24021
Comfort Systems USA, Inc., Standard Acquisition Corp., Standard Heating & Air
Conditioning Company and the Stockholders named therein
2.10 -- Agreement and Plan of Organization, dated as of March 18, 1997, by and among 2.10 333-24021
Comfort Systems USA, Inc., Tech I Acquisition Corp., Tech II Acquisition
Corp., Tech Heating and Air Conditioning, Inc., Tech Mechanical, Inc. and the
Stockholder named therein
2.11 -- Agreement and Plan of Organization, dated as of March 18, 1997, by and among 2.11 333-24021
Comfort Systems USA, Inc., Tri-City Acquisition Corp., Tri-City Mechanical,
Inc. and the Stockholders named therein
2.12 -- Agreement and Plan of Organization, dated as of March 18, 1997, by and among 2.12 333-24021
Comfort Systems USA, Inc., Western Building Acquisition Corp., Western
Building Services, Inc. and the Stockholders named therein
3.1 -- Second Amended and Restated Certificate of Incorporation of Comfort Systems 3.1 333-24021
USA, Inc.
</TABLE>
II-3
<PAGE>
<TABLE>
<S> <C> <C> <C> <C>
3.2 -- Bylaws of Comfort Systems USA, Inc., as amended 3.2 333-24021
4.1 -- Form of certificate evidencing ownership of Common Stock of Comfort Systems 4.1 333-24021
USA, Inc.
5.1 -- Opinion of Bracewell & Patterson, L.L.P. Filed herewith
10.1 -- Comfort Systems USA, Inc. 1997 Long-Term Incentive Plan 10.1 333-24021
10.2 -- Comfort Systems USA, Inc. 1997 Non-Employee Directors' Stock Plan 10.2 333-24021
10.3 -- Form of Employment Agreement between Comfort Systems USA, Inc. and Fred M. 10.3 333-24021
Ferreira.
10.4 -- Form of Employment Agreement between Comfort Systems USA, Inc. and J. Gordon 10.4 333-24021
Beittenmiller.
10.5 -- Form of Employment Agreement between Comfort Systems USA, Inc. and William 10.5 333-24021
George, III.
10.6 -- Form of Employment Agreement between Comfort Systems USA, Inc. and Reagan S. 10.6 333-24021
Busbee.
10.7 -- Form of Employment Agreement between Comfort Systems USA, Inc., Accurate Air 10.7 333-24021
Systems, Inc. and Thomas J. Beaty.
10.8 -- Form of Employment Agreement between Comfort Systems USA, Inc., Atlas Comfort 10.8 333-24021
Services USA, Inc. and Brian S. Atlas.
10.9 -- Form of Employment Agreement between Comfort Systems USA, Inc., Contract 10.9 333-24021
Service, Inc. and John C. Phillips.
10.10 -- Form of Employment Agreement between Comfort Systems USA, Inc., Eastern 10.10 333-24021
Heating & Cooling, Inc. and Alfred J. Giardenelli, Jr.
10.11 -- Form of Employment Agreement between Comfort Systems USA, Inc., Quality Air 10.11 333-24021
Heating & Cooling, Inc. and Robert J. Powers.
10.12 -- Form of Employment Agreement between Comfort Systems USA, Inc., S. M. 10.12 333-24021
Lawrence Company, Inc. and Samuel M. Lawrence III.
10.13 -- Form of Employment Agreement between Comfort Systems USA, Inc., Tech Heating 10.13 333-24021
and Air Conditioning, Inc. and Robert R. Cook.
10.14 -- Form of Employment Agreement between Comfort Systems USA, Inc., Tri-City 10.14 333-24021
Mechanical, Inc. and Michael Nothum, Jr.
10.15 -- Form of Employment Agreement between Comfort Systems USA, Inc., Western 10.15 333-24021
Building Services, Inc. and Charles W. Klapperich.
10.16 -- Form of Agreement among certain stockholders 10.16 333-24021
10.17 -- Lease between M & B Interests, Inc. and Atlas Air Conditioning Company, Inc. Filed herewith
dated October 1, 1994.
10.18 -- Lease between Thomas J. and Bonnie J. Beaty and Accurate Air Systems, Inc. Filed herewith
dated July 1, 1997.
10.19 -- Amended and Restated Agreement of Lease between Thomas J. and Bonnie J. Beaty Filed herewith
and Accurate Air Systems, Inc. dated July 1, 1997.
10.20 -- Lease between Nothum Development, L.L.C. and Tri-City Mechanical, Inc. dated Filed herewith
July 1, 1997.
10.21 -- Lease between Samuel Matthews Lawrence, Jr. and S.M. Lawrence Company, Filed herewith
Incorporated dated November 1, 1996.
10.22 -- Lease between K and P Warehouse #1 and Quality Trane Heating and Cooling, Filed herewith
Inc. (n/k/a/ Quality Air Heating and Cooling, Inc.) dated April 1, 1986,
together with amendments thereto.
10.23 -- Lease between J&J Investments and Contract Service, Inc. dated March 1, 1997. Filed herewith
10.24 -- Lease by Tech Heating and Air Conditioning, Inc. dated April 2, 1995 as Filed herewith
amended by Amendment between Cook Properties, Inc. and Tech Heating and Air
Conditioning, Inc. on March 13, 1997.
10.25 -- Credit Agreement among the Company and its subsidiaries, Bank One, Texas, Filed herewith
N.A., as agent and the banks listed therein dated July 2, 1997.
</TABLE>
II-4
<PAGE>
<TABLE>
<S> <C>
10.26 -- Form of Indemnity Agreement entered into by the Company with each of the Filed herewith
following persons: Fred M. Ferreira, J. Gordon Beittenmiller, Reagan S.
Busbee, William George, III, Steven S. Harter, Robert J. Powers, Michael
Nothum, Jr., Robert R. Cook, Brian S. Atlas, Thomas J. Beaty, John C.
Phillips, Samuel M. Lawrence III, Alfred J. Giardenelli, Jr., Charles W.
Klapperich, Larry Martin and John Mercandante, Jr. on June 27, 1997.
10.27 -- Indemnity Agreement between the Company and Notre Capital Ventures II, L.L.C. Filed herewith
21.1 -- List of subsidiaries of Comfort Systems USA, Inc. 21.1 333-24021
23.1 -- Consent of Arthur Andersen LLP Filed herewith
23.2 -- Consent of Bracewell & Patterson, L.L.P. (contained in Exhibit 5.1). Filed herewith
23.3 -- Consent of Fred M. Ferreira to be named as a director. 23.3 333-24021
23.4 -- Consent of J. Gordon Beittenmiller to be named as a director. 23.4 333-24021
23.5 -- Consent of Brian S. Atlas to be named as a director. 23.5 333-24021
23.6 -- Consent of Thomas J. Beaty to be named as a director. 23.6 333-24021
23.7 -- Consent of Robert R. Cook to be named as a director. 23.7 333-24021
23.8 -- Consent of Alfred J. Giardenelli, Jr. to be named as a director. 23.8 333-24021
23.9 -- Consent of Charles W. Klapperich to be named as a director. 23.9 333-24021
23.10 -- Consent of Samuel M. Lawrence III to be named as a director. 23.10 333-24021
23.11 -- Consent of Michael Nothum, Jr. to be named as a director. 23.11 333-24021
23.12 -- Consent of John C. Phillips to be named as a director. 23.12 333-24021
23.13 -- Consent of Robert J. Powers to be named as a director. 23.13 333-24021
23.14 -- Consent of Steven S. Harter to be named as a director. 23.14 333-24021
23.15 -- Consent of Larry Martin to be named as a director. 23.15 333-24021
23.16 -- Consent of John Mercadante, Jr. to be named as a director. 23.16 333-24021
24.1 -- Power of Attorney (included herein on Signature Page) Filed herewith
27.1 -- Financial Data Schedule Filed herewith
</TABLE>
II-5
<PAGE>
(b) FINANCIAL STATEMENT SCHEDULES
All schedules for which provision is made in the applicable accounting
regulation of the SEC are not required under the related instructions, are
inapplicable, or the information is included in the consolidated financial
statements, and therefore have been omitted.
ITEM 17. UNDERTAKINGS.
(a) Insofar as indemnification for liabilities arising under the
Securities Act may be permitted to directors, officers and controlling persons
of the Company pursuant to the provisions described in Item 14, or otherwise,
the Company has been advised that in the opinion of the SEC such indemnification
is against public policy as expressed in the Securities Act and is, therefore,
unenforceable. In the event that a claim for indemnification against such
liabilities (other than payment by the Company of expenses incurred or paid by a
director, officer or controlling person of the Company in the successful defense
of any action, suit or proceeding) is asserted by such director, officer or
controlling person in connection with the securities being registered, the
Company will, unless in the opinion of its counsel the matter has been settled
by controlling precedent, submit to a court of appropriate jurisdiction the
question whether such indemnification by it is against public policy as
expressed in the Securities Act and will be governed by the final adjudication
of such issue.
(b) The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made, a
post-effective amendment to this registration statement:
(i) To include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising after
the effective date of the registration statement (or the most recent
post-effective amendment thereof) which, individually or in the aggregate,
represents a fundamental change in the information set forth in the
registration statement. Notwithstanding the foregoing, any increase or
decrease in volume of securities offered (if the total dollar value of
securities offered would not exceed that which was registered) and any
deviation from the low or high and of the estimated maximum offering range
may be reflected in the form of prospectus filed with the Commission
pursuant to Rule 424(b), if, in the aggregate, the changes in volume and
price represent no more than 20 percent change in the maximum aggregate
offering price set forth in the "Calculation of Registration Fee" table
in the effective registration statement.
(iii) To include any material information with respect to the plan of
distribution not previously disclosed in the registration statement or any
material change in the registration statement.
(2) That, for the purpose of determining any liability under the Securities
Act of 1933, each such post-effective amendment shall be deemed to be a new
registration statement relating to the securities offered therein, and the
offering of such securities at the time shall be deemed to be the initial bona
fide offering thereof.
(3) To remove from registration by means of a post-effective amendment any
of the securities being registered which remain unsold at the termination of the
offering.
II-6
<PAGE>
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, COMFORT SYSTEMS
USA, INC. HAS DULY CAUSED THIS REGISTRATION STATEMENT TO BE SIGNED ON ITS BEHALF
BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED, IN THE CITY OF HOUSTON, STATE OF
TEXAS, ON JULY 31, 1997.
COMFORT SYSTEMS USA, INC.
By /s/ FRED M. FERREIRA
FRED M. FERREIRA
CHIEF EXECUTIVE OFFICER
POWER OF ATTORNEY
Each person whose signature appears below on this Registration Statement
hereby constitutes and appoints Fred M. Ferreira, J. Gordon Beittenmiller and
William George, III, each with full power to act without the other, his or her
true and lawful attorney-in-fact and agent, with full power of substitution and
resubstitution, for him or her and in his or her name, place and stead, in any
and all capacities (until revoked in writing) to sign any and all amendments
(including post-effective amendments and amendments thereto) to this
Registration Statement, and to file the name, with all exhibits thereto and
other documents in connection therewith, with the Securities and Exchange
Commission, granting unto said attorney-in-fact and agent full power and
authority to do and perform each and every act and thing he or she might do or
could do in person, hereby ratifying and confirming all that said
attorney-in-fact and agent, or his substitute, may lawfully do or cause to be
done by virtue hereof.
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS
REGISTRATION STATEMENT OR AMENDMENT THERETO HAS BEEN SIGNED BELOW BY THE
FOLLOWING PERSONS IN THE INDICATED CAPACITIES ON JULY 31, 1997.
SIGNATURE TITLE
- -------------------------------------- ----------------------------------------
/s/ FRED M. FERREIRA Chairman of the Board, Chief Executive
FRED M. FERREIRA Officer and President
/s/ J. GORDON BEITTENMILLER Senior Vice President, Chief Financial
J. GORDON BEITTENMILLER Officer and Director
(PRINCIPAL ACCOUNTING OFFICER)
/s/ STEVEN S. HARTER Director
STEVEN S. HARTER
/s/ MICHAEL NOTHUM, JR. Director
MICHAEL NOTHUM, JR.
________________________ Director
BRIAN S. ATLAS
/s/ THOMAS J. BEATY Director
THOMAS J. BEATY
II-7
<PAGE>
SIGNATURES -- (CONTINUED)
/s/ROBERT R. COOK Director
ROBERT R. COOK
/s/ALFRED J. GIARDENELLI Director
ALFRED J. GIARDENELLI
/s/CHARLES W. KLAPPERICH Director
CHARLES W. KLAPPERICH
/s/SAMUEL M. LAWRENCE III Director
SAMUEL M. LAWRENCE III
/s/ JOHN C. PHILLIPS Director
JOHN C. PHILLIPS
/s/ROBERT J. POWERS Director
ROBERT J. POWERS
_________________________ Director
LARRY MARTIN
_________________________ Director
JOHN MERCADANTE, JR.
II-8
EXHIBIT 5.1
July 31, 1997
Comfort Systems USA, Inc.
4801 Woodway Drive, Suite 300E
Houston, Texas 77056
Gentlemen:
We have acted as counsel to Comfort Systems USA, Inc., a Delaware corporation
(the "Company"), in connection with the preparation of its Registration
Statement on Form S-1 (the "Registration Statement"), filed by the Company under
the Securities Act of 1933, as amended (the "Securities Act"), with respect to
the offering and sale by the Company of up to 8,000,000 shares of its common
stock, par value $.01 per share (the "Common Stock").
We have examined originals or copies of (i) the Amended and Restated Certificate
of Incorporation of the Company; (ii) the Bylaws of the Company, as amended;
(iii) certain resolutions of the Board of Directors of the Company; and (iv)
such other documents and records as we have deemed necessary and relevant for
purposes hereof. We have relied upon certificates of public officials and
officers of the Company as to all matters of fact relating to this opinion and
have made such investigations of law as we have deemed necessary and relevant as
a basis hereof. We have not independently verified any factual matter relating
to this opinion.
We have assumed the genuineness of all signatures, the authenticity of all
documents, certificates and records submitted to us as copies, and the
conformity to original documents, certificates and records of all documents,
certificates and records submitted to us as copies.
Based upon the foregoing, and subject to the limitations and assumptions set
forth herein, and having due regard for such legal considerations as we deem
relevant, we are of the opinion that:
1. The Company is a corporation duly incorporated, validly existing and in
good standing under the laws of the State of Delaware.
<PAGE>
Comfort Systems USA, Inc.
July 31, 1997
Page 2
2. The Common Stock is duly authorized, and when issued and delivered by
the Company against payment therefor as described in the Registration Statement
pursuant to Board authorization of the transactions contemplated by the
Registration Statement, such shares will be duly and validly issued, fully paid
and nonassessable.
The foregoing opinion is based on and is limited to the laws of the General
Corporation Law of the State of Delaware, and we render no opinion with respect
to any other law.
We hereby consent to the filing of this opinion with the Securities and Exchange
Commission as Exhibit 5.1 to the Registration Statement and to the reference to
this firm as having passed on the validity of the issuance of the Common Stock
under the caption "Legal Matters" in the prospectus contained in the
Registration Statement. By giving such consent, we do not admit that we are
included within the category of persons whose consent is required under Section
7 of the Securities Act or the rules and regulations issued thereunder.
Very truly yours,
/s/ BRACEWELL & PATTERSON, L.L.P.
Bracewell & Patterson, L.L.P.
EXHIBIT 10.17
STANDARD COMMERCIAL LEASE AGREEMENT
(EXISTING BUILDING) #1
LEASE AGREEMENT
THIS LEASE AGREEMENT, made and entered into by and between M & B INTERESTS,
INC. hereinafter referred to as "Landlord", and ATLAS AIR CONDITIONING COMPANY,
INC. hereinafter referred to as "Tenant";
WITNESSETH:
1. PREMISES AND TERM. Landlord hereby leases unto Tenant and Tenant hereby
leases from Landlord, subject to the terms of this Lease, approximately 12,500
square feet of space (the "Premises") in Building 4125 SOUTHERLAND ROAD (the
"Building") of HOUSTON, TEXAS 77092 (the "Project"), constructed upon that tract
of land (the "Site") described more particularly in Exhibit "A" annexed
hereto, such Premises being outlined in red on Exhibit A.
TO HAVE AND TO HOLD the same for a term commencing on OCTOBER 1, 1994 and
ending SEPTEMBER 30, 1997 months thereafter. Tenant acknowledges that it has
inspected and accepts the premises, and specifically the buildings and
improvements comprising the same, in their present condition as suitable for the
purpose for which the premises are leased. Taking of possession by Tenant shall
be deemed conclusively to establish that said buildings and other improvements
are in good and satisfactory condition as of when possession was taken. Tenant
further acknowledges that no representations as to the repair of the premises,
nor promises to alter, remodel or improve the premises have been made by
Landlord, unless such are expressly set forth in this lease. If this lease is
executed before the premises become vacant or otherwise available and ready for
occupancy, or if any present tenant or occupant of the premises holds over, and
Landlord cannot acquire possession of the premises prior to the date above
recited as the commencement date of this lease, Landlord shall not be deemed to
be in default hereunder, and Tenant agrees to accept possession of the premises
at such time as Landlord is able to tender the same, which data shall
thenceforth be deemed the "commencement date"; and Landlord hereby waives
payment of rent covering any period prior to the tendering of possession to
Tenant hereunder. After the commencement date Tenant shall, upon demand, execute
and deliver to Landlord a letter of acceptance of delivery of the premises.
2. BASE RENT AND SECURITY DEPOSIT.
A. Tenant agrees to pay to Landlord rent for the premises in advance,
without demand, deduction or set off, for the entire term hereof at the rate of
SEVEN THOUSAND FIVE HUNDRED AND 00/00 Dollars ($7,500.00) per month. One such
monthly installment shall be due and payable on the date hereof and a like
monthly installment shall be due and payable on or before the first day of each
calendar month at the commencement or end of the lease period shall be prorated.
B. In addition, Tenant agrees to deposit with Landlord on the date hereof
the sum of -0- Dollars ($-0-), which sum shall be held by Landlord, without
obligation for interest, as security for the performance of Tenant's covenants
and obligations under this lease, it being expressly understood and agreed that
such deposit is not an advance rental deposit or a measure of Landlord's damages
in case of Tenant's default. Upon the occurrence of any event of default by
Tenant, Landlord may, from time to time, without prejudice to any other remedy
provided herein or provided by law, use such fund to the extent necessary to
make good any arrears of rent or other payments due Landlord hereunder, and any
other damage, injury, expense or liability caused by such event of default; and
Tenant shall pay to Landlord on demand the amount so applied in order to restore
the security deposit to its original amount. Although the security deposit shall
be deemed the property of Landlord, any remaining balance of such deposit shall
be returned by Landlord to Tenant at such time after termination of this lease
that all of Tenant's obligations under this lease have been fulfilled.
3. ADDITIONAL RENT.
A. The rental payment under Paragraph 2A of the Lease is based, in part, on
estimated operating expenses for the calendar year in which the lease commences
of $-0- per square foot. In the event that the operating expenses, as
hereinafter defined, for any calendar year during the term of this lease
(including without limitation the calendar year in which the lease commences)
exceed $________ per square foot, the tenant agrees to pay, upon demand, to the
Landlord as additional rent, a pro rated share of such expenses for the entire
building and/or project. Tenant's pro rata share, as used in this lease shall
mean a fraction, the numerator of which is the total number of square feet in
the demised premises and the denominator of which is the total number of square
feet in the building and/or project.
Landlord may within 150 days after close of each calendar year give Tenant
an invoice to include in reasonable detail, all computation of additional rent.
Tenant will cause payment of said invoice within thirty (30) days of receipt. An
equitable adjustment shall be made for Tenant's share of excess operating
expenses in the last partial calendar year of the term of this lease computed
upon the previous year's figures. Such payment shall be due from Tenant thirty
(30) days prior to the expiration of the lease term. Tenant shall have the right
at Landlord's convenience to review Landlord's books relevant to the additional
rental.
B. The term "Operating Expenses" as used in this Lease includes all
generally accepted expenses incurred by Landlord with respect to the maintenance
and operation of the building and/or project of which the premises are a part,
including, but not limited to, maintenance and repair costs, water, sewer, gas,
heat, light, power, telephone and other utilities, security, trash and snow
removal, landscaping, wages and benefits payable to employees of Landlord, whose
duties are connected with the operation and maintenance of the building and/or
project, amounts to be paid to contractors for subcontractors for the work or
service performed in connection with the operation and maintenance of the
building and/or project, all services, supplies, repairs, replacements or other
expenses for maintaining and operating the building and/or project including
common area and parking area. The term "Operating Expenses" includes all taxes
and assessments and governmental charges whether federal, state, county or
municipal, and whether they be by taxing districts or authorities presently
taxing the leased premises or by others, subsequently created or otherwise, and
by any other taxes and assessments attributable to the building and its
operation excluding, however, federal and state taxes on income. In connection
with the taxes there may be the expense of employing a tax consulting firm to
attempt to assure a fair tax burden on the building and grounds within
applicable taxing jurisdiction. The term "Operating Expenses" also includes all
insurance premiums Landlord is required to pay or deems necessary to pay for
public liability insurance and fire and extended insurance coverage, with
respect to the building and/or project of which the premises are part. The term
"Operating Expenses" does not include any capital improvement to the building
and/or project of which the premises are part, nor shall it include any repairs,
restoration or other work, occasioned by fire, windstorm or other casualty,
income and franchise taxes of the Landlord, expenses incurred in leasing to or
procurring of tenants, leasing commissions, advertising expenses, expenses of
the renovating of space for new tenants, interest or principal payments on any
mortgage or indebtedness of Landlord, nor depreciation allowance or expense.
4. USE. The demised premises shall be used only for the purpose of
receiving, storing, shipping and selling (other than retail) products, materials
and merchandise made and/or distributed by Tenant and for such other lawful
purposes as may be incidental thereto. Outside storage, including without
limitation, trucks and other vehicles, is prohibited without Landlord's prior
written consent. Tenant shall at its own cost and expense obtain any and
licenses and permits necessary for any such use. Tenant shall comply with all
governmental laws, ordinances and regulations applicable to the use of the
premises, and shall promptly comply with all governmental orders and directives
for the correction, prevention and abatement of nuisances, in or upon, or
connected with, the premises, all at Tenant's sole expense. Tenant shall not
permit any objectionable or unpleasant odors, smoke, dust, gas, noise or
vibrations to emanate from the premises, nor take any other action which would
constitute a nuisance or would disturb or endanger any other tenants of the
building in which the premises are situated or unreasonably interfere with their
use of their respective premises. Without Landlord's prior written consent,
Tenant shall not receive, store or otherwise handle any product, material or
merchandise which is explosive or highly inflammable. Tenant will not permit the
premises to be used for any purpose or in any manner (including without
limitation any method of storage) which would render the insurance thereon void
or the insurance risk more hazardous or cause the State Board of insurance or
other insurance authority to disallow any sprinkler credits.
5. TAXES. Landlord agrees to pay before they become delinquent all taxes,
assessments and governmental charges of any kind and nature whatsoever lawfully
levied or assessed against the building and the ground, parking areas,
driveways, and alleys around the building.
6. LANDLORD'S REPAIRS. Landlord shall at his expense maintain only the
roof, foundation and the structural soundness of the exterior walls of the
building in good repair, reasonable wear and tear excepted. Tenant shall repair
and pay for any damage caused by the negligence of Tenant, or Tenant's
employees, agents or invitees, or caused by Tenant's default hereunder, The term
"walls" as used herein shall not include windows, glass or plate glass, doors,
special store fronts or office entrys. Tenant shall immediately give Landlord
written notice of defect or need for repairs, after which Landlord shall have
reasonable opportunity to repair same or cure such defect. Landlord's liability
with respect to any defects, repairs or maintenance for which Landlord is
responsible under any of the provisions of this lease shall be limited to the
cost of such repairs or maintenance or the curing of such defect.
7. TENANT'S REPAIRS.
A. Tenant shall at its own cost and expense keep and maintain all parts of
the premises (except those for which Landlord is expressly responsible under the
terms of this lease) in good condition, promptly making all necessary repairs
and replacements, including but not limited to, windows, glass and plate glass,
doors, any special office entry, interior wells and finish work, floors and
floor covering, downspouts, gutters, heating and air conditioning systems,
dock boards, truck doors, dock bumpers, paving, plumbing work and fixtures,
termite and pest extermination, regular removal of trash and debris, including
rail spur areas, keeping the parking areas, driveways, alleys and the whole of
the premises in a clean and sanitary condition, and maintaining any spur tracks
serving the premises (Tenant agrees to sign a joint maintenance agreement with
the railroad company servicing the premises, if requested by the railroad
company), Tenant shall not be obligated to repair any damage caused by fire,
tornado or other casualty covered by the insurance to be maintained by Landlord
pursuant to subparagraph 13 (A) below, except the Tenant shall be obligated to
repair all wind damage to glass except with respect to tornado or hurricane
damage.
B. Tenant shall not damage any demising wall or disturb the integrity and
support provided by any demising wall and shall, at its sole cost and expense,
promptly repair any damage or injury to any demising wall caused by Tenant or
its employees, agents or invitees.
C. In the event the premises constitute a portion of a multiple occupancy
building, Tenant and its employees, customers and licensees shall have the
exclusive right to use the parking areas, if any, as may be designated by
Landlord in writing, subject to such reasonable rules and regulations as
Landlord may from time to time prescribe and subject to rights of ingress and
egress of other tenants, Landlord shall not be responsible for enforcing
Tenant's exclusive parking rights against any third parties. Further, in
multiple occupancy buildings, Landlord reserves the right to perform the paving
and landscape maintenance, exterior painting and common sewage line plumbing
which are otherwise Tenant's obligations under subparagraph A above, and Tenant
shall, in lieu of the obligations set forth under subparagraph A above with
respect to such items, be liable for its proportionate share (as defined in
subparagraph 3 (B) (above) of the cost and expense of the care for the grounds
around the building, including but not limited to, the mowing of grass, care of
shrubs, general landscaping, maintenance of parking areas, driveways and alleys,
exterior repainting and common sewage line plumbings provided that if Tenant or
any other particular tenant of the building can be clearly identified as being
responsible for obstructions or stoppage of the common sanitary sewage line,
then Tenant, if Tenant is responsible, or such other responsible tenant, shall
pay the entire cost thereof, upon demand, as additional rent, Tenant shall pay
when due its share, determined as aforesaid, of such costs and expenses along
with the other tenants of the building to Landlord upon demand, as additional
rent, for the amount of its share as aforesaid of such costs and expenses in the
event Landlord elects to perform or cause to performed such work.
D. In the event the premises constitute a portion of a multiple occupancy
building, Landlord shall have the right to coordinate any repairs and other
maintenance of any rail tracks serving or to serve the building, and if Tenant
uses such rail tracks, Tenant shall reimburse Landlord from time to time upon
demand, as additional rent, for a share of the costs of such repairs and
maintenance and any other sums specified in any agreement to which Landlord is a
party respecting such tracks, such share to be a fraction, the numerator of
which is the space contained in the premises, and the denominator of which is
the entire space occupied by rail users in the building.
E. Tenant shall, at his own cost and expense, enter into a regularly
scheduled preventive maintenance service contract with a maintenance contractor
for servicing all hot water, heating and air conditioning systems and equipment
within the premises. The maintenance contractor and the contract must be
approved by Landlord. The service contract must include all services suggested
by the equipment manufacturer within the operations/maintenance manual and must
become effective (and a copy thereof delivered to Landlord) within thirty (30)
days of the date Tenant takes possession of the premises.
8. ALTERATIONS. Tenant shall not make any alterations, additions or
improvements to the premises (including but not limited to roof and wall
penetrations) without the prior written consent of Landlord. Tenant may, without
the consent of Landlord, but at its own cost and expense and in a good
workmanlike manner erect such shelves, bins, machinery and trade fixtures as it
may deem advisable, without altering the basic character of the building or
improvements and without overloading or damaging such building or improvements,
and in each case complying with all applicable governmental laws, ordinances,
regulations and other requirements. All alterations, additions, improvements and
partitions erected by Tenant shall be and remain the property of Tenant during
the term of this lease and Tenant shall, unless Landlord otherwise elects as
hereinafter provided, remove all alterations, additions, improvements and
partitions erected by Tenant and restore the premises to their original
condition by the date of termination of this lease and Tenant shall, unless
however, that if Landlord so elects prior to termination of this lease or upon
earlier vacating of the premises, such alterations, additions, improvements and
partitions shall become the property of Landlord as of the date of termination
of this lease or upon earlier vacating of the premises and shall be delivered up
to the Landlord with the premises. All shelves, bins, machinery and trade
fixtures installed by Tenant may be removed by Tenant prior to the termination
of this lease if Tenant so elects, and shall be removed by the date of
termination of this lease or upon earlier vacating of the premises if required
by Landlord; upon any such removal Tenant shall restore the premises to their
original condition. All such removals and restoration shall be accomplished in a
good workmanlike manner so as not to damage the primary structure or structural
qualities of the buildings and other improvements situated on the premises.
9. SIGNS. Tenant shall have the right to install signs upon the premises
only when first approved in writing by Landlord and subject to any applicable
governmental laws, ordinances, regulations and other requirements, Tenant shall
remove all such signs by the termination of this lease. Such installations and
removals shall be made in such manner as to avoid injury or defacement of the
building and other improvements, and Tenant shall repair any injury or
defacement, including without limitation discoloration, caused by such
installation and/or removal.
10. INSPECTION. Landlord and Landlord's agents and representatives shall
have the right to enter and inspect the premises at any reasonable time during
business hours, for the purpose of ascertaining the condition of the premises or
in order to make such repairs as may be required or permitted to be made by
Landlord under the terms of this lease. During the period that is six (6) months
prior to the end of the term hereof, Landlord and Landlord's agents and
representatives shall have the right to enter the premises at any reasonable
time during business hours for the purpose of showing the premises and shall
have the right to erect on the premises a suitable sign indicating the premises
are available. Tenant shall give written notice to Landlord at least thirty (30)
days prior to vacating the premises and shall arrange to meet with Landlord for
a joint inspection of the premises prior to vacating. In the event of Tenant's
failure to give such notice or arrange such joint inspection, Landlord's
inspection at or after Tenant's vacating the premises shall be conclusively
deemed correct for purposes of determining Tenant's responsibility for repairs
and restoration.
11. UTILITIES. Landlord agrees to provide at its cost water, electricity
and telephone service connections into the premises, but Tenant shall pay for
all water, gas, heat, light, water, telephone, sewer, sprinkler charges and
other utilities and services used on or from the premises, together with any
taxes, penalties, surcharges or the like pertaining thereto and any maintenance
charges for utilities and shall furnish all electric light bulbs and tubes. if
any such services are not separately metered to Tenant, Tenant shall pay a
reasonable proportion as determined by Landlord of all charges Jointly metered
with other premises. Landlord shall in no event be liable for any interruption
or failure of utility services on the premises.
12. ASSIGNMENT AND SUBLETTING. Tenant shall not have the right to assign
this lease or to sublet the whole or any part of the premises without the prior
written consent of Landlord. Notwithstanding any permitted assignment of
subletting, Tenant shall at all times remain directly, primarily and fully
responsible and liable for the payment of the rent herein specified and for
compliance with all of its other obligations under the terms, provisions and
covenants of this lease. Upon the occurrence of an "event of default" as
hereinafter defined, if the premises or any part thereof are then assigned or
sublet, Landlord, in addition to any other remedies herein provided, or provided
by law, may at its option collect directly from such assignee its subtenant all
rents becoming due to Tenant under such assignment or sublease and apply such
rent against any sums due to Landlord from Tenant hereunder, and no such
collection shall be construed to constitute a novation or a release of Tenant
from the further performance of Tenant's obligations hereunder.
13. FIRE AND CASUALTY DAMAGE.
A. Landlord agrees to maintain standard fire and extended coverage
insurance covering the building of which the premises are a part in an amount
not less than 80% (or such greater percentage as may be necessary to comply with
the provisions of any co-insurance clauses of the policy) of the "replacement
cost" thereof as such terms is defined in the Replacement Cost Endorsement to be
attached thereto, insuring against the perils of Fire, Lighting and Extended
Coverage, such coverages and endorsements to be as defined, provided and limited
in the standard bureau forms prescribed by the insurance regulatory authority
for the State in which the premises are situated for use by insurance companies
admitted in such state for the writing of such insurance on risks located within
such state. Subject to the provisions of subparagraphs 13 (C), 13 (D) and 13 (E)
below, such insurance shall be for the sole benefit of Landlord and under its
sole control.
B. If the buildings situated upon the premises should be damaged or
destroyed by fire, tornado or other casualty, Tenant shall give immediate
written notice thereof to Landlord.
C. If the buildings situated upon the premises should be totally destroyed
by fire, tornado or other casualty, or if they should be so damaged thereby that
rebuilding or repairs cannot in Landlord's estimation be completed within two
hundred (200) days after the date upon which Landlord is notified by Tenant of
such damage, this lease shall terminate and the rent shall be abated during the
unexpired portion of this lease, effective upon the date of the occurrence of
such damage.
D. If the buildings situated upon the premises should be damaged by any
peril covered by the insurance to be provided by Landlord under subparagraph 13
(A) above, but only to such extent that rebuilding or repairs can in Landlord's
estimation be completed within two hundred (200) days after the date upon which
Landlord is notified by Tenant of such damage, this lease shall not terminate,
and Landlord shall at its sole cost and expense thereupon proceed with
reasonable diligence to rebuild and repair such buildings to substantially the
condition in which they existed prior to such damage, except that Landlord shall
not be required to rebuild, repair or replace any part of the partitions,
fixtures, additions and other improvements which may have been placed in, on or
about the premises by Tenant. If the premises are untenantable in whole or in
part following such damage, the rent payable hereunder during the period in
which they are untenantable shall be reduced to such extent as may be fair and
reasonable under all of the circumstances. In the event that Landlord should
fail to complete such repairs and rebuilding within two hundred (200) days after
the date upon which Landlord is notified by Tenant of such damage, Tenant may at
its option terminate this lease by delivering written notice of termination to
Landlord as Tenant's exclusive remedy, whereupon all rights and obligations
hereunder shall cease and terminate.
E. Notwithstanding anything herein to the contrary, in the event the holder
of any indebtedness secured by a mortgage of deed of trust covering premises
requires that the insurance proceeds be applied to such indebtedness, then
Landlord shall have the right to terminate this lease by delivering written
notice of termination to Tenant within fifteen (15) days after such requirement
is made by any such holder, whereupon all rights and obligations hereunder shall
cease and terminate.
F. Each of Landlord and Tenant hereby releases the other from any loss or
damage to property caused by fire or any other perils insured through or under
them by way of subrogation or otherwise for any loss or damage to property
caused by fire or any other perils insured in policies of insurance covering
such property, even if such loss or damage shall have been caused by the fault
or negligence of the other party, or anyone for whom such party may be
responsible; provided, however, that this release shall be applicable and in
force and effect only with respect to loss or damage occurring during such times
as the releasor's policies shall contain a clause or endorsement to the effect
that any such release shall not adversely affect or impair said policies or
prejudice the right of the releasor to recover thereunder and then only to the
extent of the insurance proceeds payable under such polices. Each of the
Landlord and Tenant agrees that it will request its insurance carriers to
include in its policies such a clause or endorsement. If extra cost shall be
charged therefor, each party shall advise the other thereof and of the amount of
the extra cost, and the other party, at its election, may pay the same, but
shall not be obligated to do so.
14. LIABILITY. Landlord shall not be liable to Tenant or Tenant's
employees, agents, patrons or visitors, or to any other person whomsoever, for
any injury to person or damage to property on or about the premises, resulting
from and/or caused in part or whole by the negligence or misconduct of Tenant,
it agents, servants or employees, or of any other person entering upon the
premises, or caused by the buildings and improvements located on the premises
becoming out of repair, or caused by leakage of gas, oil, water or steam or by
electricity emanating from the premises, or due to any cause whatsoever, and
Tenant hereby covenants and agrees that it will at all times indemnify and hold
safe and harmless the property, the Landlord (including without limitation the
trustee and beneficiaries if Landlord is a trust), Landlord's agents and
employees from any loss, liability, claims, suits, costs, expenses, including
without limitation attorney's fees and damages, both real and alleged, arising
out of any such damage or injury; except injury to persons or damage to property
the sole cause of which is the negligence of Landlord or the failure of Landlord
to repair any part of the premises which Landlord is obligated to repair and
maintain hereunder within a reasonable time after the receipt of written notice
form Tenant of needed repairs. Tenant shall procure and maintain throughout the
term of this lease a policy or policies of insurance, at its sole cost and
expense, insuring both Landlord and Tenant against all claims, demands or
actions arising out of or in connection with: (I) the premises; (II) the
condition of the premises: (III) Tenant's operations in and maintenance and use
of the premises; and (IV) Tenant's liability assumed under this lease, the
limits of such policy or policies to be in the amount of not less than $300,000
per occurrence in respect of injury to persons (including death), and in the
amount of not less than $50,000 per occurrence in respect of property damage or
destruction, including loss of use thereof. All such policies shall be procured
by Tenant from responsible insurance companies satisfactory to Landlord.
Certified copies of such policies, together with receipt evidencing payment of
premium therefor, shall be delivered to Landlord prior to the commencement date
of this lease. Not less than fifteen (15) days prior to the expiration date of
any such policies, certified copies of the renewals thereof (bearing notations
evidencing the payment of renewal premiums) shall be delivered to Landlord. Such
policies shall further provide the not less than thirty (30) days written notice
shall be given to Landlord before such policy may be cancelled or changed to
reduce insurance provided thereby.
15. CONDEMNATION.
A. If the whole or any substantial part of the premises should be taken for
any public or quasi-public use under governmental law, ordinance or regulation,
or by right of eminent domain, or by private purchase in lieu thereof and the
taking would prevent or materially interfere with the use of the premises for
the purpose for which they are being used, this lease shall terminate and the
rent shall be abated during the unexpired portion of this lease, effective when
the physical taking of said premises shall occur.
B. If part of the premises shall be taken for any public or quasi-public
use under any governmental law, ordinance or regulation, or by right of eminent
domain, or by private purchase in lieu thereof, and this lease is not terminated
as provided in the subparagraph above, this lease shall not terminate by the
rent payable hereunder during the unexpired portion of this lease shall be
reduced to such extent as may be fair and reasonable under all of the
circumstances.
C. In the event of any such taking or private purchase in lieu thereof,
Landlord and Tenant shall each be entitled to receive and retain such separate
awards and/or portion of lump sum awards as may be allocated to their respective
interests in any condemnation proceedings.
16. HOLDING OVER. Tenant will, at the termination of this lease by lapse of
time or otherwise, yield up immediate possession to Landlord. If Landlord agrees
in writing that Tenant may hold over after the expiration or termination of this
lease, unless the parties hereto otherwise agree in writing on the terms of such
holding over, the hold over tenancy shall be subject to termination by Landlord
at any time upon not less than five (5) days advance written notice, or by
Tenant at any time upon not less than thirty (30) days advance written notice,
and all of the other terms and provisions of this lease shall be applicable
during that period, except that Tenant shall pay Landlord from time to time upon
demand, as rental for the period of any hold over, an amount equal to one and
one-half (1 1/2) the rent in effect on the termination date, computed on a daily
basis for each day of the hold over period. No holding over by Tenant, whether
with or without consent of Landlord, shall operate to extend this lease except
as otherwise expressly provided. The preceding provisions of this paragraph 16
shall not be constructed as Landlord's consent for Tenant to hold over.
17. QUIET ENJOYMENT. Landlord covenants that it now has, or will acquire
before Tenant takes possession of the premises, good title to the premises, free
and clear of all liens and encumbrances, excepting only the lien for current
taxes not yet due, such mortgage or mortgages as are permitted by the terms of
this lease, zoning ordinances and other conditions of record. In the event this
lease is a sublease, then Tenant agrees to take the premises subject to the
provisions of the prior leases. Landlord represents and warrants that it has
full right and authority to enter into this lease and that Tenant, upon paying
the rental herein set forth and performing its other covenants and agreements
herein set forth, shall peaceably and quietly have, hold and enjoy the premises
for the term hereof without hindrance or molestation from Landlord, subject to
the terms and provisions of this lease.
18. EVENTS OF DEFAULT. The following events shall be deemed to be events of
default by Tenant under this lease:
(a) Tenant shall fail to pay any installment of the rent herein
reserved when due, or any payment with respect to taxes hereunder when due, or
any other payment or reimbursement to Landlord required herein when due, and
such failure shall continue for a period of five (5) days from the date such
payment was due.
(b) Tenant shall become insolvent, or shall make a transfer in fraud
of creditors, or shall make an assignment for the benefit of creditors.
(c) Tenant shall file a petition under any section or chapter of the
National Bankruptcy Act as amended, or under any similar law or statute of the
United States or any State thereof; or Tenant shall be adjudged bankrupt or
insolvent in proceedings filed against Tenant thereunder.
(d) A receiver or trustee shall be appointed for all or substantially
all of the assets of Tenant.
(e) Tenant shall desert or vacate any substantial portion of premises.
(f) Tenant shall fail to comply with any term, provision or covenant
of this lease (other than the foregoing in this Paragraph 18), and shall not
cure such failure within twenty (20) days after written notice thereof to
Tenant.
19. REMEDIES. Upon the occurrence of any of such events of default
described in Paragraph 18 hereof, Landlord shall have the option to pursue any
one or more of the following remedies without any notice or demand whatsoever:
(a) Terminate this lease, in which event Tenant shall immediately
surrender the premises to Landlord, and if Tenant fails so to do, Landlord may,
without prejudice to any other remedy which it may have for possession or
arrearages in rent, enter upon and take possession of the premises and expel or
remove Tenant and any other person who may be occupying such premises or any
part thereof, by force if necessary, without being liable for prosecution or any
claim of damages therefor; and Tenant agrees to pay to Landlord on demand the
amount of all loss and damage which Landlord may suffer by reason of such
termination, whether through inability to relet the premises on satisfactory
terms or otherwise.
(b) Enter upon and take possession of the premises and expel or remove
Tenant and any other person who may be occupying such premises or any part
thereof, by force if necessary, without being liable for prosecution or any
claim for damages therefor, and relet the premises and receive the rent
therefor; and Tenant agrees to pay to the Landlord on demand any deficiency that
may arise by reason of such reletting. In the event Landlord is successful in
reletting the premises at a rental in excess of that agreed to be paid by the
Tenant pursuant to the terms of this lease, Landlord and Tenant each mutually
agree that Tenant shall not be entitled, under any circumstances, to such excess
rental, and Tenant does hereby specifically waive any claim to such excess
rental.
(c) Enter upon the premises, by force if necessary, without being
liable for prosecution or any claim for damages therefor, and do whatever Tenant
is obligated to do under the terms of this lease; and Tenant agrees to reimburse
Landlord on demand for any expenses which Landlord may incur in this effecting
compliance with Tenant's obligations under this lease, and Tenant further agrees
that Landlord shall not be liable for any damages resulting to the Tenant from
such action, whether caused by the negligence of Landlord or otherwise.
In the event Tenant fails to pay any installation of rent hereunder as and when
such installment is due, to help defray the additional cost to Landlord for
processing such late payments Tenant shall pay to Landlord on demand a late
charge in an amount equal to five percent (5%) of such installment; and the
failure to pay such amount within ten (10) days after demand therefor shall be
an event of default hereunder. The provision for such late charge shall be in
addition to all of Landlord's other rights and remedies hereunder or at law and
shall not be construed as a liquidated damages or as limiting Landlord's
remedies in any manner.
Pursuit of any of the foregoing remedies shall not preclude pursuit of any
of the other remedies herein provided or any other remedies provided by law, nor
shall pursuit of any remedy herein provided constitute a forfeiture or waiver of
any rent due to Landlord hereunder or of any damages accruing to Landlord by
reason of the violation of any of the terms, provisions and covenants herein
contained. No act or thing done by the Landlord or its agents during the term
hereby granted shall be deemed a termination of this lease or an acceptance of
the surrender of the premises, and no agreement to terminate this lease or
accept a surrender of said premises shall be valid unless in writing signed by
Landlord. No waiver by Landlord of any violation or breach of any of the terms,
provisions and covenants herein contained. Landlord's acceptance of the payment
of rental or other payments hereunder after the occurrence of an event of
default shall not be construed as a waiver of such default, unless Landlord so
notifies Tenant in writing. Forbearance by Landlord to enforce one or more of
the remedies herein provided upon an event of default shall not be deemed or
construed to constitute a waiver of such default or of Landlord's right to
enforce any such remedies with respect to such default or any subsequent
default. If, on account of any breach of default by Tenant in Tenant's
obligations under the terms and conditions of this lease, it shall become
necessary or appropriate for Landlord to employ or consult with an attorney
concerning or to enforce or defend any of Landlord's rights or remedies
hereunder, Tenant agrees to pay any reasonable attorney's fees so incurred.
20. LANDLORD'S LIEN. In addition to any statutory lien for rent in
Landlord's favor, Landlord shall have and Tenant hereby grants to Landlord a
continuing security interest for all rentals and other sums of money becoming
due hereunder from Tenant, upon all goods, wares, equipment, fixtures,
furniture, inventory, accounts, contract rights, chattel paper and other
personal property of Tenant situated on the premises, and such property shall
not be removed therefrom without the consent of Landlord until all arrearages in
rent as well as any and all other sums of money then due to Landlord hereunder
shall first have been paid and discharged. In the event of a default under this
lease, Landlord shall have, in addition to any other remedies provided herein or
by law, all rights and remedies under the Uniform Commercial Code, including
without limitation the right to sell the property described in this Paragraph 20
at public or private sale upon five (5) days notice to Tenant. Tenant hereby
agrees to execute such financing statements and other instruments necessary or
desirable in Landlord's discretion to perfect the security interest hereby
created. Any statutory lien for rent is not hereby waived, the express
contractal lien herein granted being in addition and supplementary thereto.
21. MORTGAGES. Tenant accepts this lease subject and subordinate to any
mortgage(s) and/or deed(s) of trust now or at any time hereafter constituting a
lien or charge upon the premises or the improvements situated thereon, provided,
however, that if the mortgagee, trustee, or holder of any such mortgage or deed
of trust elects to have Tenant's interest in this lease superior to any such
instruments, releases or other documents which may be desired by any mortgagee
for the purpose of subjecting and subordinating this lease to the lien of any
such mortgage.
22. LANDLORD'S DEFAULT. In the event Landlord should become in default in
any payments due on any such mortgage described in Paragraph 21 hereof or in the
payment of taxes or any other items which might become a lien upon the premises
and which Tenant is not obligated to pay under the terms and provisions of this
lease, Tenant is authorized and empowered after giving Landlord five (5) days
prior written notice of such default and Landlord's failure to cure such
default, to pay any such items for and on behalf of Landlord, and the amount of
any item so paid by Tenant for or on behalf of Landlord, together with any
interest or penalty required to be paid in connection therewith, shall be
payable on demand by Landlord to Tenant; provided, however, that Tenant shall
not be authorized and empowered to make any payment under the terms of this
Paragraph 22 unless the item paid shall be superior to Tenant's interest
hereunder. In the event Tenant pays any mortgage debt in full, in accordance
with this paragraph, it shall, at its election, be entitled to the mortgage
security by assignment or subrogation.
23. MECHANIC'S LIENS. Tenant shall have no authority, express or implied,
to create or place any lien or encumbrance of any kind or nature whatsoever
upon, or in any manner to bind, the interest of Landlord in the premises or to
charge the rentals payable hereunder for any claim in favor of any person
dealing with Tenant, including those who may furnish materials or perform labor
for any construction or repairs, and each such claim shall affect and each such
lien shall attach to, if at all, only the leasehold interest granted to Tenant
by this instrument. Tenant covenants and agrees that it will pay or cause to be
paid all sums legally due and payable by it on account of any labor performed or
materials furnished in connection with any work performed on the premises on
which any lien is or can be validly and legally asserted against its leasehold
interest in the premises or the improvements thereon and that it will save and
hold Landlord harmless from any and all loss, cost or expense based on or
arising out of asserted claims or liens against the leasehold estate or against
the right, title and interest of the Landlord in the premises or under the terms
of this lease.
24. NOTICES. Each provision of this instrument or of any applicable
governmental laws, ordinances, regulations and other requirements with reference
to the sending, mailing or delivery of any notice or the making of any payment
by Landlord to Tenant or with reference to the sending, mailing delivery of any
notice or the making of any payment by Tenant to Landlord shall be deemed to be
complied with when and if the following steps are taken:
(a) All rent and other payments required to be made by Tenant to
Landlord hereunder shall be payable to Landlord at the address hereinbelow set
forth or at such other address as Landlord may specify from time to time by
written notice delivered in accordance herewith Tenant's obligation to pay rent
and any other amounts to Landlord under the terms of this lease shall not be
deemed satisfied until such rent and other amounts have been actually received
by Landlord.
(b) All payments required to be made by Landlord to Tenant hereunder
shall be payable to Tenant at the address hereinbelow set forth, or at such
other address within the continental United States as Tenant may specify from
time to time by written notice delivered in accordance herewith.
(c) Any notice or document required or permitted to be delivered hereunder
shall be deemed to be delivered whether actually received or not when deposited
in the United States Mail, postage prepaid, Certified or Registered Mail,
addressed to the parties hereto at the respective addresses set out below, or at
such other address as they have theretofore specified by written notice
delivered in accordance herewith:
LANDLORD: TENANT:
M & B INTERESTS, INC. ATLAS AIR CONDITIONING COMPANY, INC.
4125 SOUTHERLAND 4125 SOUTHERLAND ROAD
HOUSTON, TEXAS 77092 HOUSTON, TEXAS 77092
If and when included within the term "Landlord", as used in this instrument,
there are more than one person, firm or corporation, all shall jointly arrange
among themselves for their joint execution of such a notice specifying some
individual at some specific address for the receipt of notices and payments to
Landlord; if and when included within the term "Tenant", as used in this
instrument, there are more than one person, firm or corporation, all shall
jointly arrange among themselves for their joint execution of such a notice
specifying some individual at some specific address within the continental
United States for the receipt of notices and payments to Tenant. All parties
included within the terms "Landlord" and "Tenant", respectively, shall be bound
by notices given in accordance with the provisions of this paragraph to the same
effect as if each had received such notice.
25. MISCELLANEOUS.
A. Words of any gender used in this lease shall be held and construed to
include any other gender, and words in the singular number shall be held to
include the plural, unless the context otherwise requires.
B. The terms, provisions and covenants and conditions contained in this
lease shall apply to, inure to the benefit of, and be binding upon, the parties
hereto and upon their respective heirs, legal representatives, successors and
permitted assigns, except as otherwise herein expressly provided. Landlord shall
have the right to assign any of its rights and obligations under this lease.
Each party agrees to furnish to the other, promptly upon demand, a corporate
resolution, proof of due authorization by partners, or other appropriate
documentation evidencing the due authorization of such party to enter into this
lease.
C. The captions inserted in this lease are for convenience only and in no
way define, limit or otherwise describe the scope or intent of this lease, or
any provision hereof, or in any way affect the interpretation of this lease.
D. Tenant agrees from time to time within ten (10) days after request of
Landlord, to deliver to Landlord, or Landlord's designee, an estoppel
certificate stating that this lease is in full force and effect, the date to
which rent has been paid, the unexpired term of this lease and such other
matters pertaining to this lease as may be requested by Landlord. It is
understood and agreed that Tenant's obligation to furnish such estoppel
certificates in a timely fashion is a material inducement for Landlord's
execution of this lease.
E. This lease may not be altered, changed or amended except by an
instrument in writing signed by both parties hereto.
F. All obligations of Tenant hereunder not fully performed as of the
expiration or earlier termination of the term of this lease shall survive the
expiration or earlier termination of the term hereof, including without
limitation all payment obligations with respect to taxes and insurance and all
obligations concerning the condition of the premises. Upon the expiration or
earlier termination of the term hereof, and prior to Tenant vacating the
premises, Tenant shall pay to Landlord any amount reasonably estimated by
Landlord as necessary to put the premises, including without limitation all
heating and air conditioning systems and equipment therein, in good condition
and repair. Tenant shall also, prior to vacating the premises, pay to Landlord
the amount, as estimated by Landlord, of Tenant's obligation hereunder for real
estate taxes and insurance premiums for the year in which the lease expires or
terminates. All such amounts shall be used and held by Landlord for payment of
such obligations of Tenant hereunder, with Tenant being liable for any
additional costs therefor upon demand by Landlord, or with any excess to be
returned to Tenant after all such obligations have been determined and
satisfied, as the case may be. Any security deposit held by Landlord shall be
credited against the amount payable by Tenant under this Paragraph 25 (F).
G. If any clause or provision of this lease is illegal, invalid or
unenforceable under present or future laws effective during the term of this
lease, then and in the event, it is the intention of the parties hereto that the
remainder of this lease shall not be affected thereby, and it is also the
intention of the parties to this lease that in lieu of each clause or provision
of this lease that is illegal, invalid or unenforceable, there be added as a
part of this lease contract a clause or provision as similar in terms to such
illegal, invalid or unenforceable clause or provision as may be possible and be
legal, valid and enforceable.
H. Because the premises are on the open market and are presently being
shown, this lease shall be treated as an offer with the premises being subject
to prior lease and such offer subject to withdrawal or non-acceptance by
Landlord or to other use of the premises without notice, and this lease shall
not be valid or binding unless and until accepted by Landlord in writing and a
fully executed copy delivered to both parties hereto.
I. All references in this lease to "the date hereof" or similar references
shall be deemed to refer to the last date, in point of time, on which all
parties hereto have executed this lease.
26. ADDITIONAL PROVISIONS.
EXECUTED BY LANDLORD, this 1st day of OCTOBER 1994
Attest/Witness M & B INTERESTS, INC.
/s/ CHARLES I. HITT By /s/ MICHAEL ATLAS
Title: Title: President
EXECUTED BY TENANT, this 1st day of OCTOBER 1994
Attest/Witness ATLAS AIR CONDITIONING CO.
/s/ CHARLES I. HITT By: /s/ CLIFFORD STEAKLEY
Title: Title: Treasurer
EXHIBIT 10.18
AGREEMENT OF LEASE
BETWEEN
THOMAS J. AND BONNIE J. BEATY
LANDLORD
AND
ACCURATE AIR SYSTEMS, INC.
TENANT
===================================
DATED: JULY 1, 1997
===================================
PREMISES
8508 Rannie Road
Houston, Texas 77080
<PAGE>
AGREEMENT OF LEASE, made as of the 1st day of July, 1997, among THOMAS J.
BEATY and BONNIE J. BEATY, collectively as Landlord, and ACCURATE AIR SYSTEMS,
INC., a Texas corporation, having an address at 4801 Woodway Drive, Suite 300E,
Houston, Texas 77056, as Tenant.
W I T N E S S E T H:
WHEREAS, the Landlord is the owner of certain premises known as and by the
street address of 8508 Rannie Road, Houston, Texas (as more particularly
described on Schedule "A", annexed hereto and made a part hereof) together with
all buildings and other improvements thereon, and all fixtures, materials,
equipment, apparatus, furniture, furnishings and other property, real and
personal installed or used on the above described property or the improvements
thereon; and
WHEREAS, the Landlord desires to rent the aforementioned premises to the
Tenant and the Tenant desires to rent the aforementioned premises from the
Landlord.
NOW, THEREFORE, in consideration of the mutual promises and covenants
herein contained and for other good and valuable consideration, the receipt and
sufficiency of which is hereby acknowledged, the parties hereto, for themselves,
as well as their respective legal representatives, heirs, successors and
assigns, hereby agree as follows:
ARTICLE 1
GLOSSARY
For the purposes of this Lease, the following terms shall have the
meanings indicated below:
"ADA" shall have the meaning set forth in Section 9.1 hereof.
"ADDITIONAL RENT" shall have the meaning set forth in Section 2.2 hereof.
"ALTERATION" or "ALTERATIONS" shall mean any and all alterations,
decorations, installations, repairs, improvements, additions, replacements or
other physical changes of any nature whatsoever in or about the Premises at any
time, now or hereafter.
"APPLICABLE RATE" shall mean the lesser of (x) three percentage points
above the then current Base Rate, or (y) the maximum rate permitted by
applicable law.
"BANKRUPTCY CODE" shall mean 11 U.S.C. Section 101 ET SEQ., or any
statute, federal or state, of similar nature and purpose, now or hereafter.
"BASE RATE" shall mean the rate of interest publicly announced from time
to time by Bank One, Texas, N.A., or its successor, as its "base rate" (or such
other term as may be used by Bank One, Texas, N.A., from time to time, for the
rate presently referred to as its "base rate").
<PAGE>
"BUILDING SYSTEMS" shall mean the mechanical, electrical, sanitary,
heating, air conditioning, ventilating, elevator, plumbing, life-safety and
other service or support systems of any nature whatsoever located at or on the
Premises, but shall not include installations made by Tenant or fixtures or
appliances (regardless of whether or not such fixtures or appliances are owned
by the Tenant or the Landlord).
"BUILDING INSURANCE" shall have the meaning set forth in Section 11.2
hereof.
"BUSINESS DAYS" shall mean all days, excluding Saturdays, Sundays and all
days observed as holidays by the State of Texas or the federal government.
"COMMENCEMENT DATE" is July 1, 1997.
"DEFICIENCY" shall have the meaning set forth in Section 18.2(A)(2)
hereof.
"EVENT OF DEFAULT" shall have the meaning set forth in Section 17.1
hereof.
"EXPIRATION DATE" shall mean the Fixed Expiration Date or such other date
on which the Term ends pursuant to any of the terms, conditions or covenants of
this Lease or pursuant to law.
"FIXED EXPIRATION DATE" is June 30, 2002.
"FIXED RENT" shall mean $46,700.04 per annum ($3,891.67 per month) for the
first Lease Year (as such term is hereinafter defined) to be adjusted thereafter
on each anniversary date from and after the Commencement Date in accordance with
the provisions of Article 8 of this Lease.
"GOVERNMENT AUTHORITY" or "GOVERNMENT AUTHORITIES" shall mean the United
States of America, the State of Texas, the county of Harris, the Municipality of
Houston, and/or any political subdivision thereof and any agency, department,
commission, board, bureau or instrumentality of any of the foregoing, now
existing or hereafter created, having jurisdiction over the Premises or any
portion thereof.
"HAZARDOUS MATERIALS" shall have the meaning set forth in Section 9.2(A)
hereof.
"INCREASE NOTICE" shall have the meaning set forth in Section 8.3 hereof.
"INDEMNITEES" shall mean Landlord, his agents and contractors (and the partners,
shareholders, officers, directors and employees of any of the Landlord's agents
or contractors).
"INITIAL TERM" shall mean five (5) years.
"LANDLORD", on the date as of which this Lease is made, shall mean Thomas
J. and Bonnie J. Beaty, but thereafter, "Landlord" shall mean any fee owner of
the Premises.
"LEASE YEAR" shall mean each twelve (12) month period commencing on each
anniversary date from and after the Commencement Date.
"MORTGAGE(S)" shall mean any trust indenture or mortgage which may now or
hereafter affect the Premises and all extensions, supplements, amendments,
modifications, consolidations,
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refinancings and replacements thereof or thereto, substitutions therefor, and
advances made thereunder.
"MORTGAGEE(S)" shall mean any trustee or mortgagee or holder of a
Mortgage.
"NOTICE(S)" shall have the meaning set forth in Section 27.1(A) hereof.
"OPTION" or "OPTIONS" shall have the meaning set forth in Section 31.1
hereof.
"OPTION PERIOD" or "OPTION PERIODS" shall have the meaning set forth in
Section 31.1 hereof.
"PARTIES" shall have the meaning set forth in Section 34.2 hereof.
"PERMITTED USE" shall mean general, executive and administrative offices,
parking and related facilities in connection with Tenant's business as a air
conditioning systems business and uses related thereto including the evolution
of the Tenant's business consistent with the evolution of the air conditioning
systems industry in general.
"PERSON(S) OR PERSON(S)" shall mean any natural person or persons, a
partnership, a corporation and any other form of business or legal association
or entity.
"PERSONS WITHIN TENANT'S CONTROL" shall mean and include Tenant, all of
Tenant's respective shareholders, directors, officers, agents, contractors,
sub-contractors, servants, employees, licensees and invitees as well as any of
the heirs, successors, representatives and assigns of any of the foregoing.
"PREMISES" shall mean all that certain plot, piece and parcel of land,
known as and by the street address of 8508 Rannie Road, Houston, Texas 77080 (as
more particularly described on Schedule "A", annexed hereto and made a part
hereof) together with all buildings and other improvements thereon and hereafter
placed thereon, and all fixtures, materials, equipment, apparatus, furniture,
furnishings and other property, real and personal, now or hereafter installed or
used on the above described property or the improvements thereon.
"PRICE INDEX" shall have the meaning set forth in Section 8.1(ii) hereof.
"RENTAL" shall mean and be deemed to include Fixed Rent, Additional Rent
and any other sums payable, now or hereafter, by Tenant hereunder.
"REQUIREMENTS" shall mean (i) all present and future laws, rules,
ordinances, regulations, statutes, requirements, codes and executive orders,
extraordinary as well as ordinary, retroactive and prospective, of all
Governmental Authorities, now existing or hereafter created, which affect,
directly or indirectly, the Premises and/or the maintenance, use, operation or
occupation of the Premises, (ii) all requirements, obligations and conditions of
all instruments of record on the date of this Lease, and (iii) all requirements,
obligations and conditions imposed by any fire rating agency or by the carrier
of Landlord's hazard insurance policy for the Premises.
"TAXES" shall have the meaning set forth in Section 3.1 hereof.
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<PAGE>
"TENANT", on the date as of which this Lease is made, shall mean the
Tenant named in this Lease, but thereafter "Tenant" shall mean only the tenant
under this Lease at the time in question; provided, however, that the Tenant
named in this Lease and any and all successor tenant(s) hereunder shall not be
released and relieved from any liability hereunder in the event of any
assignment of this Lease or a sublet, in whole or in part, of the Premises.
"TENANT'S PROPERTY" shall mean Tenant's movable fixtures and movable
partitions, telephone and other equipment, furniture, furnishings and other
movable items of personal property owned by the Tenant.
"TERM", on the date as of which this Lease is made shall mean five (5)
years, but thereafter shall be deemed to include any Option Period for which the
Tenant exercises its Option pursuant to the provisions of Article 31 hereof.
"TERMINATION NOTICE PERIOD" shall have the meaning set forth in Section
27.1 hereof.
"UNAVOIDABLE DELAYS" shall have the meaning set forth in Article 25
hereof.
ARTICLE 2
DEMISE; PREMISES; TERM; RENT
SECTION 2.1. Landlord hereby leases to Tenant and Tenant hereby hires from
Landlord the Premises for the Term to commence on the Commencement Date and to
end on the Fixed Expiration Date, unless earlier terminated as provided herein.
SECTION 2.2. Commencing upon the Commencement Date, Tenant shall pay to
Landlord, in lawful money of the United States of America, without notice or
demand, by good and sufficient check at the office of Landlord or at such other
place as Landlord may designate from time to time, the following:
(A) the Fixed Rent, as such term is defined in Article 1 hereof,
which shall be payable in equal monthly installments in advance on the first day
of each and every calendar month during the Term, and
(B) additional rent ("ADDITIONAL RENT") consisting of all other sums
of money as shall become due from and be payable by Tenant hereunder (for
default in the payment of which Landlord shall have the same remedies as for a
default in the payment of Fixed Rent).
SECTION 2.3. If the Commencement Date is other than the first day of a
calendar month, or the Fixed Expiration Date is other than the last day of a
calendar month, Fixed Rent for such month shall be prorated on a per diem basis.
SECTION 2.4. Tenant shall pay the Fixed Rent and Additional Rent when due
without notice, demand (except as provided herein) and without abatement,
deduction, counterclaim, setoff or defense of any nature.
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<PAGE>
ARTICLE 3
REAL ESTATE TAXES; MORTGAGE(S)
SECTION 3.1. The Tenant represents, warrants, covenants and agrees that it
shall, within five (5) days of written demand by the Landlord to the Tenant, pay
to the Landlord, as Additional Rent, any and all Taxes (as hereinafter defined)
of any nature whatsoever assessed or imposed against the Premises for each and
every Lease Year during the Term of this Lease. The Landlord hereby agrees that
any demand given by the Landlord to the Tenant pursuant to the provisions of
this Section 3.1 shall include an accurate copy of the invoice, statement, bill
or similar document issued by the relevant Governmental Authority or
Governmental Authorities, as the case may be, with respect to the Taxes for
which payment is demanded. For purposes of this Section 3.1, "TAXES" shall
include, without limitation, any and all taxes assessed against the Premises,
all personal property taxes, all ad valorem taxes, all license fees, all rent
taxes, all levies, all penalties and any and all other taxes assessed against
the Premises by any Governmental Authority, now or hereafter.
SECTION 3.2. The Tenant represents, warrants and covenants and agrees that
it shall, within five (5) days of written demand by the Landlord to the Tenant,
pay to the Landlord, as Additional Rent, any and all amounts which may be due
and owing under and pursuant to the terms and conditions of any Mortgage or
Mortgages, as the case may be, encumbering the Premises, now or hereafter,
during the Term of this Lease including, but not limited to, any extensions,
supplements, amendments, modifications, consolidations, refinancings and
replacements of any such Mortgage or Mortgages provided that:
(A) the principal balance of any Mortgage subsequent to any
extension, supplement, amendment, modification, consolidation, refinancing or
replacement shall not exceed the outstanding principal balance of the Mortgage
which is to be extended, supplemented, amended, modified, consolidated,
refinanced or replaced at the time of such extension, supplement, amendment,
modification, consolidation, refinancing or replacement, as the case may be; and
(B) the amount of the monthly payments of principal and interest
payable pursuant to the terms and conditions of any Mortgage subsequent to any
extension, supplement, amendment, modification, consolidation, refinancing or
replacement shall not exceed the amount of the monthly payments with respect to
the Mortgage which is to be extended, supplemented, amended, modified,
consolidated, refinanced or replaced at the time of such extension, supplement,
amendment, modification, consolidation, refinancing or replacement, as the case
may be; and
(C) the terms of any extended, supplemented, amended, modified,
consolidated, refinanced or replaced Mortgage shall be no more financially
onerous than the provisions of such Mortgage prior to such extension,
supplement, amendment, modification, consolidation, refinancing or replacement,
as the case may be; and
(D) the term of any Mortgage extended, supplemented, amended,
modified, consolidated, refinanced or replaced shall be no less than the term of
such Mortgage prior to such
5
<PAGE>
extension, supplementation, amendment, modification, consolidation, refinancing
or replacement, as the case may be.
Notwithstanding anything contained herein to the contrary, the provisions of
this Section 3.2 shall not apply with respect to any amounts which may be due
and owing under and pursuant to the terms and conditions of any Mortgage
securing additional indebtedness (above and beyond any Mortgage or Mortgages
existing as of the date hereof) which first becomes a recorded lien on the
Premises subsequent to the date of this Lease and which is executed and
delivered by the Landlord without the consent of the Tenant. The Landlord hereby
agrees that any demand given by the Landlord to the Tenant for payment of
Additional Rent pursuant to the provisions of this Section 3.2 shall include,
only to the extent provided to the Landlord by the Mortgagee, an accurate copy
of the invoice, statement, bill or similar document issued by such Mortgagee or
Mortgagees, as the case may be, with respect to any amount for which payment of
Additional Rent is demanded by the Landlord under and pursuant to the provisions
of this Section 3.2.
ARTICLE 4
UTILITIES
SECTION 4.1. The Tenant represents, warrants, covenants and agrees that it
shall, within five (5) days of written demand by the Landlord to the Tenant, pay
to the Landlord, as Additional Rent, any and all charges incurred by the
Landlord for any and ail utilities supplied to the Premises including, without
limitation, telephone, electricity, water, heating oil and/or natural gas. The
Landlord hereby agrees that any demand given by the Landlord to the Tenant
pursuant to the provisions of this Section 4.1 shall include an accurate copy of
the invoice, statement, bill or similar document issued by the public utility or
any private company providing such utility, as the case may be, with respect to
any utility for which payment is demanded.
SECTION 4.2. Landlord shall not be liable in any way to Tenant for any
interruption or failure of or defect in the supply or character of any utility
furnished to the Premises, now or hereafter, or for any loss, damage or expense
Tenant may sustain if either the quantity or character of any utility is changed
or is no longer suitable for Tenant's requirements, whether by reason of any
requirement, act or omission of the public utility serving the Premises or for
any other reason whatsoever. Notwithstanding the provisions of this Section 4.2,
the Landlord shall be responsible for any and all actual damages suffered by the
Tenant as a result of any interruption of utility service caused solely by the
Landlord's failure to remit (prior to the expiration of any applicable grace
period) to the appropriate public utility or private company providing such
utility, as the case may be, any amount which has been paid by the Tenant to the
Landlord pursuant to the provisions of Section 4.1 hereof.
SECTION 4.3. Tenant shall at all times comply with the rules, regulations,
terms and conditions applicable to service, equipment, wiring, as well as any
and all requirements of the public utility supplying electricity to the
Premises. Tenant shall not, without Landlord's prior written consent in each
instance (which consent may be withheld by the Landlord in its reasonable
discretion), connect any fixtures, machinery, appliances or equipment to the
Premises electric distribution system or make any alteration or addition to
Tenant's machinery, appliances or equipment, or the electric system of the
Premises, if the effect thereof would be to increase the electrical load in the
Premises. Should Landlord grant such consent, all additional risers or
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<PAGE>
other equipment required therefor shall be provided by Landlord and the cost
thereof shall be deemed Additional Rent due hereunder and shall be forthwith
paid by Tenant within five (5) days of Landlord's written demand.
SECTION 4.4. If any Taxes are imposed upon Landlord with respect to any
utility furnished as a service to Tenant by any Governmental Authority, Tenant
agrees that such Taxes shall be reimbursed by Tenant to Landlord within five (5)
days of written demand. The Landlord hereby agrees that any demand given by the
Landlord to the Tenant pursuant to the provisions of this Section 4.4 shall
include an accurate copy of the invoice, statement, bill or similar document
issued by the relevant Governmental Authority or Governmental Authorities, as
the case may be, with respect to the Taxes for which payment is demanded.
ARTICLE 5
USE AND OCCUPANCY
SECTION 5.1. Tenant shall use and occupy the Premises for the Permitted
Use and for no other purpose of any nature whatsoever.
ARTICLE 6
ALTERATIONS
SECTION 6.1.
(A) (1) Prior to making any Alterations, Tenant shall (i) submit to
Landlord detailed plans and specifications for approval by the Landlord
(including layout, architectural, electrical, mechanical and structural
drawings) and that comply with all Requirements for each proposed Alteration,
and Tenant shall not commence any such Alteration without first obtaining
Landlord's approval of such plans and specifications, (ii) at Tenant's expense,
obtain all permits, approvals and certificates required by any Governmental
Authorities, and (iii) furnish to Landlord duplicate original policies or
certificates thereof for worker's compensation insurance (covering all persons
to be employed by Tenant, and Tenant's contractors and subcontractors, in
connection with such Alteration) and commercial general liability insurance
(including premises operation, bodily injury, personal injury, death,
independent contractors, products and completed operations, broad form
contractual liability and broad form property damage coverages) in such form,
with such companies, for such periods and in such amounts as Landlord may
reasonably approve, naming Landlord and its agents and any Mortgagee, as
additional insureds. Upon completion of such Alteration, Tenant, at Tenant's
expense, shall obtain certificates of final approval of such Alterations
required by any Governmental Authority and shall furnish Landlord with copies
thereof, together with the "as-built" plans and specifications for such
Alterations. All Alterations shall be made and performed in accordance with the
plans and specifications therefor as approved by Landlord and otherwise in
accordance with all Requirements. All materials and equipment to be incorporated
in the Premises as a result of any Alterations shall be first quality and no
such materials or equipment shall be subject to any lien, encumbrance, chattel
mortgage, title retention or security agreement.
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(2) Landlord reserves the right to disapprove any plans and
specifications, in whole or in part, to reserve approval of items shown thereon
pending its review and approval of other plans and specifications, and to
condition its approval upon Tenant making revisions to the plans and
specifications or supplying additional information. Tenant agrees that any
review or approval by Landlord of any plans and/or specifications with respect
to any Alteration is solely for Landlord's benefit, and without any
representation or warranty whatsoever to Tenant or any other Person with respect
to the adequacy, correctness or sufficiency thereof or with respect to
Requirements or otherwise.
(B) All Alterations shall become a part of the Premises and shall be
Landlord's property from and after the installation thereof and may not be
removed or changed without Landlord's prior written consent. Notwithstanding the
foregoing, Landlord, upon notice given at least thirty (30) days prior to the
Expiration Date or upon such shorter notice as is reasonable under the
circumstances upon the earlier expiration of the Term, may require Tenant to
remove any specified Alterations and to repair and restore in a good and
workmanlike manner any damage to the Premises caused by such removal all at
Tenant's sole cost and expense. All Tenant's Property shall remain the property
of Tenant and, on or before the Expiration Date or earlier end of the Term, may
be removed from the Premises by Tenant at Tenant's sole cost and expense;
provided, however, that Tenant shall repair and restore in a good and
workmanlike manner any damage to the Premises caused by such removal. The
provisions of this Section 6.1(B) shall survive the expiration or earlier
termination of this Lease.
(C) (1) Any and all Alterations shall be performed, at Tenant's sole
cost and expense, by contractors, subcontractors or mechanics previously
approved in writing by Landlord. Prior to making an Alteration, at Tenant's
request, Landlord shall furnish Tenant with a list of contractors who may
perform Alterations to the Premises on behalf of Tenant.
(2) Notwithstanding the terms and conditions of Section
6.1(C)(1) hereof, with respect to any Alteration affecting any Building Systems,
(i) Tenant shall only employ Landlord's designated contractor, and (ii) the
Alteration shall, at Tenant's expense, be designed by Landlord's engineer.
(D) (1) Any mechanic's lien filed against the Premises for work
claimed to have been done for, or materials claimed to have been furnished to,
Tenant shall be canceled or discharged by Tenant, at Tenant's expense, within
twenty (20) days after such lien shall be filed, by payment or filing of the
bond required by law, and Tenant shall indemnify and hold Landlord harmless from
and against any and all costs, expenses, claims, losses or damages resulting
therefrom by reason thereof.
(2) If Tenant shall fail to discharge such mechanic's lien
within the aforesaid period, then, in addition to any other right or remedy of
Landlord, Landlord may, but shall not be obligated to, discharge the same either
by paying the amount claimed to be due or by procuring the discharge of such
lien by deposit in court or bonding, and in any such event, Landlord shall be
entitled, if Landlord so elects, to compel the prosecution of an action for the
foreclosure of such mechanics lien by the lienor and to pay the amount of the
judgment, if any, in favor of the lienor, with interest, costs and allowances.
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(3) Any amount paid by Landlord for any of the aforesaid
charges and for all expenses of Landlord (including, but not limited to,
attorneys' fees and disbursements) incurred in defending any such action,
discharging said lien or in procuring the discharge of said lien, with interest
on all such amounts at the maximum legal rate of interest then chargeable to
Tenant from the date of payment, shall be repaid by Tenant within ten (10) days
after written demand therefor, and all amounts so repayable, together with such
interest, shall be considered Additional Rent.
SECTION 6.2. Landlord, at Tenant's expense, and upon the request of
Tenant, shall join in any applications for any permits, approvals or
certificates required to be obtained by Tenant in connection with any permitted
Alteration (provided that the provisions of the applicable Requirements shall
require that Landlord join in such application) and shall otherwise cooperate
with Tenant in connection therewith; provided, however, that Landlord shall not
be obligated to incur any cost or expense or liability in connection therewith.
SECTION 6.3. Tenant shall furnish to Landlord copies of records of all
Alterations and of the cost thereof within fifteen (15) days after the
completion of such Alterations.
SECTION 6.4. Tenant shall not, at any time prior to or during the Term,
directly or indirectly, employ, or permit the employment of, any contractor,
mechanic or laborer in the Premises, whether in connection with any Alteration
or otherwise, if such employment would interfere or cause any conflict with
other contractors, mechanics or laborers engaged in the construction,
maintenance or operation of the Premises by Landlord, Tenant or others, or of
any other property owned by Landlord. In the event of any such interference or
conflict, Tenant, upon demand of Landlord, shall cause all contractors,
mechanics or laborers causing such interference or conflict to leave the
Premises immediately.
ARTICLE 7
REPAIRS; REPLACEMENTS; MAINTENANCE
SECTION 7.1. Tenant, at Tenant's sole cost and expense, shall take good
care of the Premises and the fixtures, equipment and appurtenances therein and
make all repairs and replacements thereto, both structural and non-structural,
of any nature whatsoever as and when needed to preserve them in good working
order and condition, except for (a) reasonable wear and tear and (b)
obsolescence. If Tenant shall fail, after five (5) days notice (or such shorter
period as may be required because of an emergency), to proceed with due
diligence to make repairs required to be made by Tenant, the same may be made by
Landlord, at the expense of Tenant, and the expenses thereof incurred by
Landlord, with interest thereon at the Applicable Rate, shall be paid to
Landlord, as Additional Rent, within ten (10) days after rendition of a bill or
statement therefor. Tenant shall give Landlord prompt notice of any defective
condition in any Building Systems located in, servicing or passing through the
Premises.
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ARTICLE 8
INCREASES IN FIXED RENT
SECTION 8.1. For purposes of the Lease:
(i) "BUREAU" shall mean the Federal Bureau of Labor Statistics or
any successor agency that shall issue the indices or data referred to in
subparagraph (ii) below.
(ii) "PRICE INDEX" shall mean the Consumer Price Index for All Urban
Consumers for the Houston, Texas geographic area, 1982-1984=100, issued from
time to time by the Bureau or any other successor measure hereafter employed by
the Bureau in lieu of such price index that measures the cost of living for such
geographic area, failing such successor, the most nearly comparable index
(reflecting changes in costs of housing including rental housing, energy and
services), published by a Governmental Authority, appropriately adjusted.
Furthermore, if hereafter the Price Index is converted to a different standard
reference base or a substantial change is made in the terms or number of items
contained therein, the Price Index shall be adjusted (with the use of such
conversion factor, formula or table as is published by the Bureau, or if it
shall not publish same, the conversion factor published by Prentice Hall, Inc.,
or, failing such publication, by any other nationally recognized publisher of
similar statistical information) to the figure that would have resulted if not
for such conversion or change.
(iii) "APPLICABLE PRICE INDEX" for a Lease Year shall mean the Price
Index issued for August of the year in which such Lease Year commences.
SECTION 8.2. (A) Tenant shall pay to Landlord Fixed Rent in the amount set
forth in Article 1 of this Lease for the first Lease Year.
(B) For each Lease Year subsequent to the first Lease Year
(and for each and every Lease Year thereafter during the Term hereof), the
Tenant shall pay to the Landlord, as Fixed Rent, an amount equal to the greater
of:
(i) an amount equal to the sum of (x) the percentage by
which the Applicable Price Index for such Lease Year exceeds the Applicable
Price Index for the immediately preceding Lease Year, multiplied by the Fixed
Rent payable for such immediately preceding Lease Year and (y) such Fixed Rent
payable for the immediately preceding Lease Year (e.g., if the Base Index is
200, the Applicable Price Index for the second Lease Year is 203, the Applicable
Price Index for the third Lease Year is 215, and the Fixed Rent payable for the
second Lease Year is $50,000.00, then the Applicable Price Index for the third
Lease Year exceeds the Applicable Price Index for the second Year by 5.91% (i
.e., the difference between 203 and 215), and the Fixed Rent derived from the
aforesaid calculation shall be $52,955.75 (5.91% of $50,000.00, $2,955.00, plus
$50,000.00); or
(ii) an amount equal to the Fixed Rent for the
immediately preceding Lease Year.
The Landlord and the Tenant hereby acknowledge that it is the mutual intention
of the parties that for each and every Lease Year subsequent to the first Lease
Year during the Term hereof,
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the Fixed Rent payable by the Tenant to the Landlord hereunder shall never be
decreased from the prior Lease Year.
SECTION 8.3. Upon notice by the Landlord to the Tenant of an increase in
the Fixed Rent pursuant to the provisions of this Article 8 ("INCREASE NOTICE"),
the Tenant shall pay the Fixed Rent as set forth in the Increase Notice.
ARTICLE 9
REQUIREMENTS OF LAW
SECTION 9.1. Tenant shall not do, and shall not permit any act or thing in
or upon the Premises which will invalidate or be in conflict with the
certificate of occupancy for the Premises or violate any Requirements. Tenant
shall, at Tenant's sole cost and expense, immediately take all action, including
but not limited to, making any required Alterations necessary to comply with all
Requirements [including, but not limited to, the Americans With Disabilities Act
of 1990 (the "ADA"), as modified and supplemented from time to time] which shall
or may impose any violation, order or duty upon Landlord or Tenant arising from,
or in connection with, the Premises, Tenant's occupancy, use or manner of use of
the Premises (including, without limitation, any occupancy, use or manner of use
that constitutes a "place of public accommodation" under the ADA), or any
installations in the Premises, or required by reason of a breach of any of
Tenant's covenants or agreements under this Lease, whether or not such
Requirements shall now be in effect or hereafter enacted or issued, and whether
or not any work required shall be ordinary or extraordinary or foreseen or
unforeseen as of the date hereof.
SECTION 9.2. Tenant covenants and agrees that Tenant shall, at Tenant's
sole cost and expense, comply at all times with all Requirements governing the
use, generation, storage, treatment and/or disposal of any Hazardous Materials
(as defined below), the presence of which results from or in connection with the
act or omission of Tenant or Persons Within Tenant's Control or the breach of
this Lease by Tenant or Persons Within Tenant's Control. The term "HAZARDOUS
MATERIALS" shall mean any biologically or chemically active or other toxic or
hazardous wastes, pollutants or substances, including, without limitation,
asbestos, PCBS, petroleum products and by-products, substances defined or listed
as "hazardous substances" or "toxic substances" or similarly identified in or
pursuant to the Comprehensive Environmental Response, Compensation and Liability
Act, 42 U.S.C. ss. 9601 ET SEQ., and as hazardous wastes under the Resource
Conservation and Recovery Act, 42 U.S.C. ss. 6010, ET SEQ., any chemical
substance or mixture regulated under the Toxic Substance Control Act of 1976, as
amended, 15 U.S.C. 2601, ET SEQ., any "toxic pollutant" under the Clean Water
Act, 33 U.S.C. ss. 466 ET SEQ., as amended, any hazardous air pollutant under
the Clean Air Act, 42 U.S.C. ss. 7401 ET SEQ., hazardous materials identified in
or pursuant to the Hazardous Materials Transportation Act, 49 U.S.C. ss. 1802,
ET SEQ., and any hazardous or toxic substances or pollutant regulated under any
other Requirements including, without limitation, ECRA (as such term is
hereinafter defined). Tenant agrees to execute, from time to time, at Landlord's
request, affidavits, representations and the like concerning Tenant's best
knowledge and belief regarding the presence of Hazardous Materials in, on, under
or about the Premises. Tenant shall indemnify and hold harmless all Indemnitees
from and against any loss, claim, cost, damage, liability or expense (including
attorneys' fees and disbursements) arising by reason of any clean up, removal,
remediation, detoxification action or any other activity required or recommended
of any Indemnitees by any
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Governmental Authority by reason of the presence in, on, under or about the
Premises of any Hazardous Materials, as a result of or in connection with the
act or omission of Tenant or Persons Within Tenant's Control or the breach of
this Lease by Tenant or Persons Within Tenant's Control. The foregoing covenants
and indemnity shall survive the expiration or any termination of this Lease.
SECTION 9.3. If Tenant shall receive notice of any violation of, or
defaults under, any Requirements, liens or other encumbrances applicable to the
Premises, Tenant shall give immediate written notice thereof to Landlord.
SECTION 9.4. If any governmental license or permit shall be required for
the proper and lawful conduct of Tenant's business and if the failure to secure
such license or permit would, in any way, affect Landlord or the Premises, then
Tenant, at Tenant's expense, shall promptly procure and thereafter maintain,
submit for inspection by Landlord, and at all times comply with the terms and
conditions of, each such license or permit.
ARTICLE 10
SUBORDINATION
SECTION 10.1. This Lease shall at all times, now and hereafter, be subject
and subordinate to each and every Mortgage, whether made prior to or after the
execution of this Lease, and to all extensions, supplements, amendments,
modifications, consolidations and replacements thereof or thereto, substitutions
therefor, and advances made thereunder; provided, that Tenant has received from
the holder of any Mortgage an agreement that Tenant will not be disturbed in its
possession of the Premises, or have its rights under this Lease modified or
terminated other than pursuant to the terms of this Lease. This clause shall be
self-operative and no further agreement of subordination shall be required to
make the interest of any Mortgagee superior to the interest of Tenant hereunder.
In confirmation of such subordination, Tenant shall promptly execute and
deliver, at its own cost and expense, any document, in recordable form if
requested, that Landlord or any Mortgagee may request to evidence such
subordination; and if Tenant fails to execute, acknowledge or deliver any such
document within five (5) days after request therefor, Tenant hereby irrevocably
constitutes and appoints Landlord as Tenant's attorney-in-fact, coupled with an
interest, to execute, acknowledge and deliver any such document for and on
behalf of Tenant. Tenant shall not do anything that would constitute a default
under any Mortgage, or omit to do anything that Tenant is obligated to do under
the terms of this Lease so as to cause Landlord to be in default thereunder.
SECTION 10.2. If, at any time prior to the expiration of the Term, any
Mortgagee comes into possession of the Premises, by receiver or otherwise,
Tenant agrees, at the election and upon demand of any owner of the Premises, or
of any Mortgagee in possession of the Premises, to attorn, from time to time, to
any such owner or Mortgagee or any person acquiring the interest of Landlord as
a result of any such termination or as a result of a foreclosure of the Mortgage
or the granting of a deed in lieu of foreclosure, upon the then executory terms
and conditions of this Lease (except as provided below), for the remainder of
the Term, provided that such owner or Mortgagee, as the case may be, or receiver
caused to be appointed by any of the foregoing,
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is then entitled to possession of the Premises. Any such attornment shall be
made upon the condition that no such owner or Mortgagee shall be:
(1) liable for any act or omission of any prior landlord (including,
without limitation, the then defaulting landlord); or
(2) subject to any defense or offsets (except as expressly set forth
in this Lease) which Tenant may have against any prior landlord (including,
without limitation, the then defaulting landlord); or
(3) bound by any payment of Rental which Tenant might have paid for
more than the current month to any prior landlord (including, without
limitation, the then defaulting landlord); or
(4) bound by any obligation to make any payment to Tenant which was
required to be made prior to the time such owner or Mortgagee succeeded to any
prior landlord's interest; or
(5) bound by any obligation to perform any work or to make
improvements to the Premises except for (i) repairs to the Premises or any part
thereof as a result of damage by fire or other casualty pursuant to Article 12,
but only to the extent that such repairs can be reasonably made from the net
proceeds of any insurance actually made available to such owner or Mortgagee and
(ii) repairs to the Premises as a result of a partial condemnation pursuant to
Article 13, but only to the extent that such repairs can be reasonably made from
the net proceeds of any award made available to such owner or Mortgagee. Tenant,
upon demand of any such owner or Mortgagee, shall execute, from time to time,
agreements in confirmation of the foregoing provisions of this Section 10.2,
satisfactory to any such owner or Mortgagee, and acknowledging such attornment
and setting forth the terms and conditions of its tenancy. Nothing contained in
this Section 10.2 shall be construed to impair any right otherwise exercisable
by any such owner or Mortgagee.
SECTION 10.3. If requested by any Mortgagee or Landlord, Tenant shall
promptly execute and deliver, at Tenant's own cost and expense, any document in
accordance with the terms of this Article 10, in recordable form, to evidence
such subordination.
SECTION 10.4. At any time and from time to time upon not less than ten
(10) days' prior notice to Tenant or Landlord given by the other, or to Tenant
given by a Mortgagee, Tenant or Landlord, as the case may be, shall, without
charge, execute, acknowledge and deliver a statement in writing addressed to
such party as Tenant, Landlord or Mortgagee, as the case may be, may designate,
in form satisfactory to Tenant, Landlord or Mortgagee, as the case may be,
certifying all or any of the following: (i) that this Lease is unmodified and in
full force and effect (or if there have been modifications, that this Lease is
in full force and effect as modified and stating the modifications); (ii) the
date that the Term commenced and the date(s) that Fixed Rent and Additional Rent
became payable hereunder and the dates to which they have been paid; (iii)
whether or not, to the best knowledge of the signer of such certificate,
Landlord is in default in performance of any of the terms of this Lease and, if
so, specifying each such event of default of which the signer may have
knowledge; (iv) whether or not, to the best knowledge of the signer of such
certificate, Tenant has accepted possession of the Premises; (v) whether Tenant
has made
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any claim against Landlord under this Lease and, if so, the nature thereof and
the dollar amount, if any, of such claim; (vi) either that Tenant does not know
of any default in the performance of any provision of this Lease or specifying
the details of any default of which Tenant may have knowledge and stating what
action Tenant is taking or proposes to take with respect thereto; (vii) that, to
the best knowledge of Tenant, there are no proceedings pending or threatened
against Tenant before or by any court or administrative agency which, if
adversely decided, would materially or adversely affect the financial condition
or operations of Tenant or, if any such proceedings are pending or threatened to
the best knowledge of Tenant, specifying and describing the same; and (viii)
such further information with respect to the Lease or the Premises as Landlord
may reasonably request or Mortgagee may require; it being intended that any such
statement delivered pursuant hereto may be relied upon by any prospective
purchaser of the Premises or any part thereof or of the interest of Landlord in
any part thereof, by any Mortgagee or prospective Mortgagee or by any
prospective assignee of any Mortgage or by any assignee of Tenant.
The failure of either Tenant or Landlord to execute, acknowledge and
deliver a statement in accordance with the provisions of this Section 10.4
within said ten (10) day period shall constitute an acknowledgment by Tenant or
Landlord, as the case may be, which may be relied on by any person or entity of
any nature whatsoever who would be entitled to rely upon any such statement,
that such statement as submitted by Landlord or Tenant, as the case may be, is
true and correct.
SECTION 10.5. As long as any Mortgage exists, Tenant shall not seek to
terminate this Lease by reason of any act or omission of Landlord until Tenant
has given not less than thirty (30) days prior written notice of such act or
omission to all Mortgagees, and if any such Mortgagee notifies Tenant within
thirty (30) days following receipt of such notice of its intention to remedy
such act or omission, until a reasonable period of time shall have elapsed
following the giving of such notice, during which period such Mortgagee shall
have the right, but not the obligation, to remedy such act or omission.
ARTICLE 11
INSURANCE; PROPERTY LOSS OR DAMAGE; REIMBURSEMENT
SECTION 11.1.
(A) Neither Landlord nor Landlord's agents shall be liable for any
injury or damage to persons or property, or interruption of Tenant's business,
resulting from fire or other casualty; nor shall Landlord or Landlord's agents
be liable for any such damage caused by Persons other than the Landlord or the
Landlord's agents or by construction of any private, public or quasi-public
work; nor shall Landlord be liable for any latent defect in the Premises.
(B) Tenant shall give written notice to Landlord, immediately after
Tenant learns thereof, of any accident, emergency, occurrence for which Landlord
might be liable, fire or other casualty and all damages to or defects in the
Premises for the repair of which Landlord might be responsible or which
constitutes Landlord's property. Such notice shall be given by telecopy or
personal delivery to the address(es) of Landlord in effect for notice.
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SECTION 11.2. Tenant shall not do or permit to be done any act or thing in
or upon the Premises which will invalidate or be in conflict with the terms of
the State of Texas standard form of fire insurance with extended coverage, or
with rental, liability, boiler, sprinkler, water damage, war risk or other
insurance policies covering the Premises and the fixtures and property therein
(hereinafter referred to as "BUILDING INSURANCE"); and Tenant, at Tenant's own
expense, shall comply with all rules, orders, regulations and requirements of
all insurance boards, and shall not do or permit anything to be done in or upon
the Premises or bring or keep anything therein or use the Premises in a manner
which increases the rate of premium for any of the Building Insurance or any
property or equipment located therein over the rate in effect at the
commencement of the Term of this Lease.
SECTION 11.3.
(A) If, by reason of any failure of Tenant to comply with the
provisions of this Lease, the rate of premium for Building Insurance or other
insurance on the property and equipment of Landlord shall be higher than it
otherwise would be, Tenant shall reimburse Landlord for that part of the
insurance premiums thereafter paid by Landlord which shall have been charged
because of such failure by Tenant. Tenant shall make said reimbursement on the
first day of the month following such payment by Landlord.
(B) In any action or proceeding wherein Landlord and Tenant are
parties, a schedule of any insurance rate for the Premises issued by any
insurance board establishing insurance premium rates for the Premises shall be
prima facie evidence of the facts therein stated and of the several items and
charges in the insurance premium rates then applicable to the Premises.
SECTION 11.4.
(A) Tenant shall, at Tenant's own cost and expense, obtain, maintain
and keep in full force and effect during the Term, for the benefit of Landlord,
any Mortgagees and Tenant, commercial general liability insurance (including
premises operation, bodily injury, personal injury, death, independent
contractors, products and completed operations, broad form contractual liability
and broad form property damage coverages) in a combined single limit amount of
not less than Five Million and 00/100 ($5,000,000.00) Dollars, against all
claims, demands or actions with respect to damage, injury or death made by or on
behalf of any person or entity, arising from or relating to the conduct and
operation of Tenant's business in, on or about the Premises (which shall include
Tenant's signs, if any), or arising from or related to any act or omission of
Tenant or of Persons Within Tenant's Control. If Tenant shall install or
maintain one or more pressure vessels to serve Tenant's operations at the
Premises, Tenant shall, at Tenant's own cost and expense, obtain, maintain and
keep in full force and effect, for the benefit of Landlord, any Mortgagees and
Tenant, appropriate boiler or other insurance coverage therefor in an amount not
less than Three Million and 00/100 ($3,000,000.00) Dollars (it being understood
and agreed, however, that the foregoing shall not be deemed a consent by
Landlord to the installation and/or maintenance of any such pressure vessels in
the Premises, which installation and/or maintenance shall at all times be
subject to the prior written consent of Landlord). Whenever, in Landlord's
reasonable judgment, good business practice and changing conditions indicate a
need for additional amounts or different types of insurance coverage, Tenant
shall, within ten (10) days after Landlord's request, obtain such insurance
coverage, at Tenant's expense.
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(B) Tenant, at Tenant's sole cost and expense, shall maintain
insurance protecting and indemnifying Tenant against any and all damage to or
loss of any Alterations and leasehold improvements, including any made by
Landlord to prepare the Premises for Tenant's occupancy, and Tenant's Property,
and all claims and liabilities relating thereto.
(C) Landlord and any Mortgagees shall be named as insureds in said
policies and shall be protected against all liability occasioned by an
occurrence insured against. All said policies of insurance shall be: (i) written
as "occurrence" policies; (ii) written as primary policy coverage and not
contributing with or in excess of any coverage which Landlord may carry; and
(iii) issued by reputable and independent insurance companies rated in Best's
Insurance Guide, or any successor thereto (or if there be none, an organization
having a national reputation) as having a general policyholder rating of "A+"
and a financial rating of at least "13", and which are licensed to do business
in the State of Texas. Tenant shall deliver to Landlord the policies of
insurance or certificates thereof, together with evidence of payment of premiums
thereon, and shall thereafter furnish to Landlord, at least thirty (30) days
prior to the expiration of any such policies and any renewal thereof, a new
policy or certificate in lieu thereof, with evidence of the payment of premiums
thereon. Each of said policies shall also contain a provision whereby the
insurer agrees not to cancel, fail to renew, diminish or materially modify said
insurance policy(ies) without having given Landlord and any Mortgagees at least
thirty (30) days prior written notice thereof.
(D) Tenant shall pay all premiums and charges for all of said
policies, and, if Tenant shall fail to make any payment when due or carry any
such policy, Landlord may, but shall not be obligated to, make such payment or
carry such policy, and the amount paid by Landlord, with interest thereon (at
the Applicable Rate), shall be repaid to Landlord by Tenant on demand, and all
such amounts so repayable, together with such interest, shall be deemed to
constitute Additional Rent hereunder. Payment by Landlord of any such premium,
or the carrying by Landlord of any such policy, shall not be deemed to waive or
release the default of Tenant with respect thereto.
SECTION 11.5.
(A) Tenant shall cause each insurance policy carried by Tenant and
insuring the Premises and Tenant's Alterations, leasehold improvements, space
equipment, furnishings, furniture, contents and fixtures against loss, damage or
destruction by fire or other casualty, to be written in a manner so as to
provide that the insurance company waives all rights of recovery by way of
subrogation against Landlord or Tenant in connection with any loss or damage
covered by any such policy. If the release of either Landlord or Tenant shall
contravene any law with respect to exculpatory agreements, the liability of the
party in question shall be deemed not released, but no action or rights shall be
sought or enforced against such party unless and until all rights and remedies
against the insurer are exhausted and such party shall be unable to collect such
insurance proceeds.
(B) The waiver of subrogation referred to in Section 11.5(A) above
shall extend to the agents and employees of each party, but-only if and to the
extent that such waiver can be obtained without additional charge (unless such
party shall pay such charge). Nothing contained in this Section 11.5 shall be
deemed to relieve the Tenant from any duty imposed elsewhere in this Lease to
repair, restore and rebuild the Premises, in whole or in part.
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ARTICLE 12
DESTRUCTION BY FIRE OR OTHER CAUSE
SECTION 12.1. If the Premises or any part thereof shall be damaged by fire
or other casualty, Tenant shall give immediate written notice thereof to
Landlord. Landlord shall, subject to the provisions of Sections 12.2 and 12.3
below, proceed with reasonable diligence, after receipt of the net proceeds of
insurance, to repair or cause to be repaired such damage at its expense, but in
no event shall such repair or restoration be greater in scope than the quantity
or quality of construction of the Premises as of the Commencement Date; and, if
the Premises, or any part thereof, shall be rendered untenantable by reason of
such damage and such damage shall not be due to the fault of Tenant or Persons
Within Tenant's Control, then the Fixed Rent hereunder, or an amount thereof
apportioned according to the area of the Premises so rendered untenantable (if
less than the entire Premises shall be so rendered untenantable), shall be
abated for the period from the date of such damage to the date when the repair
of such damage shall have been substantially completed. If Landlord or any
Mortgagee shall be unable to collect the insurance proceeds (including rent
insurance proceeds) applicable to such damage because of some action or inaction
on the part of Tenant or Persons Within Tenant's Control, then the cost of
repairing such damage shall be paid by Tenant and there shall be no abatement of
Fixed Rent. Tenant covenants and agrees to cooperate with Landlord and any
Mortgagee in their efforts to collect insurance proceeds (including rent
insurance proceeds) payable to such parties. Landlord shall not be liable for
any delay which may arise by reason of adjustment of insurance on the part of
Landlord and/or Tenant, or any cause beyond the control of Landlord or
contractors employed by Landlord.
It is expressly understood that if Landlord is prevented from
substantially completing the repairs by reason of any acts of Tenant or Persons
Within Tenant's Control, including, without limitation, by reason of the
performance of any Alterations, or by reason of Tenant's failure or refusal to
comply or to cause its architects, engineers, designers and contractors to
comply with any of Tenant's obligations described or referred to in this Lease,
then such work shall be deemed substantially completed on the date when the work
would have been substantially completed but for such delay, and the expiration
of the abatement of Tenant's obligations to pay Fixed Rent shall not be
postponed by reason of such delay. Any additional costs to Landlord to complete
any work occasioned by such delay shall be paid by Tenant to Landlord, as
Additional Rent, within ten (10) days after demand therefor by Landlord.
SECTION 12.2. Landlord shall not be liable for any inconvenience or
annoyance to Tenant or injury to the business of Tenant resulting in any way
from damage from fire or other casualty or the repair thereof. Tenant
understands that Landlord, in reliance upon Section 11.4 hereof, will not carry
insurance of any kind on Tenant's furnishings, furniture, contents, fixtures,
space equipment and leasehold improvements, and that Landlord shall not be
obligated to repair any damage thereto or replace the same.
SECTION 12.3. (A) Notwithstanding anything to the contrary contained in
Sections 12.1 and 12.2 above, in the event that:
(i) at least fifty (50%) percent of the rentable square
feet of the Premises shall be damaged by a fire or other casualty so that
substantial alteration or
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reconstruction of the Premises shall, in Landlord's sole opinion, be required
(whether or not the Premises shall have been damaged by such fire or other
casualty and without regard to the structural integrity of the Premises); or
(ii) the Premises shall be totally or substantially
damaged or shall be rendered wholly or substantially untenantable; or
(iii) there shall be any damage to the Premises within
the last two (2) years of the Term wherein the cost of repair exceeds an amount
equal to three (3) monthly installments of Fixed Rent, then, as a result of any
circumstances described in subparagraphs (i), (ii) or (iii) hereof, the Landlord
may, in Landlord's sole and absolute discretion, terminate this Lease and the
term and estate hereby granted, by notifying Tenant in writing of such
termination within one hundred twenty (120) days after the date of such damage.
In the event that such a notice of termination shall be given, then this Lease
and the term and estate hereby granted shall expire as of the date of
termination stated in said notice with the same effect as if that were the Fixed
Expiration Date, and the Fixed Rent and Additional Rent hereunder shall be
apportioned as of such date.
SECTION 12.4. Except as may be provided in Section 11.5, nothing herein
contained shall relieve Tenant from any liability to Landlord or to Landlord's
insurers in connection with any damage to the Premises by fire or other casualty
if Tenant shall be legally liable in such respect.
ARTICLE 13
EMINENT DOMAIN
SECTION 13.1. If the whole of the Premises is acquired or condemned for
any public or quasi-public use or purpose, this Lease and the Term shall end as
of the date of the vesting of title with the same effect as if said date were
the Fixed Expiration Date. If only a part of the Premises is so acquired or
condemned then, (1) except as hereinafter provided in this Section 13.1, this
Lease and the Term shall continue in effect but, if a part of the Premises is so
acquired or condemned, from and after the date of the vesting of title, the
Fixed Rent and Additional Rent, if any, shall be reduced in the proportion which
the area of the part of the Premises so acquired or condemned bears to the total
area of the Premises immediately prior to such acquisition or condemnation; (2)
whether or not the Premises are affected thereby, Landlord, at Landlord's
option, may give to Tenant, within sixty (60) days next following the date upon
which Landlord receives notice of vesting of title, a thirty (30) day notice of
termination of this Lease; and (3) if the part of the Premises so acquired or
condemned contains more than seventy-five (75%) percent of the total area of the
Premises immediately prior to such acquisition or condemnation, or if, by reason
of such acquisition or condemnation, Tenant no longer has access to the
Premises, Tenant, at Tenant's option, may give to Landlord, within thirty (30)
days next following the date upon which Tenant receives notice of vesting of
title, a thirty (30) day notice of termination of this Lease. If any such thirty
(30) day notice of termination is given, by Landlord or Tenant, this Lease and
the Term shall come to an end and expire upon the expiration of said thirty (30)
days with the same effect as if the date of expiration of said thirty (30) days
were the Fixed Expiration Date. In the event of any termination of this Lease
and the Term pursuant to the provisions of this Section 13.1, the Fixed Rent or
Additional Rent shall be apportioned as of
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the date of sooner termination and any prepaid portion of the Fixed Rent for any
period after such date shall be refunded by Landlord to Tenant.
SECTION 13.2. In the event of any such acquisition or condemnation of all
or any part of the Premises, Landlord shall be entitled to receive the entire
award for any such acquisition or condemnation. Tenant shall have no claim
against Landlord or the condemning authority for the value of any unexpired
portion of the Term and Tenant hereby expressly assigns to Landlord all of its
right in and to any such award. Nothing contained in this Section 13.2 shall be
deemed to prevent Tenant from making a separate claim in any condemnation
proceedings for the value of any Tenant's Property included in such taking, and
for any moving expenses, so long as Landlord's award is not reduced thereby.
ARTICLE 14
ASSIGNMENT; SUBLETTING; MORTGAGE; ETC.
SECTION 14.1. (A) The Tenant shall not (a) assign this Lease (whether by
operation of law, transfers of interests in Tenant or otherwise); or (b)
mortgage or encumber Tenant's interest in this Lease, in whole or in part; or
(c) sublet, or permit the subletting of, the Premises or any part thereof.
Notwithstanding the provisions of this Section 14.1, the use of the Premises by
any Person affiliated (as such term is hereinafter defined) with the Tenant or
under the common control (as such term is hereinafter defined) of Comfort
Systems USA, Inc., as the case may be, shall not be deemed an assignment of this
Lease or a sublet of the Premises; provided, however, that such use of the
Premises as aforesaid shall not violate or be prohibited by any of the
provisions of any Mortgage then encumbering the Premises, if any. For purposes
of this Article 14, a Person shall be deemed to be an "AFFILIATE" of the Tenant
or under the "COMMON CONTROL" of Comfort Systems USA, Inc. if such Person is a
member of a "parent-subsidiary controlled group" [as such term is defined by
Section 1563(a)(1) of the Internal Revenue Code of 1986, as amended] or a member
of a "brother-sister controlled group" [as such term is defined by Section
1563(a)(2) of the Internal Revenue Code of 1986, as amended] of which either
Comfort Systems USA, Inc. or the Tenant, as the case may be, is a member.
(B) Notwithstanding the provisions otherwise set forth in this
Article 14, any reorganization, consolidation and/or restructuring of the Tenant
in which the issued and outstanding stock of the Tenant remains under the common
control (as such term is defined in Section 14.1 hereinabove) of Comfort Systems
USA, Inc. shall not be deemed an assignment of this Lease or a sublet of the
Premises; provided, however, that the same shall not violate or be prohibited by
any of the provisions of any Mortgage then encumbering the Premises, if any.
SECTION 14.2. If Tenant's interest in this Lease shall be assigned in
violation of the provisions of this Article 14, such assignment shall be invalid
and of no force and effect against Landlord; provided, however, that Landlord
may collect an amount equal to the then Fixed Rent plus any other item of Rental
from the assignee as a fee for its use and occupancy. If the Premises or any
part thereof are sublet to, or occupied by, or used by, any person other than
Tenant, whether or not in violation of this Article 14, Landlord, after default
by Tenant under this Lease, may collect any item of Rental or other sums paid by
the subtenant, user or occupant as a fee for its use and occupancy, and shall
apply the net amount collected to the Fixed Rent and the items of Rental
reserved in this Lease. No such assignment, subletting, occupancy, or use,
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nor any such collection or application of Rental or fee for use and occupancy,
shall be deemed a waiver by Landlord of any term, covenant or condition of this
Lease or the acceptance by Landlord of such assignee, subtenant, occupant or
user as Tenant hereunder, nor shall the same, in any circumstances, relieve
Tenant of any of its obligations under this Lease.
SECTION 14.3. Except as otherwise set forth in Section 14.1 hereof, for
purposes of this Article 14, (i) any increase in the amount of issued and/or
outstanding capital stock of any corporate tenant and/or the creation of one or
more additional classes of capital stock of any corporate tenant, in a single
transaction or a series of related or unrelated transactions, resulting in a
change in the legal or beneficial ownership of such tenant so that the
shareholders of such tenant existing immediately prior to such transaction or
series of transactions shall no longer own a majority of the issued and
outstanding capital stock of such tenant shall be deemed an assignment of this
Lease and (ii) any Person or legal representative of Tenant, to whom Tenant's
interest under this Lease passes by operation of law, or otherwise, shall be
bound-by the provisions of this Article 14. Tenant agrees to furnish to Landlord
on request at any time such information and assurances as Landlord may
reasonably request that Tenant has not violated the provisions of this Article
14.
ARTICLE 15
ACCESS TO PREMISES
SECTION 15.1. Tenant shall permit Landlord, Landlord's agents and any
public utilities servicing the Premises to erect, use and maintain, now and
hereafter, concealed ducts, pipes and conduits in and through the Premises.
Landlord or Landlord's agents shall have the right to enter the Premises at all
reasonable times upon (except in case of emergency) reasonable prior notice,
which notice may be oral, to examine the same, to show the same to prospective
purchasers or Mortgagees and to make such repairs, alterations, improvements or
additions (i) as Landlord may deem necessary or desirable to the Premises, or
(ii) which Landlord may elect to perform at least ten (10) days after notice
(except in an emergency when no notice shall be required) following Tenant's
failure to make repairs or perform any work which Tenant is obligated to make or
perform under this Lease, or (iii) for the purpose of complying with
Requirements, and Landlord shall be allowed to take all material into and upon
the Premises that may be required therefor without the same constituting an
eviction or constructive eviction of Tenant in whole or in part and the Fixed
Rent (and any other item of Rental) shall in no respect abate or be reduced by
reason of said repairs, alterations, improvements or additions, wherever
located, or while the same are being made, by reason of loss or interruption of
business of Tenant, or otherwise. Landlord shall promptly repair any damage
caused to the Premises by such work, alterations, improvements or additions.
SECTION 15.2. If Tenant is not present when for any reason entry into the
Premises may be necessary or permissible, Landlord or Landlord's agents may
enter the same without rendering Landlord or such agents liable therefor.
SECTION 15.3. Landlord also shall have the right at any time, without the
same constituting an actual or constructive eviction and without incurring any
liability to Tenant therefor, to change the arrangement or location of entrances
or passageways, doors and doorways, and corridors, stairs, toilets or other
parts of the Premises, provided any such change does not unreasonably
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interfere with, or deprive Tenant of access to, the Premises; to put so-called
"solar film" or other energy-saving installations on the inside and outside of
the windows; and to change the name, number or designation by which the Premises
is commonly known.
ARTICLE 16
CERTIFICATE OF OCCUPANCY
SECTION 16.1. Tenant shall not at any time, now or hereafter, use or
occupy the Premises, directly or indirectly, in violation of the certificate of
occupancy for the Premises and in the event that any Governmental Authority
hereafter contends or declares by notice, violation, order or in any other
manner whatsoever that the Premises are used for a purpose that is a violation
of such certificate of occupancy, Tenant shall, upon three (3) Business Days'
written notice from Landlord or any Government Authority, immediately
discontinue such use of the Premises.
ARTICLE 17
DEFAULT
SECTION 17.1. Each of the following events shall be an "EVENT OF DEFAULT"
under this Lease:
(A) if Tenant shall on any occasion default in the payment when due
of any installment of Fixed Rent or Additional Rent or in the payment when due
of any other item of Rental and such default shall continue for five (5)
business days from and after the date when written notice has been received by
Tenant; or
(B) if the Premises shall become vacant or abandoned; or
(C) if Tenant's interest in this Lease shall devolve upon or pass to
any person, whether by operation of law or otherwise, except as specifically
permitted by the provisions of Article 14 hereof; or
(D) (1) if Tenant shall not, or shall be unable to, or shall admit
in writing Tenant's inability to, as to any obligation, pay Tenant's debts as
they become due; or
(2) if Tenant shall commence or institute any case, proceeding
or other action (a) seeking relief on Tenant's behalf as debtor, or to
adjudicate it a bankrupt or insolvent, or seeking reorganization, arrangement,
adjustment, winding-up, liquidation, dissolution, composition or other relief
with respect to Tenant or Tenant's debts under any existing or future law of any
jurisdiction, domestic or foreign, relating to bankruptcy, insolvency,
reorganization or relief of debtors, or (b) seeking appointment of a receiver,
trustee, custodian or other similar official for it or for all or any
substantial part of its property; or
(3) if Tenant shall make a general assignment for the benefit
of creditors; or
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(4) if any case, proceeding or other action shall be commenced
or instituted against Tenant (a) seeking to have an order for relief entered
against Tenant as debtor or to adjudicate Tenant a bankrupt or insolvent, or
seeking reorganization, arrangement, adjustment, winding-up, liquidation,
dissolution, composition or other relief with respect to Tenant or Tenant's
debts under any existing or future law of any jurisdiction, domestic or foreign,
relating to bankruptcy, insolvency, reorganization or relief of debtors, or (b)
seeking appointment of a receiver, trustee, custodian or other similar official
for Tenant or for all or any substantial part of Tenant's property, which either
(i) results in any such entry of an order for relief, adjudication of bankruptcy
or insolvency or such an appointment or the issuance or entry of any other order
having a similar effect or (ii) remains undismissed for a period of sixty (60)
days; or
(5) if a trustee, receiver or other custodian shall be
appointed for any substantial part of the assets of Tenant which appointment is
not vacated or effectively stayed within thirty (30) days; or
(E) if Tenant shall default in the observance or performance of any
other term, covenant or condition of this Lease on Tenant's part to be observed
or performed including, without limitation, the terms and-conditions of Article
27 hereof, and Tenant shall fail to remedy such default within ten (10) days
after written notice by Landlord to Tenant of such default, or if such default
is of such a nature that it cannot with due diligence be completely remedied
within said period of ten (10) days and the continuation of which for the period
required for cure will not subject Landlord to the risk of criminal liability or
foreclosure of any Mortgage, if Tenant shall not, (i) within said ten (10) day
period advise Landlord of Tenant's intention duly to institute all steps
necessary to remedy such situation, (ii) duly institute within said ten (10) day
period, and thereafter diligently and continuously prosecutes to completion all
steps necessary to remedy the same and (iii) completes such remedy within such
time after the date of the giving of said notice by Landlord as shall reasonably
be necessary.
SECTION 17.2. If an Event of Default shall occur, Landlord may, at any
time thereafter, at Landlord's option, give written notice to Tenant stating
that this Lease and the Term shall expire and terminate on the date specified in
such notice whereupon this Lease and the Term and all rights of Tenant under
this Lease shall automatically expire and terminate as if the date specified in
the notice given pursuant to this Section 17.2 were the Fixed Expiration Date
and Tenant immediately shall quit and surrender the Premises, but Tenant shall
remain liable for damages as provided herein or pursuant to law. Anything
contained herein to the contrary notwithstanding, if such termination shall be
stayed by order of any court having jurisdiction over any proceeding described
in Section 17.1(D), or by federal or state statute, then, following the
expiration of any such stay, or if the trustee appointed in any such proceeding,
Tenant or Tenant as debtor-in-possession fails to assume Tenant's obligations
under this Lease within the period prescribed therefor by law or within one
hundred twenty (120) days after entry of the order for relief or as may be
allowed by the court, or if said trustee, Tenant or Tenant as debtor-
in-possession shall fail to provide adequate protection of Landlord's right,
title and interest in and to the Premises or adequate assurance of the complete
and continuous future performance of Tenant's obligations under this Lease,
Landlord, to the extent permitted by law or by leave of the court having
jurisdiction over such proceeding, shall have the right, at its election, to
terminate this Lease on three (3) days' notice to Tenant, Tenant as
debtor-in-possession or said trustee and upon the expiration of said three (3)
day period this Lease shall cease and expire as aforesaid and
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Tenant, Tenant as debtor-in-possession or said trustee shall immediately quit
and surrender the Premises as aforesaid.
SECTION 17.3. If, at any time, (i) Tenant shall consist of two (2) or more
Persons, or (ii) Tenant's obligations under this Lease shall have been
guaranteed by any Person other than Tenant, or (iii) Tenant's interest in this
Lease has been assigned, the word "Tenant" as used and referred to in this
Lease, shall be deemed to mean any one or more of the persons primarily or
secondarily liable for Tenant's obligations under this Lease. Any monies
received by Landlord from or on behalf of Tenant during the pendency of any
proceeding of the types referred to in Section 17.1(D) hereof shall be deemed
paid as compensation for the use and occupancy of the Premises and the
acceptance of any such compensation by Landlord shall not be deemed an
acceptance of Rental or a waiver on the part of Landlord of any rights under
Section 17.2 hereof.
ARTICLE 18
REMEDIES AND DAMAGES
SECTION 18.1.
(A) If any Event of Default shall occur, or this Lease and the Term
shall expire and come to an end as provided in Article 17 hereof:
(1) Tenant shall quit and peacefully surrender the Premises to
Landlord, and Landlord and its agents may immediately, or at any time after such
Event of Default or after the date upon which this Lease and the Term shall
expire and come to an end, re-enter the Premises or any part thereof, without
notice, either by summary proceedings, or by any other applicable action or
proceeding or otherwise (without being liable to indictment, prosecution or
damages therefor), and may repossess the Premises and dispossess Tenant and any
other persons from the Premises by summary proceedings or otherwise and remove
any and all of their property and effects from the Premises (and Tenant shall
remain liable for damages as provided herein or pursuant to law); and
(2) Landlord, at Landlord's option, may relet the whole or any
part or parts of-the Premises from time to time, either in the name of Landlord
or otherwise, to such tenant or tenants, for such term or terms ending before,
on or after the Fixed Expiration Date, at such rent or rentals and upon such
other conditions, which may include concessions and free rent periods, as
Landlord, in Landlord's sole discretion, may determine; provided, however, that
Landlord shall have no obligation to relet the Premises or any part thereof and
shall in no event be liable for refusal or failure to relet the Premises or any
part thereof, or, in the event of any such reletting, for refusal or failure to
collect any rent due upon any such reletting, and no such refusal or failure
shall operate to relieve Tenant of any liability under this Lease or otherwise
affect any such liability, and Landlord, at Landlord's option, may make such
Alterations, in and to the Premises as Landlord, in Landlord's sole discretion,
shall consider advisable or necessary in connection with any such reletting or
proposed reletting, without relieving Tenant of any liability under this Lease
or otherwise affecting any such liability.
(B) Tenant hereby waives the service of any notice of intention to
re-enter or to institute legal proceedings to that end that may otherwise be
required to be given under any
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present or future law. Tenant, on its own behalf and on behalf of all persons
claiming through or under Tenant, including all creditors of Tenant, does
further hereby waive any and all rights that Tenant and all such persons might
otherwise have under any present or future law to redeem the Premises, or to
re-enter or repossess the Premises, or to restore the operation of this Lease,
after (a) Tenant shall have been dispossessed by a judgment or by warrant of any
court, or (b) any re-entry by Landlord, or (c) any expiration or termination of
this Lease and the Term, whether such dispossess, re-entry, expiration or
termination is by operation of law or pursuant to the provisions of this Lease.
The words "re-entry", "re-enter" and "re-entered" as used in this Lease shall
not be deemed to be restricted to their technical legal meanings. In the event
of a breach or threatened breach by Tenant, or any persons claiming through or
under Tenant, of any term, covenant or condition of this Lease, Landlord shall
have the right to enjoin such breach and the right to invoke any other remedy
allowed by law or in equity as if reentry, summary proceedings and other special
remedies were not provided in this Lease for such breach. The right to invoke
the remedies hereinbefore set forth are cumulative and shall not preclude
Landlord from invoking any other remedy allowed at law or in equity.
SECTION 18.2.
(A) If this Lease and the Term shall expire and come to an end as
provided in Article 17 hereof, or by or under any summary proceeding or any
other action or proceeding, or if Landlord shall re-enter the Premises as
provided in Section 18.1 hereof, or by or under any summary proceeding or any
other action or proceeding, then, in any of said events:
(1) Tenant shall pay to Landlord all Fixed Rent, Additional
Rent and other items of Rental payable under this Lease by Tenant to Landlord to
the date upon which this Lease and the Term shall have expired and come to an
end or to the date of re-entry upon the Premises by Landlord, as the case may
be;
(2) Tenant also shall be liable for and shall pay to Landlord,
as damages, any deficiency ("DEFICIENCY") between the Rental for the period
which otherwise would have constituted the unexpired portion of the Term and the
net amount, if any, of rents collected under any reletting effected pursuant to
the provisions of Section 18.1(2) for any part of such period (after first
deducting from the rents collected under any such reletting all of Landlord's
expenses in connection with the termination of this Lease, Landlord's re-entry
upon the Premises and such reletting including, but not limited to, all
repossession costs, brokerage commissions, attorneys' fees and disbursements,
alteration costs and other expenses of preparing the Premises for such
reletting); any such Deficiency shall be paid in monthly installments by Tenant
on the days specified in this Lease for payment of installments of Fixed Rent;
Landlord shall be entitled to recover from Tenant each monthly Deficiency as the
same shall arise, and no suit to collect the amount of the Deficiency for any
month shall prejudice Landlord's right to collect the Deficiency for any
subsequent month by a similar proceeding; and
(3) whether or not Landlord shall have collected any
Deficiency as aforesaid, Landlord shall be entitled to recover from Tenant, and
Tenant shall pay to Landlord, on demand, in lieu of any further Deficiency as
and for liquidated and agreed final damages, a sum equal to the amount by which
the unpaid Rental for the period which otherwise would have constituted the
unexpired portion of the Term exceeds the then fair and reasonable rental value
of the Premises for the same period; if, before presentation of proof of such
liquidated damages
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to any court, commission or tribunal, the Premises, or any part thereof, are
relet by Landlord for the period which otherwise would have constituted the
unexpired portion of the Term, or any part thereof, the amount of rent reserved
upon such reletting shall be deemed, prima facie, to be the fair and reasonable
rental value for the part or the whole of the Premises so relet during the term
of the reletting.
(B) Tenant shall in no event be entitled to any rents collected or
payable under any reletting, whether or not such rents exceed the Fixed Rent
reserved in this Lease. Nothing contained in Article 17 hereof or this Article
18 shall be deemed to limit or preclude the recovery by Landlord from Tenant of
the maximum amount allowed to be obtained as damages by any statute or rule of
law, or of any sums or damages to which Landlord may be entitled in addition to
the damages set forth in this Section 18.2.
ARTICLE 19
FEES AND EXPENSES
SECTION 19.1. If an Event of Default shall have occurred, Landlord may (l)
perform the same for the account of Tenant, or (2) make any expenditure or incur
any obligation for the payment of money in connection with any obligation owed
to Landlord, including, but not limited to, reasonable attorneys fees and
disbursements in instituting, prosecuting or defending any action or proceeding,
and in either case the cost thereof with interest thereon at the Applicable Rate
shall be deemed to be Additional Rent hereunder and shall be paid by Tenant to
Landlord within ten (10) days after rendition of any bill or statement to Tenant
therefor. In addition, Tenant shall pay Landlord any reasonable attorneys fees
and disbursements incurred by Landlord in connection with any proceeding in
which the value for the use and occupancy of the Premises by Tenant is being
determined (whether or not any such proceeding results from a default by Tenant
under this Lease).
SECTION 19.2. If Tenant shall fail to pay any installment of Fixed Rent,
Additional Rent or any other item of Rental for a period longer than five (5)
days after the same shall have become due, Tenant shall pay to Landlord, in
addition to such installment of Fixed Rent, Additional Rent or other item of
Rental, as the Case may be, as a late charge and as Additional Rent, a sum equal
to interest at the Applicable Rate on the amount unpaid, computed from the date
such payment was due, without regard to any such grace period, to and including
the date of payment.
ARTICLE 20
NO REPRESENTATIONS BY LANDLORD
SECTION 20.1. LANDLORD AND LANDLORD'S AGENTS HAVE MADE NO REPRESENTATIONS,
PROMISES OR WARRANTIES EXPRESS OR IMPLIED, INCLUDING WITHOUT LIMITATION,
WARRANTIES OF SUITABILITY, HABITABILITY AND FITNESS FOR A PARTICULAR USE OR
PURPOSE WITH RESPECT TO THE PREMISES EXCEPT AS HEREIN EXPRESSLY SET FORTH, AND
NO RIGHTS, EASEMENTS OR LICENSES ARE ACQUIRED BY TENANT BY IMPLICATION OR
OTHERWISE EXCEPT AS EXPRESSLY SET FORTH HEREIN. TENANT SHALL ACCEPT POSSESSION
OF THE
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PREMISES IN ITS "AS IS" CONDITION ON THE COMMENCEMENT DATE, AND LANDLORD SHALL
HAVE NO OBLIGATION TO PERFORM ANY WORK OR MAKE ANY INSTALLATIONS IN ORDER TO
PREPARE THE PREMISES FOR TENANT'S OCCUPANCY. THE TAKING OF OCCUPANCY OF THE
WHOLE OR ANY PART OF THE PREMISES BY TENANT SHALL BE CONCLUSIVE EVIDENCE, AS
AGAINST TENANT, THAT TENANT ACCEPTS POSSESSION OF THE SAME AND THAT THE PREMISES
WERE IN GOOD AND SATISFACTORY CONDITION AT THE TIME SUCH OCCUPANCY
WAS SO TAKEN. All references in this Lease to the consent or approval of
Landlord shall be deemed to mean the written consent or approval executed by
Landlord and no other consent or approval of Landlord shall be effective for any
purpose whatsoever.
ARTICLE 21
END OF TERM
SECTION 21.1. Upon the expiration or other termination of this Lease,
Tenant shall quit and surrender to Landlord the Premises, vacant, broom clean,
in good order and condition, ordinary wear and tear excepted, and Tenant shall
remove all of Tenant's Alterations as may be required pursuant to Article 6.
Tenant shall also remove all of Tenant's Property and all other personal
property and personal effects of all persons claiming through or under Tenant,
and shall pay the cost of repairing all damage to the Premises occasioned by
such removal. Any Tenant's Property or other personal property that remains in,
on or at the Premises after the termination of this Lease shall be deemed to
have been abandoned and either may be retained by Landlord as its property or
may be disposed of in such manner as Landlord may see fit. If Tenant's Property
or other personal property or any part thereof is sold, Landlord may receive and
retain the proceeds of such sale as the property of Landlord. Any expense
incurred by Landlord in removing or disposing of Tenant's Property or other
personal property or Alterations required to be removed as provided in Article
6, as well as the cost of repairing all damage to the Premises caused by such
removal, shall be reimbursed to Landlord by Tenant, as Additional Rent, on
demand.
SECTION 21.2. If the Expiration Date falls on a day which is not a
Business Day, then Tenant's obligations under Section 21.1 shall be performed on
or prior to such Business Day.
SECTION 21.3. If the Premises are not surrendered upon the expiration or
other termination of this Lease, Tenant hereby indemnifies Landlord against
liability resulting from delay by Tenant in so surrendering the Premises,
including any claims made by any succeeding tenant or prospective tenant founded
upon such delay and agrees to be liable to Landlord for (i) any payment or rent
concession which Landlord may be required to make to any tenant obtained by
Landlord for all or any part of the Premises in order to induce such tenant not
to terminate its lease by reason of the holding-over by Tenant and (ii) the loss
of the benefit of the bargain if any such tenant shall terminate its lease by
reason of the holding-over by Tenant.
SECTION 21.4. Tenant's obligations under this Article 21 shall survive the
expiration or termination of this Lease.
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ARTICLE 22
POSSESSION
SECTION 22.1. If Landlord shall be unable to deliver possession of the
Premises on the Commencement Date for any reason whatsoever, Landlord shall not
be subject to any liability therefor and the validity of this Lease shall not be
impaired thereby nor the Expiration Date extended, but the Commencement Date
shall be postponed until five (5) Business Days following notice from Landlord
that the Premises are available for occupancy by Tenant. Tenant expressly waives
any right to rescind this Lease under any present or future statute and further
expressly waives the right to recover any damages that may result from
Landlord's failure to deliver possession of the Premises on the Commencement
Date.
ARTICLE 23
NO WAIVER
SECTION 23.1. No act or thing done by Landlord or Landlord's agents during
the Term shall be deemed an acceptance of a surrender of the Premises, and no
agreement to accept such surrender shall be valid unless in writing signed by
Landlord. No employee of Landlord or of Landlord's agents shall have any power
to accept the keys to the Premises prior to the termination of this Lease. The
delivery of keys to any employee of Landlord or of Landlord's agents shall not
operate as a termination of this Lease or a surrender of the Premises.
SECTION 23.2. The failure of Landlord to seek redress for violation of, or
to insist upon the strict performance of, any covenant or condition of this
Lease shall not prevent a subsequent act, which would have originally
constituted a violation, from having all of the force and effect of an original
violation. The receipt by Landlord of Fixed Rent, Additional Rent or any other
item of Rental with knowledge of the breach of any covenant of this Lease shall
not be deemed a waiver of such breach. No provision of this Lease shall be
deemed to have been waived by Landlord, unless such waiver shall be in writing
and shall be signed by Landlord. No payment by Tenant or receipt by Landlord of
a lesser amount than the Rental then due and payable shall be deemed to be other
than on account of the earliest item(s) of Rental, or as Landlord may elect to
apply the same, nor shall any endorsement or statement on any check or any
letter accompanying any check or payment be deemed an accord and satisfaction,
and Landlord may accept such check or payment without prejudice to Landlord's
right to recover the balance due of the Rental or to otherwise pursue any other
remedy in this Lease provided. This Lease contains the entire agreement between
the parties and all prior negotiations and agreements are merged herein. Any
executory agreement hereafter made shall be ineffective to change, discharge or
effect an abandonment of this Lease in whole or in part unless such executory
agreement is in writing and signed by the party against whom enforcement of the
change, discharge or abandonment is sought.
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ARTICLE 24
WAIVER OF TRIAL BY JURY
SECTION 24.1. Tenant hereby waives trial by jury in any action or
proceeding brought by or against the Tenant with respect to any matters
whatsoever arising out of or in any way connected with this Lease, the
relationship of Landlord and Tenant, Tenant's use or occupancy of the Premises,
whether during or after the Term, or for the enforcement of any remedy under any
statute, emergency or otherwise. If Landlord shall commence any summary
proceeding against Tenant, Tenant will not interpose any counterclaim of
whatever nature or description in any such proceeding, and will not seek to
consolidate such proceeding with any other action which may have been or will be
brought in any other court by Tenant or Landlord.
ARTICLE 25
INABILITY TO PERFORM
SECTION 25.1. This Lease and the obligation of Tenant to pay Rental
hereunder and to perform all of the other covenants and agreements hereunder on
the part of Tenant to be performed shall in no way be affected, impaired or
excused because Landlord is unable to fulfill any of Landlord's obligations
under this Lease, expressly or implicitly to be performed by Landlord, or
because Landlord is unable to make or is delayed in making any repairs, or is
unable to supply or is delayed in supplying any services, if Landlord is
prevented from or delayed in so doing by reason of acts of God, casualty,
strikes or labor troubles, accident, governmental preemption in connection with
an emergency, Requirements, conditions of supply and demand which have been or
are affected by war or other emergency, or any other cause whatsoever, whether
similar or dissimilar to the foregoing, beyond Landlord's reasonable control
("UNAVOIDABLE DELAYS").
ARTICLE 26
NOTICES
SECTION 26.1.
(A) Except as otherwise expressly provided in this Lease, any bills,
statements, consents, notices, demands, requests or other communications given
or required to be given under this Lease ("NOTICE(S)") shall be in writing and
shall be deemed sufficiently given or rendered if delivered by hand (against a
signed receipt) or if deposited with a nationally recognized overnight courier
and in either case addressed:
IF TO TENANT:
4801 Woodway Drive, Suite 300E
Houston, Texas 77056
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WITH A COPY TO:
Bracewell & Patterson, L.L.P.
711 Louisiana St., Suite 2900
Houston, Texas 77002
Attn: Thomas W. Adkins
(a) at Tenant's address first set forth in this Lease or (b) at any
place where Tenant or any agent or employee of Tenant may be found
if given subsequent to Tenant's vacating, deserting, abandoning or
surrendering the Premises, and
IF TO LANDLORD:
17402 Bending Cypress
Cypress, Texas 77429
and any Mortgagee who may have requested the same, by Notice given
in accordance with the provisions of this Article 26, at the address
designated by such Mortgagee,
or to such other address(es) as either Landlord or Tenant may
designate as its new address(es) for such purpose by notice given to
the other in accordance with the provisions of this Article 26.
(B) Notices shall be deemed to have been rendered or given (a) on
the date delivered, if delivered by hand, or (b) on the day after being
deposited with a nationally recognized overnight courier as provided in Section
26.1(A) hereof.
ARTICLE 27
LANDLORD'S AGREEMENT ON WAIVER
SECTION 27.1. Landlord agrees that from time to time the Tenant shall
mortgage and grant security interest in the inventory, equipment, accounts,
general intangibles and other personal property of the Tenant (collectively, the
"Pledged Property") to Bank One, Texas, N.A., as Agent for a group of lenders
(in such capacity, the "Agent"), or to such other lender or lenders from time to
time, which Pledged Property may now or hereafter be situated upon the Premises.
For valuable consideration, the receipt of which is hereby acknowledged, by the
Landlord, the Landlord hereby waives all landlords' liens, whether contractual,
statutory, constitutional or otherwise that the Landlord now has or hereafter
may obtain against the Pledged Property, and all of the liens, security
interests, claims and other interests that the Landlord now has or hereafter may
obtain against the Pledged Property. The Landlord agrees that the Agent may, at
any time upon reasonable notice to the Landlord, enter and remove the Pledged
Property from the Premises. This waiver binds the Landlord, its successors, and
assigns.
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ARTICLE 28
BROKER
SECTION 28.1. Landlord represents and warrants to Tenant that Landlord has
not dealt with any broker or Person in connection with this Lease. Tenant
represents and warrants to Landlord that Tenant has not dealt with any broker or
Person in connection with this Lease. The execution and delivery of this Lease
by Tenant shall be conclusive evidence that Tenant acknowledges that Landlord
has relied upon the foregoing representation and warranty. Tenant shall
indemnify and hold harmless Landlord from and against any and all claims for
commission, fee or other compensation by any broker or Person who claims to have
dealt with Tenant in connection with this Lease and for any and all costs
incurred by Landlord in connection with such claims, including, without
limitation, attorneys' fees and disbursements. The provisions of this Article 28
shall survive the expiration or earlier termination of this Lease.
ARTICLE 29
INDEMNITY
SECTION 29.1. Tenant shall not do or permit any act or thing to be done
in, at or upon the Premises that may subject any Indemnitee to any liability or
responsibility for injury, damage to persons or property or to any liability by
reason of the existence or application of, compliance with or violation of any
Requirement, but shall exercise such control over the Premises as to protect
each Indemnitee fully against any such liability and responsibility. Tenant
shall indemnify and save harmless the Indemnitees from and against (a) all
claims of whatever nature against the Indemnitees arising from any act, omission
or negligence of Tenant or Persons Within Tenant's Control, (b) all claims
against the Indemnitees arising from any accident, injury or damage whatsoever
caused to any person or to the property of any person and occurring in or about
the Premises during the Term or during Tenant's occupancy of the Premises,
unless and to the extent caused by the gross negligence of Landlord or its
shareholders, officers and employees, (c) all claims against the Indemnitees
arising from any accident, injury or damage occurring outside of the Premises
but anywhere within or about the Premises, where such accident, injury or damage
results or is claimed to have resulted from an act, omission or negligence of
Tenant or Persons Within Tenant's Control, and (d) any breach, violation or
non-performance of any covenant, condition or agreement contained in this Lease
to be fulfilled, kept, observed and performed by Tenant. This indemnity and hold
harmless agreement shall include indemnity from and against any and all
liability, claims, fines, suits, demands, costs and expenses of any kind or
nature (including, without limitation, attorneys' fees and disbursements)
incurred in or in connection with any such claim or proceeding brought thereon,
and the defense thereof.
SECTION 29.2. If any claim, action or proceeding is made or brought
against any Indemnitee, against which claim, action or proceeding Tenant is
obligated to indemnify such Indemnitee pursuant to the terms of this Lease,
then, upon demand by the Indemnitee, Tenant, at its sole cost and expense, shall
resist or defend such claim, action or proceeding in the Indemnitee's name, if
necessary, by such attorneys as the Indemnitee may select, including, without
limitation, attorneys for the Indemnitee's insurer. The provisions of this
Article 29 shall survive the expiration or earlier termination of this Lease.
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ARTICLE 30
ADJACENT EXCAVATION
SECTION 30.1. If an excavation shall be made upon land adjacent to the
Premises, or shall be authorized to be made, Tenant shall, upon reasonable
advance notice, afford to the person or entity causing or authorized to cause
such excavation, a limited license to enter upon the Premises for the purpose of
doing such work as said person or entity deems necessary to preserve the walls
of any building located on the Premises from injury or damage and to support the
same by proper foundations without any claim for eviction or constructive
eviction, damages or indemnity against Landlord, or diminution or abatement of
Rental.
ARTICLE 31
RENEWAL OPTIONS
SECTION 31.1. Provided that the Tenant is not in default with respect to
any of its obligations to the Landlord under and pursuant to the terms and
conditions of this Lease at the time each Option (as such term is hereinafter
defined) is to be exercised, the Tenant shall have the option to renew this
Lease for two (2) additional five (5) year periods [the option with respect to
each additional five (5) year period is referred to herein as an "OPTION" and,
collectively, all of the options granted herein are referred to as the
"OPTIONS"] as follows:
OPTION PERIOD 1 shall commence on July 1, 2002 and shall continue up to
and including June 30, 2007.
OPTION PERIOD 2 shall commence on July 1, 2007 and shall continue up to
and including June 30, 2012.
(each of the aforementioned option periods is individually referred to
herein as an "OPTION PERIOD" and, collectively, all of the aforementioned
Option Periods are referred to herein as "OPTION PERIODS")
SECTION 31.2. Each Option granted to the Tenant pursuant to the provisions
of Section 31.1 hereof shall be exercised by the Tenant giving written notice to
the Landlord of the Tenant's intent to exercise the Option not less than
one-hundred eighty (180) days prior to the expiration of the Initial Term or not
less than one-hundred eighty (180) days prior to the expiration of the Option
Period which is then in effect, as the case may be. Time is of the essence in
the exercise of the Options and should Tenant fail to exercise any of said
Options by timely notice, said Options shall lapse and be of no further force or
effect.
SECTION 31.3. In the event that the Tenant exercises the Option with
respect to any Option Period, the Landlord and the Tenant hereby agree that this
Lease shall continue in full force and effect and remain unamended during the
applicable Option Period AND specifically, without limitation, that the Fixed
Rent payable by the Tenant to the Landlord during such Option Period shall be
increased on each anniversary date from and after the Commencement Date in
accordance with the provisions of Article 8 hereof.
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ARTICLE 32
RENT REGULATION
SECTION 32.1. If at any time or times during the Term of this Lease, the
Rental reserved in this Lease is not fully collectible by reason of any
Requirement, Tenant shall enter into such agreements and take such other steps
as Landlord may request and as may be legally permissible to permit Landlord to
collect the maximum rents that may from time to time during the continuance of
such legal rent restriction be legally permissible (and not in excess of the
amounts reserved under this Lease). Upon the termination of such legal rent
restriction (a) the Rental shall become and thereafter be payable hereunder in
accordance with the amounts reserved in this Lease for the remainder of the
Term, and (b) Tenant shall pay to Landlord, if legally permissible, an amount
equal to (i) the items of Rental that would have been paid pursuant to this
Lease but for such legal rent restriction less (ii) the rents paid by Tenant to
Landlord during the period or periods such legal rent restriction was in effect.
This provision shall survive the expiration or earlier termination of this Lease
to the maximum enforceable extent.
ARTICLE 33
COVENANT OF QUIET ENJOYMENT
SECTION 33.1. Landlord covenants that, upon Tenant paying all Fixed Rent
and Additional Rent and observing and performing all the terms, agreements,
covenants, provisions and conditions of this Lease on Tenant's part to be
observed and performed, Tenant may peaceably and quietly enjoy the Premises,
subject nevertheless to the terms and conditions of this Lease; provided,
however, that no eviction of Tenant by reason of the foreclosure of any Mortgage
now or hereafter affecting the Premises shall be construed as a breach of this
covenant nor shall any action by reason thereof be brought against Landlord, and
provided further that this covenant shall bind and be enforceable against
Landlord or any successor to Landlord's interest, subject to the terms hereof,
only so long as Landlord or any successor to Landlord's interest, is in
possession and is collecting rent from Tenant but not thereafter.
ARTICLE 34
MISCELLANEOUS
SECTION 34.1. This Lease is presented for signature by Tenant and it is
understood that this Lease shall not constitute an offer by or be binding upon
Landlord unless and until Landlord shall have executed and delivered a fully
executed copy of this Lease to Tenant.
SECTION 34.2. The obligations of Landlord under this Lease shall not be
binding upon Landlord named herein after the sale, conveyance, assignment or
transfer by such Landlord (or upon any subsequent landlord after the sale,
conveyance, assignment or transfer by such subsequent landlord) of its interest
in the Premises, as the case may be, and in the event of any such sale,
conveyance, assignment or transfer, Landlord shall be and hereby is entirely
freed and relieved of all covenants and obligations of Landlord under this Lease
thereafter arising, and the transferee shall be deemed to have assumed, subject
to the remaining provisions of this Section 34.2, all obligations of the
Landlord under this Lease arising after the effective date of the
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transfer. No trustee, partner, principal, shareholder, director or officer of
Landlord (collectively, the "PARTIES") shall have any direct or personal
liability for the performance of Landlord's obligations under this Lease, and
Tenant shall look solely to Landlord's interest in the Premises to enforce
Landlord's obligations hereunder and shall not otherwise seek any damages
against Landlord or any of the Parties whatsoever. Tenant shall not look to any
other property or assets of Landlord or any property or assets of any of the
Parties in seeking either to enforce Landlord's obligations under this Lease or
to satisfy a judgment for Landlord's failure to perform such obligations.
SECTION 34.3. Notwithstanding anything contained in this Lease to the
contrary, all amounts payable by Tenant to or on behalf of Landlord under this
Lease, whether or not expressly denominated Fixed Rent, Additional Rent or
Rental, shall constitute rent for the purposes of Section 502(b)(7) of the
Bankruptcy Code.
SECTION 34.4. Neither this Lease nor any memorandum of this Lease shall be
recorded without the prior written consent of the Landlord, which consent may be
withheld by the Landlord in its sole and absolute discretion.
SECTION 34.5. Except as otherwise expressly stated in this Lease, any
consent or approval required to be obtained from Landlord may be granted by
Landlord in its sole and absolute discretion. In any instance in which Landlord
agrees not to act unreasonably, Tenant hereby waives any claim for damages
against or liability of Landlord that Tenant may have based upon any assertion
that Landlord has unreasonably withheld or unreasonably delayed any consent or
approval requested by Tenant, and Tenant agrees that its sole remedy shall be an
action or proceeding to enforce any related provision or for specific
performance, injunction or declaratory judgment. If with respect to any required
consent or approval Landlord is required by the express provisions of this Lease
not to unreasonably withhold or delay its consent or approval, and if it is
determined in any such proceeding referred to in the preceding sentence that
Landlord acted unreasonably, the requested consent or approval shall be deemed
to have been granted; however, Landlord shall have no liability whatsoever to
Tenant for its refusal or failure to give such consent or approval. Tenant's
sole remedy for Landlord's unreasonably withholding or delaying consent or
approval shall be as provided in this Section 34.5.
SECTION 34.6. Landlord shall have the right at any time, and from time to
time, to amend unilaterally the provisions of this Lease if Landlord is advised
by its counsel that all or any portion of the Rental paid by Tenant to Landlord
hereunder is, or may be deemed to be, unrelated business taxable income within
the meaning of the United States Internal Revenue Code or regulations issued
thereunder, and Tenant agrees that it will execute all documents necessary to
effect any such amendment, provided that no such amendment shall increase
Tenant's payment obligations or other liability under this Lease nor reduce
Landlord's obligations hereunder.
SECTION 34.7. If Tenant shall remain in possession of the Premises after
the Expiration Date, without the execution by both Tenant and Landlord of a new
lease, Tenant, at the election of Landlord, shall be deemed to be occupying the
Premises as a Tenant from month-to-month, at a monthly rental equal to three
(3x) times the Rental payable during the last month of the Term, subject to all
the other conditions, provisions and obligations of this Lease insofar as the
same are applicable to a month-to-month tenancy.
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SECTION 34.8. This Lease shall be construed without regard to any
presumption or other rule requiring construction against the party causing this
Lease to be drafted. If any words or phrases in this Lease are stricken out or
otherwise eliminated, whether or not any other words or phrases have been added,
this Lease shall be construed as if the words or phrases so stricken out or
otherwise eliminated were never included in this Lease and no implication or
inference shall be drawn from the fact that such words or phrases were stricken
out or otherwise eliminated.
SECTION 34.9. If any of the provisions of this Lease, or the application
thereof to any person or circumstance, shall, to any extent, be invalid or
unenforceable, the remainder of this Lease, or the application of such
provisions to persons or circumstances other than those as to whom or which it
is held invalid or unenforceable, shall not be affected thereby and shall remain
valid and enforceable, and every provision of this Lease shall be valid and
enforceable to the fullest extent permitted by law.
SECTION 34.10. Landlord shall have the right to erect any gate, chain or
other obstruction or to close off any portion of the Premises to the public at
any time to the extent necessary to prevent a dedication thereof for public use.
SECTION 34.11. Tenant hereby represents to Landlord that it is not
entitled, directly or indirectly, to diplomatic or sovereign immunity and Tenant
agrees that in all disputes arising directly or indirectly out of this Lease
Tenant shall be subject to service of process in, and the jurisdiction of the
courts of, the State of Texas. The provisions of this Section 34.11 shall
survive the expiration of this Lease.
SECTION 34.12. This Lease contains the entire agreement between the
parties and all prior negotiations and agreements are merged into this Lease.
Except as provided in Section 34.6 this Lease may not be changed, abandoned or
discharged, in whole or in part, nor may any of its provisions be waived except
by a written agreement that (a) expressly refers to this Lease, (b) is executed
by the party against whom enforcement of the change, abandonment, discharge or
waiver is sought and (c) is permissible under the Mortgage(s).
SECTION 34.13. Any apportionment or prorations of Rental to be made under
this Lease shall be computed on the basis of a three hundred sixty (360) day
year, with twelve (12) months of thirty (30) days each.
SECTION 34.14. The laws of the State of Texas applicable to contracts made
and to be performed wholly within the State of Texas shall govern and control
the validity, interpretation, performance and enforcement of this Lease without
regard to principles of conflicts of law.
SECTION 34.15. If Tenant is a corporation, each person executing this
Lease on behalf of Tenant hereby covenants, represents and warrants that Tenant
is a duly incorporated or duly qualified (if foreign) corporation and is
authorized to do business in the State of Texas (a copy of evidence thereof to
be supplied to Landlord upon request); and that each person executing this Lease
on behalf of Tenant is an officer of Tenant and that he or she is duly
authorized to execute, acknowledge and deliver this Lease to Landlord (a copy of
a resolution to that effect to be supplied to Landlord upon request).
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SECTION 34.16. The captions are inserted only as a matter of convenience
and for reference and in no way define, limit or describe the scope of this
Lease nor the intent of any provision thereof.
SECTION 34.17. The covenants, conditions and agreements contained in this
Lease shall bind and inure to the benefit of Landlord and Tenant and their
respective legal representatives, heirs, successors, and, except as otherwise
provided in this Lease, their assigns.
SECTION 34.18. For the purposes of this Lease and all agreements
supplemental to this Lease, unless the context otherwise requires:
(A) The words "herein", "hereof", "hereunder" and "hereby"and words of
similar import shall be construed to refer to this Lease as a whole and not to
any particular Article or Section unless expressly so stated.
(B) Tenant's obligations hereunder shall be construed in every instance as
conditions as well as covenants, each separate and independent of any other
terms of this Lease.
(C) Reference to Landlord as having "no liability" or being "without
liability" shall mean that Tenant shall not be entitled to terminate this Lease,
or to claim actual or constructive eviction, partial or total, or to receive any
abatement or diminution of rent, or to be relieved in any manner of any of its
other obligations hereunder, or to be compensated for loss or injury suffered or
to enforce any other right or liability whatsoever against Landlord under or
with respect to this Lease or with respect to Tenant's use or occupancy of the
Premises.
(D) Reference to "termination of this Lease" or "expiration of this Lease"
and words of like import includes expiration or sooner termination of this Lease
and the Term and the estate hereby granted or cancellation of this Lease
pursuant to any of the provisions of this Lease or by law. Upon the termination
of this Lease, the Term and estate granted by this Lease shall end at noon on
the date of termination as if such date were the Fixed Expiration Date, and
neither party shall have any further obligation or liability to the other after
such termination except (i) as shall be expressly provided for in this Lease,
and (ii) for such obligations as by their nature under the circumstances can
only be, or by the provisions of this Lease, may be, performed after such
termination, and, in any event, unless expressly otherwise provided in this
Lease, any liability for a payment (which shall be apportioned as of such
termination) which shall have accrued to or with respect to any period ending at
the time of termination shall survive the termination of this Lease.
(E) Words and phrases used in the singular shall be deemed to include the
plural and vice versa, and nouns and pronouns used in any particular gender
shall be deemed to include any other gender.
(F) The rule of "ejusdem generis" shall not be applicable to limit a
general statement following or referable to an enumeration of specific matters
to matters similar to the matters specifically mentioned.
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IN WITNESS WHEREOF, Landlord and Tenant have duly executed this Lease as of the
day and year first above written.
"LANDLORD":
THOMAS J. BEATY
By: ______________________________
BONNIE J. BEATY
By: ______________________________
"TENANT":
ACCURATE AIR SYSTEMS, INC.
By: ______________________________
Name: ____________________________
Title: ___________________________
36
EXHIBIT 10.19
AMENDED AND RESTATED AGREEMENT OF LEASE
BETWEEN
THOMAS J. AND BONNIE J. BEATY
LANDLORD
AND
ACCURATE AIR SYSTEMS, INC.
TENANT
===================================
DATED: JULY 1, 1997
===================================
PREMISES
8505 Rannie Road
Houston, Texas 77080
<PAGE>
AMENDED AND RESTATED AGREEMENT OF LEASE, made as of the 1st day of July,
1997, among THOMAS J. BEATY and BONNIE J. BEATY, collectively as Landlord, and
ACCURATE AIR SYSTEMS, INC., a Texas corporation, having an address at 4801
Woodway Drive, Suite 300E, Houston, Texas 77056, as Tenant.
W I T N E S S E T H:
WHEREAS, Lessor and Lessee entered into that certain Lease Agreement (the
"Original Lease Agreement") dated as of April 1, 1994, certain premises known as
and by the street address of 8505 Rannie Road, Houston, Texas (as more
particularly described on Schedule "A", annexed hereto and made a part hereof)
together with all buildings and other improvements thereon, and all fixtures,
materials, equipment, apparatus, furniture, furnishings and other property, real
and personal installed or used on the above described property or the
improvements thereon; and
WHEREAS, Lessee has requested that the Lessor amend the Original Lease
Agreement in order to revise certain terms thereof and the Lessor has agreed to
do so on the terms and conditions set forth herein; and
WHEREAS, the parties hereto have agreed to restate the Original Lease
Agreement as amended in its entirety for clarity only, and this Amended and
Restated Lease Agreement constitutes for all purposes an amendment to the
Original Lease Agreement and not a new or substitute agreement; in the event of
a conflict between this Lease and the Original Lease Agreement, this Lease shall
control; and
WHEREAS, the terms and provisions of the Original Lease Agreement are
incorporated herein by reference and made a part of this Lease to the same
extent as though set forth in full herein.
NOW, THEREFORE, in consideration of the mutual promises and covenants
herein contained and for other good and valuable consideration, the receipt and
sufficiency of which is hereby acknowledged, the parties hereto, for themselves,
as well as their respective legal representatives, heirs, successors and
assigns, hereby agree as follows:
ARTICLE 1
GLOSSARY
For the purposes of this Lease, the following terms shall have the
meanings indicated below:
"ADA" shall have the meaning set forth in Section 9.1 hereof.
"ADDITIONAL RENT" shall have the meaning set forth in Section 2.2 hereof.
"ALTERATION" or "ALTERATIONS" shall mean any and all alterations,
decorations, installations, repairs, improvements, additions, replacements or
other physical changes of any nature whatsoever in or about the Premises at any
time, now or hereafter.
<PAGE>
"APPLICABLE RATE" shall mean the lesser of (x) three percentage points
above the then current Base Rate, or (y) the maximum rate permitted by
applicable law.
"BANKRUPTCY CODE" shall mean 11 U.S.C. Section 101 ET SEQ., or any
statute, federal or state, of similar nature and purpose, now or hereafter.
"BASE RATE" shall mean the rate of interest publicly announced from time
to time by Bank One, Texas, N.A., or its successor, as its "base rate" (or such
other term as may be used by Bank One, Texas, N.A., from time to time, for the
rate presently referred to as its "base rate").
"BUILDING SYSTEMS" shall mean the mechanical, electrical, sanitary,
heating, air conditioning, ventilating, elevator, plumbing, life-safety and
other service or support systems of any nature whatsoever located at or on the
Premises, but shall not include installations made by Tenant or fixtures or
appliances (regardless of whether or not such fixtures or appliances are owned
by the Tenant or the Landlord).
"BUILDING INSURANCE" shall have the meaning set forth in Section 11.2
hereof.
"BUSINESS DAYS" shall mean all days, excluding Saturdays, Sundays and all
days observed as holidays by the State of Texas or the federal government.
"COMMENCEMENT DATE" is July 1, 1997.
"DEFICIENCY" shall have the meaning set forth in Section 18.2(A)(2)
hereof.
"EVENT OF DEFAULT" shall have the meaning set forth in Section 17.1
hereof.
"EXPIRATION DATE" shall mean the Fixed Expiration Date or such other date
on which the Term ends pursuant to any of the terms, conditions or covenants of
this Lease or pursuant to law.
"FIXED EXPIRATION DATE" is June 30, 2002.
"FIXED RENT" shall mean $38,000.04 per annum ($3,166.67 per month) for the
first Lease Year (as such term is hereinafter defined) to be adjusted thereafter
on each anniversary date from and after the Commencement Date in accordance with
the provisions of Article 8 of this Lease.
"GOVERNMENT AUTHORITY" or "GOVERNMENT AUTHORITIES" shall mean the United
States of America, the State of Texas, the county of Harris, the Municipality of
Houston, and/or any political subdivision thereof and any agency, department,
commission, board, bureau or instrumentality of any of the foregoing, now
existing or hereafter created, having jurisdiction over the Premises or any
portion thereof.
"HAZARDOUS MATERIALS" shall have the meaning set forth in Section 9.2(A)
hereof.
"INCREASE NOTICE" shall have the meaning set forth in Section 8.3 hereof.
"INDEMNITEES" shall mean Landlord, his agents and contractors (and the partners,
shareholders, officers, directors and employees of any of the Landlord's agents
or contractors).
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"INITIAL TERM" shall mean five (5) years.
"LANDLORD", on the date as of which this Lease is made, shall mean Thomas
J. and Bonnie J. Beaty, but thereafter, "Landlord" shall mean any fee owner of
the Premises.
"LEASE YEAR" shall mean each twelve (12) month period commencing on each
anniversary date from and after the Commencement Date.
"MORTGAGE(S)" shall mean any trust indenture or mortgage which may now or
hereafter affect the Premises and all extensions, supplements, amendments,
modifications, consolidations, refinancings and replacements thereof or thereto,
substitutions therefor, and advances made thereunder.
"MORTGAGEE(S)" shall mean any trustee or mortgagee or holder of a
Mortgage.
"NOTICE(S)" shall have the meaning set forth in Section 27.1(A) hereof.
"OPTION" or "OPTIONS" shall have the meaning set forth in Section 31.1
hereof.
"OPTION PERIOD" or "OPTION PERIODS" shall have the meaning set forth in
Section 31.1 hereof.
"PARTIES" shall have the meaning set forth in Section 34.2 hereof.
"PERMITTED USE" shall mean general, executive and administrative offices,
parking and related facilities in connection with Tenant's business as a air
conditioning systems business and uses related thereto including the evolution
of the Tenant's business consistent with the evolution of the air conditioning
systems industry in general.
"PERSON(S) OR PERSON(S)" shall mean any natural person or persons, a
partnership, a corporation and any other form of business or legal association
or entity.
"PERSONS WITHIN TENANT'S CONTROL" shall mean and include Tenant, all of
Tenant's respective shareholders, directors, officers, agents, contractors,
sub-contractors, servants, employees, licensees and invitees as well as any of
the heirs, successors, representatives and assigns of any of the foregoing.
"PREMISES" shall mean all that certain plot, piece and parcel of land,
known as and by the street address of 8505 Rannie Road, Houston, Texas 77080 (as
more particularly described on Schedule "A", annexed hereto and made a part
hereof) together with all buildings and other improvements thereon and hereafter
placed thereon, and all fixtures, materials, equipment, apparatus, furniture,
furnishings and other property, real and personal, now or hereafter installed or
used on the above described property or the improvements thereon.
"PRICE INDEX" shall have the meaning set forth in Section 8.1(ii) hereof.
"RENTAL" shall mean and be deemed to include Fixed Rent, Additional Rent
and any other sums payable, now or hereafter, by Tenant hereunder.
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"REQUIREMENTS" shall mean (i) all present and future laws, rules,
ordinances, regulations, statutes, requirements, codes and executive orders,
extraordinary as well as ordinary, retroactive and prospective, of all
Governmental Authorities, now existing or hereafter created, which affect,
directly or indirectly, the Premises and/or the maintenance, use, operation or
occupation of the Premises, (ii) all requirements, obligations and conditions of
all instruments of record on the date of this Lease, and (iii) all requirements,
obligations and conditions imposed by any fire rating agency or by the carrier
of Landlord's hazard insurance policy for the Premises.
"TAXES" shall have the meaning set forth in Section 3.1 hereof.
"TENANT", on the date as of which this Lease is made, shall mean the
Tenant named in this Lease, but thereafter "Tenant" shall mean only the tenant
under this Lease at the time in question; provided, however, that the Tenant
named in this Lease and any and all successor tenant(s) hereunder shall not be
released and relieved from any liability hereunder in the event of any
assignment of this Lease or a sublet, in whole or in part, of the Premises.
"TENANT'S PROPERTY" shall mean Tenant's movable fixtures and movable
partitions, telephone and other equipment, furniture, furnishings and other
movable items of personal property owned by the Tenant.
"TERM", on the date as of which this Lease is made shall mean five (5)
years, but thereafter shall be deemed to include any Option Period for which the
Tenant exercises its Option pursuant to the provisions of Article 31 hereof.
"TERMINATION NOTICE PERIOD" shall have the meaning set forth in Section
27.1 hereof.
"UNAVOIDABLE DELAYS" shall have the meaning set forth in Article 25
hereof.
ARTICLE 2
DEMISE; PREMISES; TERM; RENT
SECTION 2.1. Landlord hereby leases to Tenant and Tenant hereby hires from
Landlord the Premises for the Term to commence on the Commencement Date and to
end on the Fixed Expiration Date, unless earlier terminated as provided herein.
SECTION 2.2. Commencing upon the Commencement Date, Tenant shall pay to
Landlord, in lawful money of the United States of America, without notice or
demand, by good and sufficient check at the office of Landlord or at such other
place as Landlord may designate from time to time, the following:
(A) the Fixed Rent, as such term is defined in Article 1 hereof,
which shall be payable in equal monthly installments in advance on the first day
of each and every calendar month during the Term, and
(B) additional rent ("ADDITIONAL RENT") consisting of all other sums
of money as shall become due from and be payable by Tenant hereunder (for
default in the payment of which Landlord shall have the same remedies as for a
default in the payment of Fixed Rent).
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SECTION 2.3. If the Commencement Date is other than the first day of a
calendar month, or the Fixed Expiration Date is other than the last day of a
calendar month, Fixed Rent for such month shall be prorated on a per diem basis.
SECTION 2.4. Tenant shall pay the Fixed Rent and Additional Rent when due
without notice, demand (except as provided herein) and without abatement,
deduction, counterclaim, setoff or defense of any nature.
ARTICLE 3
REAL ESTATE TAXES; MORTGAGE(S)
SECTION 3.1. The Tenant represents, warrants, covenants and agrees that it
shall, within five (5) days of written demand by the Landlord to the Tenant, pay
to the Landlord, as Additional Rent, any and all Taxes (as hereinafter defined)
of any nature whatsoever assessed or imposed against the Premises for each and
every Lease Year during the Term of this Lease. The Landlord hereby agrees that
any demand given by the Landlord to the Tenant pursuant to the provisions of
this Section 3.1 shall include an accurate copy of the invoice, statement, bill
or similar document issued by the relevant Governmental Authority or
Governmental Authorities, as the case may be, with respect to the Taxes for
which payment is demanded. For purposes of this Section 3.1, "TAXES" shall
include, without limitation, any and all taxes assessed against the Premises,
all personal property taxes, all ad valorem taxes, all license fees, all rent
taxes, all levies, all penalties and any and all other taxes assessed against
the Premises by any Governmental Authority, now or hereafter.
SECTION 3.2. The Tenant represents, warrants and covenants and agrees that
it shall, within five (5) days of written demand by the Landlord to the Tenant,
pay to the Landlord, as Additional Rent, any and all amounts which may be due
and owing under and pursuant to the terms and conditions of any Mortgage or
Mortgages, as the case may be, encumbering the Premises, now or hereafter,
during the Term of this Lease including, but not limited to, any extensions,
supplements, amendments, modifications, consolidations, refinancings and
replacements of any such Mortgage or Mortgages provided that:
(A) the principal balance of any Mortgage subsequent to any
extension, supplement, amendment, modification, consolidation, refinancing or
replacement shall not exceed the outstanding principal balance of the Mortgage
which is to be extended, supplemented, amended, modified, consolidated,
refinanced or replaced at the time of such extension, supplement, amendment,
modification, consolidation, refinancing or replacement, as the case may be; and
(B) the amount of the monthly payments of principal and interest
payable pursuant to the terms and conditions of any Mortgage subsequent to any
extension, supplement, amendment, modification, consolidation, refinancing or
replacement shall not exceed the amount of the monthly payments with respect to
the Mortgage which is to be extended, supplemented, amended, modified,
consolidated, refinanced or replaced at the time of such extension, supplement,
amendment, modification, consolidation, refinancing or replacement, as the case
may be; and
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(C) the terms of any extended, supplemented, amended, modified,
consolidated, refinanced or replaced Mortgage shall be no more financially
onerous than the provisions of such Mortgage prior to such extension,
supplement, amendment, modification, consolidation, refinancing or replacement,
as the case may be; and
(D) the term of any Mortgage extended, supplemented, amended,
modified, consolidated, refinanced or replaced shall be no less than the term of
such Mortgage prior to such extension, supplementation, amendment, modification,
consolidation, refinancing or replacement, as the case may be.
Notwithstanding anything contained herein to the contrary, the provisions of
this Section 3.2 shall not apply with respect to any amounts which may be due
and owing under and pursuant to the terms and conditions of any Mortgage
securing additional indebtedness (above and beyond any Mortgage or Mortgages
existing as of the date hereof) which first becomes a recorded lien on the
Premises subsequent to the date of this Lease and which is executed and
delivered by the Landlord without the consent of the Tenant. The Landlord hereby
agrees that any demand given by the Landlord to the Tenant for payment of
Additional Rent pursuant to the provisions of this Section 3.2 shall include,
only to the extent provided to the Landlord by the Mortgagee, an accurate copy
of the invoice, statement, bill or similar document issued by such Mortgagee or
Mortgagees, as the case may be, with respect to any amount for which payment of
Additional Rent is demanded by the Landlord under and pursuant to the provisions
of this Section 3.2.
ARTICLE 4
UTILITIES
SECTION 4.1. The Tenant represents, warrants, covenants and agrees that it
shall, within five (5) days of written demand by the Landlord to the Tenant, pay
to the Landlord, as Additional Rent, any and all charges incurred by the
Landlord for any and ail utilities supplied to the Premises including, without
limitation, telephone, electricity, water, heating oil and/or natural gas. The
Landlord hereby agrees that any demand given by the Landlord to the Tenant
pursuant to the provisions of this Section 4.1 shall include an accurate copy of
the invoice, statement, bill or similar document issued by the public utility or
any private company providing such utility, as the case may be, with respect to
any utility for which payment is demanded.
SECTION 4.2. Landlord shall not be liable in any way to Tenant for any
interruption or failure of or defect in the supply or character of any utility
furnished to the Premises, now or hereafter, or for any loss, damage or expense
Tenant may sustain if either the quantity or character of any utility is changed
or is no longer suitable for Tenant's requirements, whether by reason of any
requirement, act or omission of the public utility serving the Premises or for
any other reason whatsoever. Notwithstanding the provisions of this Section 4.2,
the Landlord shall be responsible for any and all actual damages suffered by the
Tenant as a result of any interruption of utility service caused solely by the
Landlord's failure to remit (prior to the expiration of any applicable grace
period) to the appropriate public utility or private company providing such
utility, as the case may be, any amount which has been paid by the Tenant to the
Landlord pursuant to the provisions of Section 4.1 hereof.
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SECTION 4.3. Tenant shall at all times comply with the rules, regulations,
terms and conditions applicable to service, equipment, wiring, as well as any
and all requirements of the public utility supplying electricity to the
Premises. Tenant shall not, without Landlord's prior written consent in each
instance (which consent may be withheld by the Landlord in its reasonable
discretion), connect any fixtures, machinery, appliances or equipment to the
Premises electric distribution system or make any alteration or addition to
Tenant's machinery, appliances or equipment, or the electric system of the
Premises, if the effect thereof would be to increase the electrical load in the
Premises. Should Landlord grant such consent, all additional risers or other
equipment required therefor shall be provided by Landlord and the cost thereof
shall be deemed Additional Rent due hereunder and shall be forthwith paid by
Tenant within five (5) days of Landlord's written demand.
SECTION 4.4. If any Taxes are imposed upon Landlord with respect to any
utility furnished as a service to Tenant by any Governmental Authority, Tenant
agrees that such Taxes shall be reimbursed by Tenant to Landlord within five (5)
days of written demand. The Landlord hereby agrees that any demand given by the
Landlord to the Tenant pursuant to the provisions of this Section 4.4 shall
include an accurate copy of the invoice, statement, bill or similar document
issued by the relevant Governmental Authority or Governmental Authorities, as
the case may be, with respect to the Taxes for which payment is demanded.
ARTICLE 5
USE AND OCCUPANCY
SECTION 5.1. Tenant shall use and occupy the Premises for the Permitted
Use and for no other purpose of any nature whatsoever.
ARTICLE 6
ALTERATIONS
SECTION 6.1.
(A) (1) Prior to making any Alterations, Tenant shall (i) submit to
Landlord detailed plans and specifications for approval by the Landlord
(including layout, architectural, electrical, mechanical and structural
drawings) and that comply with all Requirements for each proposed Alteration,
and Tenant shall not commence any such Alteration without first obtaining
Landlord's approval of such plans and specifications, (ii) at Tenant's expense,
obtain all permits, approvals and certificates required by any Governmental
Authorities, and (iii) furnish to Landlord duplicate original policies or
certificates thereof for worker's compensation insurance (covering all persons
to be employed by Tenant, and Tenant's contractors and subcontractors, in
connection with such Alteration) and commercial general liability insurance
(including premises operation, bodily injury, personal injury, death,
independent contractors, products and completed operations, broad form
contractual liability and broad form property damage coverages) in such form,
with such companies, for such periods and in such amounts as Landlord may
reasonably approve, naming Landlord and its agents and any Mortgagee, as
additional insureds. Upon completion of such Alteration, Tenant, at Tenant's
expense, shall obtain certificates of final approval of such Alterations
required by any Governmental Authority and shall furnish Landlord with copies
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thereof, together with the "as-built" plans and specifications for such
Alterations. All Alterations shall be made and performed in accordance with the
plans and specifications therefor as approved by Landlord and otherwise in
accordance with all Requirements. All materials and equipment to be incorporated
in the Premises as a result of any Alterations shall be first quality and no
such materials or equipment shall be subject to any lien, encumbrance, chattel
mortgage, title retention or security agreement.
(2) Landlord reserves the right to disapprove any plans and
specifications, in whole or in part, to reserve approval of items shown thereon
pending its review and approval of other plans and specifications, and to
condition its approval upon Tenant making revisions to the plans and
specifications or supplying additional information. Tenant agrees that any
review or approval by Landlord of any plans and/or specifications with respect
to any Alteration is solely for Landlord's benefit, and without any
representation or warranty whatsoever to Tenant or any other Person with respect
to the adequacy, correctness or sufficiency thereof or with respect to
Requirements or otherwise.
(B) All Alterations shall become a part of the Premises and shall be
Landlord's property from and after the installation thereof and may not be
removed or changed without Landlord's prior written consent. Notwithstanding the
foregoing, Landlord, upon notice given at least thirty (30) days prior to the
Expiration Date or upon such shorter notice as is reasonable under the
circumstances upon the earlier expiration of the Term, may require Tenant to
remove any specified Alterations and to repair and restore in a good and
workmanlike manner any damage to the Premises caused by such removal all at
Tenant's sole cost and expense. All Tenant's Property shall remain the property
of Tenant and, on or before the Expiration Date or earlier end of the Term, may
be removed from the Premises by Tenant at Tenant's sole cost and expense;
provided, however, that Tenant shall repair and restore in a good and
workmanlike manner any damage to the Premises caused by such removal. The
provisions of this Section 6.1(B) shall survive the expiration or earlier
termination of this Lease.
(C) (1) Any and all Alterations shall be performed, at Tenant's sole
cost and expense, by contractors, subcontractors or mechanics previously
approved in writing by Landlord. Prior to making an Alteration, at Tenant's
request, Landlord shall furnish Tenant with a list of contractors who may
perform Alterations to the Premises on behalf of Tenant.
(2) Notwithstanding the terms and conditions of Section
6.1(C)(1) hereof, with respect to any Alteration affecting any Building Systems,
(i) Tenant shall only employ Landlord's designated contractor, and (ii) the
Alteration shall, at Tenant's expense, be designed by Landlord's engineer.
(D) (1) Any mechanic's lien filed against the Premises for work
claimed to have been done for, or materials claimed to have been furnished to,
Tenant shall be canceled or discharged by Tenant, at Tenant's expense, within
twenty (20) days after such lien shall be filed, by payment or filing of the
bond required by law, and Tenant shall indemnify and hold Landlord harmless from
and against any and all costs, expenses, claims, losses or damages resulting
therefrom by reason thereof.
(2) If Tenant shall fail to discharge such mechanic's lien
within the aforesaid period, then, in addition to any other right or remedy of
Landlord, Landlord may, but
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shall not be obligated to, discharge the same either by paying the amount
claimed to be due or by procuring the discharge of such lien by deposit in court
or bonding, and in any such event, Landlord shall be entitled, if Landlord so
elects, to compel the prosecution of an action for the foreclosure of such
mechanics lien by the lienor and to pay the amount of the judgment, if any, in
favor of the lienor, with interest, costs and allowances.
(3) Any amount paid by Landlord for any of the aforesaid
charges and for all expenses of Landlord (including, but not limited to,
attorneys' fees and disbursements) incurred in defending any such action,
discharging said lien or in procuring the discharge of said lien, with interest
on all such amounts at the maximum legal rate of interest then chargeable to
Tenant from the date of payment, shall be repaid by Tenant within ten (10) days
after written demand therefor, and all amounts so repayable, together with such
interest, shall be considered Additional Rent.
SECTION 6.2. Landlord, at Tenant's expense, and upon the request of
Tenant, shall join in any applications for any permits, approvals or
certificates required to be obtained by Tenant in connection with any permitted
Alteration (provided that the provisions of the applicable Requirements shall
require that Landlord join in such application) and shall otherwise cooperate
with Tenant in connection therewith; provided, however, that Landlord shall not
be obligated to incur any cost or expense or liability in connection therewith.
SECTION 6.3. Tenant shall furnish to Landlord copies of records of all
Alterations and of the cost thereof within fifteen (15) days after the
completion of such Alterations.
SECTION 6.4. Tenant shall not, at any time prior to or during the Term,
directly or indirectly, employ, or permit the employment of, any contractor,
mechanic or laborer in the Premises, whether in connection with any Alteration
or otherwise, if such employment would interfere or cause any conflict with
other contractors, mechanics or laborers engaged in the construction,
maintenance or operation of the Premises by Landlord, Tenant or others, or of
any other property owned by Landlord. In the event of any such interference or
conflict, Tenant, upon demand of Landlord, shall cause all contractors,
mechanics or laborers causing such interference or conflict to leave the
Premises immediately.
ARTICLE 7
REPAIRS; REPLACEMENTS; MAINTENANCE
SECTION 7.1. Tenant, at Tenant's sole cost and expense, shall take good
care of the Premises and the fixtures, equipment and appurtenances therein and
make all repairs and replacements thereto, both structural and non-structural,
of any nature whatsoever as and when needed to preserve them in good working
order and condition, except for (a) reasonable wear and tear and (b)
obsolescence. If Tenant shall fail, after five (5) days notice (or such shorter
period as may be required because of an emergency), to proceed with due
diligence to make repairs required to be made by Tenant, the same may be made by
Landlord, at the expense of Tenant, and the expenses thereof incurred by
Landlord, with interest thereon at the Applicable Rate, shall be paid to
Landlord, as Additional Rent, within ten (10) days after rendition of a bill or
statement therefor. Tenant shall give Landlord prompt notice of any defective
condition in any Building Systems located in, servicing or passing through the
Premises.
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ARTICLE 8
INCREASES IN FIXED RENT
SECTION 8.1. For purposes of the Lease:
(i) "BUREAU" shall mean the Federal Bureau of Labor Statistics or
any successor agency that shall issue the indices or data referred to in
subparagraph (ii) below.
(ii) "PRICE INDEX" shall mean the Consumer Price Index for All Urban
Consumers for the Houston, Texas geographic area, 1982-1984=100, issued from
time to time by the Bureau or any other successor measure hereafter employed by
the Bureau in lieu of such price index that measures the cost of living for such
geographic area, failing such successor, the most nearly comparable index
(reflecting changes in costs of housing including rental housing, energy and
services), published by a Governmental Authority, appropriately adjusted.
Furthermore, if hereafter the Price Index is converted to a different standard
reference base or a substantial change is made in the terms or number of items
contained therein, the Price Index shall be adjusted (with the use of such
conversion factor, formula or table as is published by the Bureau, or if it
shall not publish same, the conversion factor published by Prentice Hall, Inc.,
or, failing such publication, by any other nationally recognized publisher of
similar statistical information) to the figure that would have resulted if not
for such conversion or change.
(iii) "APPLICABLE PRICE INDEX" for a Lease Year shall mean the Price
Index issued for August of the year in which such Lease Year commences.
SECTION 8.2. (A) Tenant shall pay to Landlord Fixed Rent in the amount set
forth in Article 1 of this Lease for the first Lease Year.
(B) For each Lease Year subsequent to the first Lease Year
(and for each and every Lease Year thereafter during the Term hereof), the
Tenant shall pay to the Landlord, as Fixed Rent, an amount equal to the greater
of:
(i) an amount equal to the sum of (x) the percentage by
which the Applicable Price Index for such Lease Year exceeds the Applicable
Price Index for the immediately preceding Lease Year, multiplied by the Fixed
Rent payable for such immediately preceding Lease Year and (y) such Fixed Rent
payable for the immediately preceding Lease Year (e.g., if the Base Index is
200, the Applicable Price Index for the second Lease Year is 203, the Applicable
Price Index for the third Lease Year is 215, and the Fixed Rent payable for the
second Lease Year is $50,000.00, then the Applicable Price Index for the third
Lease Year exceeds the Applicable Price Index for the second Year by 5.91% (i
.e., the difference between 203 and 215), and the Fixed Rent derived from the
aforesaid calculation shall be $52,955.75 (5.91% of $50,000.00, $2,955.00, plus
$50,000.00); or
(ii) an amount equal to the Fixed Rent for the
immediately preceding Lease Year.
The Landlord and the Tenant hereby acknowledge that it is the mutual intention
of the parties that for each and every Lease Year subsequent to the first Lease
Year during the Term hereof,
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the Fixed Rent payable by the Tenant to the Landlord hereunder shall never be
decreased from the prior Lease Year.
SECTION 8.3. Upon notice by the Landlord to the Tenant of an increase in
the Fixed Rent pursuant to the provisions of this Article 8 ("INCREASE NOTICE"),
the Tenant shall pay the Fixed Rent as set forth in the Increase Notice.
ARTICLE 9
REQUIREMENTS OF LAW
SECTION 9.1. Tenant shall not do, and shall not permit any act or thing in
or upon the Premises which will invalidate or be in conflict with the
certificate of occupancy for the Premises or violate any Requirements. Tenant
shall, at Tenant's sole cost and expense, immediately take all action, including
but not limited to, making any required Alterations necessary to comply with all
Requirements [including, but not limited to, the Americans With Disabilities Act
of 1990 (the "ADA"), as modified and supplemented from time to time] which shall
or may impose any violation, order or duty upon Landlord or Tenant arising from,
or in connection with, the Premises, Tenant's occupancy, use or manner of use of
the Premises (including, without limitation, any occupancy, use or manner of use
that constitutes a "place of public accommodation" under the ADA), or any
installations in the Premises, or required by reason of a breach of any of
Tenant's covenants or agreements under this Lease, whether or not such
Requirements shall now be in effect or hereafter enacted or issued, and whether
or not any work required shall be ordinary or extraordinary or foreseen or
unforeseen as of the date hereof.
SECTION 9.2. Tenant covenants and agrees that Tenant shall, at Tenant's
sole cost and expense, comply at all times with all Requirements governing the
use, generation, storage, treatment and/or disposal of any Hazardous Materials
(as defined below), the presence of which results from or in connection with the
act or omission of Tenant or Persons Within Tenant's Control or the breach of
this Lease by Tenant or Persons Within Tenant's Control. The term "HAZARDOUS
MATERIALS" shall mean any biologically or chemically active or other toxic or
hazardous wastes, pollutants or substances, including, without limitation,
asbestos, PCBS, petroleum products and by-products, substances defined or listed
as "hazardous substances" or "toxic substances" or similarly identified in or
pursuant to the Comprehensive Environmental Response, Compensation and Liability
Act, 42 U.S.C. ss. 9601 ET SEQ., and as hazardous wastes under the Resource
Conservation and Recovery Act, 42 U.S.C. ss. 6010, ET SEQ., any chemical
substance or mixture regulated under the Toxic Substance Control Act of 1976, as
amended, 15 U.S.C. 2601, ET SEQ., any "toxic pollutant" under the Clean Water
Act, 33 U.S.C. ss. 466 ET SEQ., as amended, any hazardous air pollutant under
the Clean Air Act, 42 U.S.C. ss. 7401 ET SEQ., hazardous materials identified in
or pursuant to the Hazardous Materials Transportation Act, 49 U.S.C. ss. 1802,
ET SEQ., and any hazardous or toxic substances or pollutant regulated under any
other Requirements including, without limitation, ECRA (as such term is
hereinafter defined). Tenant agrees to execute, from time to time, at Landlord's
request, affidavits, representations and the like concerning Tenant's best
knowledge and belief regarding the presence of Hazardous Materials in, on, under
or about the Premises. Tenant shall indemnify and hold harmless all Indemnitees
from and against any loss, claim, cost, damage, liability or expense (including
attorneys' fees and disbursements) arising by reason of any clean up, removal,
remediation, detoxification action or any other activity required or recommended
of any Indemnitees by any
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Governmental Authority by reason of the presence in, on, under or about the
Premises of any Hazardous Materials, as a result of or in connection with the
act or omission of Tenant or Persons Within Tenant's Control or the breach of
this Lease by Tenant or Persons Within Tenant's Control. The foregoing covenants
and indemnity shall survive the expiration or any termination of this Lease.
SECTION 9.3. If Tenant shall receive notice of any violation of, or
defaults under, any Requirements, liens or other encumbrances applicable to the
Premises, Tenant shall give immediate written notice thereof to Landlord.
SECTION 9.4. If any governmental license or permit shall be required for
the proper and lawful conduct of Tenant's business and if the failure to secure
such license or permit would, in any way, affect Landlord or the Premises, then
Tenant, at Tenant's expense, shall promptly procure and thereafter maintain,
submit for inspection by Landlord, and at all times comply with the terms and
conditions of, each such license or permit.
ARTICLE 10
SUBORDINATION
SECTION 10.1. This Lease shall at all times, now and hereafter, be subject
and subordinate to each and every Mortgage, whether made prior to or after the
execution of this Lease, and to all extensions, supplements, amendments,
modifications, consolidations and replacements thereof or thereto, substitutions
therefor, and advances made thereunder; provided, that Tenant has received from
the holder of any Mortgage an agreement that Tenant will not be disturbed in its
possession of the Premises, or have its rights under this Lease modified or
terminated other than pursuant to the terms of this Lease. This clause shall be
self-operative and no further agreement of subordination shall be required to
make the interest of any Mortgagee superior to the interest of Tenant hereunder.
In confirmation of such subordination, Tenant shall promptly execute and
deliver, at its own cost and expense, any document, in recordable form if
requested, that Landlord or any Mortgagee may request to evidence such
subordination; and if Tenant fails to execute, acknowledge or deliver any such
document within five (5) days after request therefor, Tenant hereby irrevocably
constitutes and appoints Landlord as Tenant's attorney-in-fact, coupled with an
interest, to execute, acknowledge and deliver any such document for and on
behalf of Tenant. Tenant shall not do anything that would constitute a default
under any Mortgage, or omit to do anything that Tenant is obligated to do under
the terms of this Lease so as to cause Landlord to be in default thereunder.
SECTION 10.2. If, at any time prior to the expiration of the Term, any
Mortgagee comes into possession of the Premises, by receiver or otherwise,
Tenant agrees, at the election and upon demand of any owner of the Premises, or
of any Mortgagee in possession of the Premises, to attorn, from time to time, to
any such owner or Mortgagee or any person acquiring the interest of Landlord as
a result of any such termination or as a result of a foreclosure of the Mortgage
or the granting of a deed in lieu of foreclosure, upon the then executory terms
and conditions of this Lease (except as provided below), for the remainder of
the Term, provided that such owner or Mortgagee, as the case may be, or receiver
caused to be appointed by any of the foregoing,
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is then entitled to possession of the Premises. Any such attornment shall be
made upon the condition that no such owner or Mortgagee shall be:
(1) liable for any act or omission of any prior landlord (including,
without limitation, the then defaulting landlord); or
(2) subject to any defense or offsets (except as expressly set forth
in this Lease) which Tenant may have against any prior landlord (including,
without limitation, the then defaulting landlord); or
(3) bound by any payment of Rental which Tenant might have paid for
more than the current month to any prior landlord (including, without
limitation, the then defaulting landlord); or
(4) bound by any obligation to make any payment to Tenant which was
required to be made prior to the time such owner or Mortgagee succeeded to any
prior landlord's interest; or
(5) bound by any obligation to perform any work or to make
improvements to the Premises except for (i) repairs to the Premises or any part
thereof as a result of damage by fire or other casualty pursuant to Article 12,
but only to the extent that such repairs can be reasonably made from the net
proceeds of any insurance actually made available to such owner or Mortgagee and
(ii) repairs to the Premises as a result of a partial condemnation pursuant to
Article 13, but only to the extent that such repairs can be reasonably made from
the net proceeds of any award made available to such owner or Mortgagee. Tenant,
upon demand of any such owner or Mortgagee, shall execute, from time to time,
agreements in confirmation of the foregoing provisions of this Section 10.2,
satisfactory to any such owner or Mortgagee, and acknowledging such attornment
and setting forth the terms and conditions of its tenancy. Nothing contained in
this Section 10.2 shall be construed to impair any right otherwise exercisable
by any such owner or Mortgagee.
SECTION 10.3. If requested by any Mortgagee or Landlord, Tenant shall
promptly execute and deliver, at Tenant's own cost and expense, any document in
accordance with the terms of this Article 10, in recordable form, to evidence
such subordination.
SECTION 10.4. At any time and from time to time upon not less than ten
(10) days' prior notice to Tenant or Landlord given by the other, or to Tenant
given by a Mortgagee, Tenant or Landlord, as the case may be, shall, without
charge, execute, acknowledge and deliver a statement in writing addressed to
such party as Tenant, Landlord or Mortgagee, as the case may be, may designate,
in form satisfactory to Tenant, Landlord or Mortgagee, as the case may be,
certifying all or any of the following: (i) that this Lease is unmodified and in
full force and effect (or if there have been modifications, that this Lease is
in full force and effect as modified and stating the modifications); (ii) the
date that the Term commenced and the date(s) that Fixed Rent and Additional Rent
became payable hereunder and the dates to which they have been paid; (iii)
whether or not, to the best knowledge of the signer of such certificate,
Landlord is in default in performance of any of the terms of this Lease and, if
so, specifying each such event of default of which the signer may have
knowledge; (iv) whether or not, to the best knowledge of the signer of such
certificate, Tenant has accepted possession of the Premises; (v) whether Tenant
has made
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any claim against Landlord under this Lease and, if so, the nature thereof and
the dollar amount, if any, of such claim; (vi) either that Tenant does not know
of any default in the performance of any provision of this Lease or specifying
the details of any default of which Tenant may have knowledge and stating what
action Tenant is taking or proposes to take with respect thereto; (vii) that, to
the best knowledge of Tenant, there are no proceedings pending or threatened
against Tenant before or by any court or administrative agency which, if
adversely decided, would materially or adversely affect the financial condition
or operations of Tenant or, if any such proceedings are pending or threatened to
the best knowledge of Tenant, specifying and describing the same; and (viii)
such further information with respect to the Lease or the Premises as Landlord
may reasonably request or Mortgagee may require; it being intended that any such
statement delivered pursuant hereto may be relied upon by any prospective
purchaser of the Premises or any part thereof or of the interest of Landlord in
any part thereof, by any Mortgagee or prospective Mortgagee or by any
prospective assignee of any Mortgage or by any assignee of Tenant.
The failure of either Tenant or Landlord to execute, acknowledge and
deliver a statement in accordance with the provisions of this Section 10.4
within said ten (10) day period shall constitute an acknowledgment by Tenant or
Landlord, as the case may be, which may be relied on by any person or entity of
any nature whatsoever who would be entitled to rely upon any such statement,
that such statement as submitted by Landlord or Tenant, as the case may be, is
true and correct.
SECTION 10.5. As long as any Mortgage exists, Tenant shall not seek to
terminate this Lease by reason of any act or omission of Landlord until Tenant
has given not less than thirty (30) days prior written notice of such act or
omission to all Mortgagees, and if any such Mortgagee notifies Tenant within
thirty (30) days following receipt of such notice of its intention to remedy
such act or omission, until a reasonable period of time shall have elapsed
following the giving of such notice, during which period such Mortgagee shall
have the right, but not the obligation, to remedy such act or omission.
ARTICLE 11
INSURANCE; PROPERTY LOSS OR DAMAGE; REIMBURSEMENT
SECTION 11.1.
(A) Neither Landlord nor Landlord's agents shall be liable for any
injury or damage to persons or property, or interruption of Tenant's business,
resulting from fire or other casualty; nor shall Landlord or Landlord's agents
be liable for any such damage caused by Persons other than the Landlord or the
Landlord's agents or by construction of any private, public or quasi-public
work; nor shall Landlord be liable for any latent defect in the Premises.
(B) Tenant shall give written notice to Landlord, immediately after
Tenant learns thereof, of any accident, emergency, occurrence for which Landlord
might be liable, fire or other casualty and all damages to or defects in the
Premises for the repair of which Landlord might be responsible or which
constitutes Landlord's property. Such notice shall be given by telecopy or
personal delivery to the address(es) of Landlord in effect for notice.
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SECTION 11.2. Tenant shall not do or permit to be done any act or thing in
or upon the Premises which will invalidate or be in conflict with the terms of
the State of Texas standard form of fire insurance with extended coverage, or
with rental, liability, boiler, sprinkler, water damage, war risk or other
insurance policies covering the Premises and the fixtures and property therein
(hereinafter referred to as "BUILDING INSURANCE"); and Tenant, at Tenant's own
expense, shall comply with all rules, orders, regulations and requirements of
all insurance boards, and shall not do or permit anything to be done in or upon
the Premises or bring or keep anything therein or use the Premises in a manner
which increases the rate of premium for any of the Building Insurance or any
property or equipment located therein over the rate in effect at the
commencement of the Term of this Lease.
SECTION 11.3.
(A) If, by reason of any failure of Tenant to comply with the
provisions of this Lease, the rate of premium for Building Insurance or other
insurance on the property and equipment of Landlord shall be higher than it
otherwise would be, Tenant shall reimburse Landlord for that part of the
insurance premiums thereafter paid by Landlord which shall have been charged
because of such failure by Tenant. Tenant shall make said reimbursement on the
first day of the month following such payment by Landlord.
(B) In any action or proceeding wherein Landlord and Tenant are
parties, a schedule of any insurance rate for the Premises issued by any
insurance board establishing insurance premium rates for the Premises shall be
prima facie evidence of the facts therein stated and of the several items and
charges in the insurance premium rates then applicable to the Premises.
SECTION 11.4.
(A) Tenant shall, at Tenant's own cost and expense, obtain, maintain
and keep in full force and effect during the Term, for the benefit of Landlord,
any Mortgagees and Tenant, commercial general liability insurance (including
premises operation, bodily injury, personal injury, death, independent
contractors, products and completed operations, broad form contractual liability
and broad form property damage coverages) in a combined single limit amount of
not less than Five Million and 00/100 ($5,000,000.00) Dollars, against all
claims, demands or actions with respect to damage, injury or death made by or on
behalf of any person or entity, arising from or relating to the conduct and
operation of Tenant's business in, on or about the Premises (which shall include
Tenant's signs, if any), or arising from or related to any act or omission of
Tenant or of Persons Within Tenant's Control. If Tenant shall install or
maintain one or more pressure vessels to serve Tenant's operations at the
Premises, Tenant shall, at Tenant's own cost and expense, obtain, maintain and
keep in full force and effect, for the benefit of Landlord, any Mortgagees and
Tenant, appropriate boiler or other insurance coverage therefor in an amount not
less than Three Million and 00/100 ($3,000,000.00) Dollars (it being understood
and agreed, however, that the foregoing shall not be deemed a consent by
Landlord to the installation and/or maintenance of any such pressure vessels in
the Premises, which installation and/or maintenance shall at all times be
subject to the prior written consent of Landlord). Whenever, in Landlord's
reasonable judgment, good business practice and changing conditions indicate a
need for additional amounts or different types of insurance coverage, Tenant
shall, within ten (10) days after Landlord's request, obtain such insurance
coverage, at Tenant's expense.
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(B) Tenant, at Tenant's sole cost and expense, shall maintain
insurance protecting and indemnifying Tenant against any and all damage to or
loss of any Alterations and leasehold improvements, including any made by
Landlord to prepare the Premises for Tenant's occupancy, and Tenant's Property,
and all claims and liabilities relating thereto.
(C) Landlord and any Mortgagees shall be named as insureds in said
policies and shall be protected against all liability occasioned by an
occurrence insured against. All said policies of insurance shall be: (i) written
as "occurrence" policies; (ii) written as primary policy coverage and not
contributing with or in excess of any coverage which Landlord may carry; and
(iii) issued by reputable and independent insurance companies rated in Best's
Insurance Guide, or any successor thereto (or if there be none, an organization
having a national reputation) as having a general policyholder rating of "A+"
and a financial rating of at least "13", and which are licensed to do business
in the State of Texas. Tenant shall deliver to Landlord the policies of
insurance or certificates thereof, together with evidence of payment of premiums
thereon, and shall thereafter furnish to Landlord, at least thirty (30) days
prior to the expiration of any such policies and any renewal thereof, a new
policy or certificate in lieu thereof, with evidence of the payment of premiums
thereon. Each of said policies shall also contain a provision whereby the
insurer agrees not to cancel, fail to renew, diminish or materially modify said
insurance policy(ies) without having given Landlord and any Mortgagees at least
thirty (30) days prior written notice thereof.
(D) Tenant shall pay all premiums and charges for all of said
policies, and, if Tenant shall fail to make any payment when due or carry any
such policy, Landlord may, but shall not be obligated to, make such payment or
carry such policy, and the amount paid by Landlord, with interest thereon (at
the Applicable Rate), shall be repaid to Landlord by Tenant on demand, and all
such amounts so repayable, together with such interest, shall be deemed to
constitute Additional Rent hereunder. Payment by Landlord of any such premium,
or the carrying by Landlord of any such policy, shall not be deemed to waive or
release the default of Tenant with respect thereto.
SECTION 11.5.
(A) Tenant shall cause each insurance policy carried by Tenant and
insuring the Premises and Tenant's Alterations, leasehold improvements, space
equipment, furnishings, furniture, contents and fixtures against loss, damage or
destruction by fire or other casualty, to be written in a manner so as to
provide that the insurance company waives all rights of recovery by way of
subrogation against Landlord or Tenant in connection with any loss or damage
covered by any such policy. If the release of either Landlord or Tenant shall
contravene any law with respect to exculpatory agreements, the liability of the
party in question shall be deemed not released, but no action or rights shall be
sought or enforced against such party unless and until all rights and remedies
against the insurer are exhausted and such party shall be unable to collect such
insurance proceeds.
(B) The waiver of subrogation referred to in Section 11.5(A) above
shall extend to the agents and employees of each party, but-only if and to the
extent that such waiver can be obtained without additional charge (unless such
party shall pay such charge). Nothing contained in this Section 11.5 shall be
deemed to relieve the Tenant from any duty imposed elsewhere in this Lease to
repair, restore and rebuild the Premises, in whole or in part.
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ARTICLE 12
DESTRUCTION BY FIRE OR OTHER CAUSE
SECTION 12.1. If the Premises or any part thereof shall be damaged by fire
or other casualty, Tenant shall give immediate written notice thereof to
Landlord. Landlord shall, subject to the provisions of Sections 12.2 and 12.3
below, proceed with reasonable diligence, after receipt of the net proceeds of
insurance, to repair or cause to be repaired such damage at its expense, but in
no event shall such repair or restoration be greater in scope than the quantity
or quality of construction of the Premises as of the Commencement Date; and, if
the Premises, or any part thereof, shall be rendered untenantable by reason of
such damage and such damage shall not be due to the fault of Tenant or Persons
Within Tenant's Control, then the Fixed Rent hereunder, or an amount thereof
apportioned according to the area of the Premises so rendered untenantable (if
less than the entire Premises shall be so rendered untenantable), shall be
abated for the period from the date of such damage to the date when the repair
of such damage shall have been substantially completed. If Landlord or any
Mortgagee shall be unable to collect the insurance proceeds (including rent
insurance proceeds) applicable to such damage because of some action or inaction
on the part of Tenant or Persons Within Tenant's Control, then the cost of
repairing such damage shall be paid by Tenant and there shall be no abatement of
Fixed Rent. Tenant covenants and agrees to cooperate with Landlord and any
Mortgagee in their efforts to collect insurance proceeds (including rent
insurance proceeds) payable to such parties. Landlord shall not be liable for
any delay which may arise by reason of adjustment of insurance on the part of
Landlord and/or Tenant, or any cause beyond the control of Landlord or
contractors employed by Landlord.
It is expressly understood that if Landlord is prevented from
substantially completing the repairs by reason of any acts of Tenant or Persons
Within Tenant's Control, including, without limitation, by reason of the
performance of any Alterations, or by reason of Tenant's failure or refusal to
comply or to cause its architects, engineers, designers and contractors to
comply with any of Tenant's obligations described or referred to in this Lease,
then such work shall be deemed substantially completed on the date when the work
would have been substantially completed but for such delay, and the expiration
of the abatement of Tenant's obligations to pay Fixed Rent shall not be
postponed by reason of such delay. Any additional costs to Landlord to complete
any work occasioned by such delay shall be paid by Tenant to Landlord, as
Additional Rent, within ten (10) days after demand therefor by Landlord.
SECTION 12.2. Landlord shall not be liable for any inconvenience or
annoyance to Tenant or injury to the business of Tenant resulting in any way
from damage from fire or other casualty or the repair thereof. Tenant
understands that Landlord, in reliance upon Section 11.4 hereof, will not carry
insurance of any kind on Tenant's furnishings, furniture, contents, fixtures,
space equipment and leasehold improvements, and that Landlord shall not be
obligated to repair any damage thereto or replace the same.
SECTION 12.3. (A) Notwithstanding anything to the contrary contained in
Sections 12.1 and 12.2 above, in the event that:
(i) at least fifty (50%) percent of the rentable square
feet of the Premises shall be damaged by a fire or other casualty so that
substantial alteration or
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reconstruction of the Premises shall, in Landlord's sole opinion, be required
(whether or not the Premises shall have been damaged by such fire or other
casualty and without regard to the structural integrity of the Premises); or
(ii) the Premises shall be totally or substantially
damaged or shall be rendered wholly or substantially untenantable; or
(iii) there shall be any damage to the Premises within
the last two (2) years of the Term wherein the cost of repair exceeds an amount
equal to three (3) monthly installments of Fixed Rent, then, as a result of any
circumstances described in subparagraphs (i), (ii) or (iii) hereof, the Landlord
may, in Landlord's sole and absolute discretion, terminate this Lease and the
term and estate hereby granted, by notifying Tenant in writing of such
termination within one hundred twenty (120) days after the date of such damage.
In the event that such a notice of termination shall be given, then this Lease
and the term and estate hereby granted shall expire as of the date of
termination stated in said notice with the same effect as if that were the Fixed
Expiration Date, and the Fixed Rent and Additional Rent hereunder shall be
apportioned as of such date.
SECTION 12.4. Except as may be provided in Section 11.5, nothing herein
contained shall relieve Tenant from any liability to Landlord or to Landlord's
insurers in connection with any damage to the Premises by fire or other casualty
if Tenant shall be legally liable in such respect.
ARTICLE 13
EMINENT DOMAIN
SECTION 13.1. If the whole of the Premises is acquired or condemned for
any public or quasi-public use or purpose, this Lease and the Term shall end as
of the date of the vesting of title with the same effect as if said date were
the Fixed Expiration Date. If only a part of the Premises is so acquired or
condemned then, (1) except as hereinafter provided in this Section 13.1, this
Lease and the Term shall continue in effect but, if a part of the Premises is so
acquired or condemned, from and after the date of the vesting of title, the
Fixed Rent and Additional Rent, if any, shall be reduced in the proportion which
the area of the part of the Premises so acquired or condemned bears to the total
area of the Premises immediately prior to such acquisition or condemnation; (2)
whether or not the Premises are affected thereby, Landlord, at Landlord's
option, may give to Tenant, within sixty (60) days next following the date upon
which Landlord receives notice of vesting of title, a thirty (30) day notice of
termination of this Lease; and (3) if the part of the Premises so acquired or
condemned contains more than seventy-five (75%) percent of the total area of the
Premises immediately prior to such acquisition or condemnation, or if, by reason
of such acquisition or condemnation, Tenant no longer has access to the
Premises, Tenant, at Tenant's option, may give to Landlord, within thirty (30)
days next following the date upon which Tenant receives notice of vesting of
title, a thirty (30) day notice of termination of this Lease. If any such thirty
(30) day notice of termination is given, by Landlord or Tenant, this Lease and
the Term shall come to an end and expire upon the expiration of said thirty (30)
days with the same effect as if the date of expiration of said thirty (30) days
were the Fixed Expiration Date. In the event of any termination of this Lease
and the Term pursuant to the provisions of this Section 13.1, the Fixed Rent or
Additional Rent shall be apportioned as of
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the date of sooner termination and any prepaid portion of the Fixed Rent for any
period after such date shall be refunded by Landlord to Tenant.
SECTION 13.2. In the event of any such acquisition or condemnation of all
or any part of the Premises, Landlord shall be entitled to receive the entire
award for any such acquisition or condemnation. Tenant shall have no claim
against Landlord or the condemning authority for the value of any unexpired
portion of the Term and Tenant hereby expressly assigns to Landlord all of its
right in and to any such award. Nothing contained in this Section 13.2 shall be
deemed to prevent Tenant from making a separate claim in any condemnation
proceedings for the value of any Tenant's Property included in such taking, and
for any moving expenses, so long as Landlord's award is not reduced thereby.
ARTICLE 14
ASSIGNMENT; SUBLETTING; MORTGAGE; ETC.
SECTION 14.1. (A) The Tenant shall not (a) assign this Lease (whether by
operation of law, transfers of interests in Tenant or otherwise); or (b)
mortgage or encumber Tenant's interest in this Lease, in whole or in part; or
(c) sublet, or permit the subletting of, the Premises or any part thereof.
Notwithstanding the provisions of this Section 14.1, the use of the Premises by
any Person affiliated (as such term is hereinafter defined) with the Tenant or
under the common control (as such term is hereinafter defined) of Comfort
Systems USA, Inc., as the case may be, shall not be deemed an assignment of this
Lease or a sublet of the Premises; provided, however, that such use of the
Premises as aforesaid shall not violate or be prohibited by any of the
provisions of any Mortgage then encumbering the Premises, if any. For purposes
of this Article 14, a Person shall be deemed to be an "AFFILIATE" of the Tenant
or under the "COMMON CONTROL" of Comfort Systems USA, Inc. if such Person is a
member of a "parent-subsidiary controlled group" [as such term is defined by
Section 1563(a)(1) of the Internal Revenue Code of 1986, as amended] or a member
of a "brother-sister controlled group" [as such term is defined by Section
1563(a)(2) of the Internal Revenue Code of 1986, as amended] of which either
Comfort Systems USA, Inc. or the Tenant, as the case may be, is a member.
(B) Notwithstanding the provisions otherwise set forth in this
Article 14, any reorganization, consolidation and/or restructuring of the Tenant
in which the issued and outstanding stock of the Tenant remains under the common
control (as such term is defined in Section 14.1 hereinabove) of Comfort Systems
USA, Inc. shall not be deemed an assignment of this Lease or a sublet of the
Premises; provided, however, that the same shall not violate or be prohibited by
any of the provisions of any Mortgage then encumbering the Premises, if any.
SECTION 14.2. If Tenant's interest in this Lease shall be assigned in
violation of the provisions of this Article 14, such assignment shall be invalid
and of no force and effect against Landlord; provided, however, that Landlord
may collect an amount equal to the then Fixed Rent plus any other item of Rental
from the assignee as a fee for its use and occupancy. If the Premises or any
part thereof are sublet to, or occupied by, or used by, any person other than
Tenant, whether or not in violation of this Article 14, Landlord, after default
by Tenant under this Lease, may collect any item of Rental or other sums paid by
the subtenant, user or occupant as a fee for its use and occupancy, and shall
apply the net amount collected to the Fixed Rent and the items of Rental
reserved in this Lease. No such assignment, subletting, occupancy, or use,
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nor any such collection or application of Rental or fee for use and occupancy,
shall be deemed a waiver by Landlord of any term, covenant or condition of this
Lease or the acceptance by Landlord of such assignee, subtenant, occupant or
user as Tenant hereunder, nor shall the same, in any circumstances, relieve
Tenant of any of its obligations under this Lease.
SECTION 14.3. Except as otherwise set forth in Section 14.1 hereof, for
purposes of this Article 14, (i) any increase in the amount of issued and/or
outstanding capital stock of any corporate tenant and/or the creation of one or
more additional classes of capital stock of any corporate tenant, in a single
transaction or a series of related or unrelated transactions, resulting in a
change in the legal or beneficial ownership of such tenant so that the
shareholders of such tenant existing immediately prior to such transaction or
series of transactions shall no longer own a majority of the issued and
outstanding capital stock of such tenant shall be deemed an assignment of this
Lease and (ii) any Person or legal representative of Tenant, to whom Tenant's
interest under this Lease passes by operation of law, or otherwise, shall be
bound-by the provisions of this Article 14. Tenant agrees to furnish to Landlord
on request at any time such information and assurances as Landlord may
reasonably request that Tenant has not violated the provisions of this Article
14.
ARTICLE 15
ACCESS TO PREMISES
SECTION 15.1. Tenant shall permit Landlord, Landlord's agents and any
public utilities servicing the Premises to erect, use and maintain, now and
hereafter, concealed ducts, pipes and conduits in and through the Premises.
Landlord or Landlord's agents shall have the right to enter the Premises at all
reasonable times upon (except in case of emergency) reasonable prior notice,
which notice may be oral, to examine the same, to show the same to prospective
purchasers or Mortgagees and to make such repairs, alterations, improvements or
additions (i) as Landlord may deem necessary or desirable to the Premises, or
(ii) which Landlord may elect to perform at least ten (10) days after notice
(except in an emergency when no notice shall be required) following Tenant's
failure to make repairs or perform any work which Tenant is obligated to make or
perform under this Lease, or (iii) for the purpose of complying with
Requirements, and Landlord shall be allowed to take all material into and upon
the Premises that may be required therefor without the same constituting an
eviction or constructive eviction of Tenant in whole or in part and the Fixed
Rent (and any other item of Rental) shall in no respect abate or be reduced by
reason of said repairs, alterations, improvements or additions, wherever
located, or while the same are being made, by reason of loss or interruption of
business of Tenant, or otherwise. Landlord shall promptly repair any damage
caused to the Premises by such work, alterations, improvements or additions.
SECTION 15.2. If Tenant is not present when for any reason entry into the
Premises may be necessary or permissible, Landlord or Landlord's agents may
enter the same without rendering Landlord or such agents liable therefor.
SECTION 15.3. Landlord also shall have the right at any time, without the
same constituting an actual or constructive eviction and without incurring any
liability to Tenant therefor, to change the arrangement or location of entrances
or passageways, doors and doorways, and corridors, stairs, toilets or other
parts of the Premises, provided any such change does not unreasonably
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interfere with, or deprive Tenant of access to, the Premises; to put so-called
"solar film" or other energy-saving installations on the inside and outside of
the windows; and to change the name, number or designation by which the Premises
is commonly known.
ARTICLE 16
CERTIFICATE OF OCCUPANCY
SECTION 16.1. Tenant shall not at any time, now or hereafter, use or
occupy the Premises, directly or indirectly, in violation of the certificate of
occupancy for the Premises and in the event that any Governmental Authority
hereafter contends or declares by notice, violation, order or in any other
manner whatsoever that the Premises are used for a purpose that is a violation
of such certificate of occupancy, Tenant shall, upon three (3) Business Days'
written notice from Landlord or any Government Authority, immediately
discontinue such use of the Premises.
ARTICLE 17
DEFAULT
SECTION 17.1. Each of the following events shall be an "EVENT OF DEFAULT"
under this Lease:
(A) if Tenant shall on any occasion default in the payment when due
of any installment of Fixed Rent or Additional Rent or in the payment when due
of any other item of Rental and such default shall continue for five (5)
business days from and after the date when written notice has been received by
Tenant; or
(B) if the Premises shall become vacant or abandoned; or
(C) if Tenant's interest in this Lease shall devolve upon or pass to
any person, whether by operation of law or otherwise, except as specifically
permitted by the provisions of Article 14 hereof; or
(D) (1) if Tenant shall not, or shall be unable to, or shall admit
in writing Tenant's inability to, as to any obligation, pay Tenant's debts as
they become due; or
(2) if Tenant shall commence or institute any case, proceeding
or other action (a) seeking relief on Tenant's behalf as debtor, or to
adjudicate it a bankrupt or insolvent, or seeking reorganization, arrangement,
adjustment, winding-up, liquidation, dissolution, composition or other relief
with respect to Tenant or Tenant's debts under any existing or future law of any
jurisdiction, domestic or foreign, relating to bankruptcy, insolvency,
reorganization or relief of debtors, or (b) seeking appointment of a receiver,
trustee, custodian or other similar official for it or for all or any
substantial part of its property; or
(3) if Tenant shall make a general assignment for the benefit
of creditors; or
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(4) if any case, proceeding or other action shall be commenced
or instituted against Tenant (a) seeking to have an order for relief entered
against Tenant as debtor or to adjudicate Tenant a bankrupt or insolvent, or
seeking reorganization, arrangement, adjustment, winding-up, liquidation,
dissolution, composition or other relief with respect to Tenant or Tenant's
debts under any existing or future law of any jurisdiction, domestic or foreign,
relating to bankruptcy, insolvency, reorganization or relief of debtors, or (b)
seeking appointment of a receiver, trustee, custodian or other similar official
for Tenant or for all or any substantial part of Tenant's property, which either
(i) results in any such entry of an order for relief, adjudication of bankruptcy
or insolvency or such an appointment or the issuance or entry of any other order
having a similar effect or (ii) remains undismissed for a period of sixty (60)
days; or
(5) if a trustee, receiver or other custodian shall be
appointed for any substantial part of the assets of Tenant which appointment is
not vacated or effectively stayed within thirty (30) days; or
(E) if Tenant shall default in the observance or performance of any
other term, covenant or condition of this Lease on Tenant's part to be observed
or performed including, without limitation, the terms and-conditions of Article
27 hereof, and Tenant shall fail to remedy such default within ten (10) days
after written notice by Landlord to Tenant of such default, or if such default
is of such a nature that it cannot with due diligence be completely remedied
within said period of ten (10) days and the continuation of which for the period
required for cure will not subject Landlord to the risk of criminal liability or
foreclosure of any Mortgage, if Tenant shall not, (i) within said ten (10) day
period advise Landlord of Tenant's intention duly to institute all steps
necessary to remedy such situation, (ii) duly institute within said ten (10) day
period, and thereafter diligently and continuously prosecutes to completion all
steps necessary to remedy the same and (iii) completes such remedy within such
time after the date of the giving of said notice by Landlord as shall reasonably
be necessary.
SECTION 17.2. If an Event of Default shall occur, Landlord may, at any
time thereafter, at Landlord's option, give written notice to Tenant stating
that this Lease and the Term shall expire and terminate on the date specified in
such notice whereupon this Lease and the Term and all rights of Tenant under
this Lease shall automatically expire and terminate as if the date specified in
the notice given pursuant to this Section 17.2 were the Fixed Expiration Date
and Tenant immediately shall quit and surrender the Premises, but Tenant shall
remain liable for damages as provided herein or pursuant to law. Anything
contained herein to the contrary notwithstanding, if such termination shall be
stayed by order of any court having jurisdiction over any proceeding described
in Section 17.1(D), or by federal or state statute, then, following the
expiration of any such stay, or if the trustee appointed in any such proceeding,
Tenant or Tenant as debtor-in-possession fails to assume Tenant's obligations
under this Lease within the period prescribed therefor by law or within one
hundred twenty (120) days after entry of the order for relief or as may be
allowed by the court, or if said trustee, Tenant or Tenant as debtor-
in-possession shall fail to provide adequate protection of Landlord's right,
title and interest in and to the Premises or adequate assurance of the complete
and continuous future performance of Tenant's obligations under this Lease,
Landlord, to the extent permitted by law or by leave of the court having
jurisdiction over such proceeding, shall have the right, at its election, to
terminate this Lease on three (3) days' notice to Tenant, Tenant as
debtor-in-possession or said trustee and upon the expiration of said three (3)
day period this Lease shall cease and expire as aforesaid and
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Tenant, Tenant as debtor-in-possession or said trustee shall immediately quit
and surrender the Premises as aforesaid.
SECTION 17.3. If, at any time, (i) Tenant shall consist of two (2) or more
Persons, or (ii) Tenant's obligations under this Lease shall have been
guaranteed by any Person other than Tenant, or (iii) Tenant's interest in this
Lease has been assigned, the word "Tenant" as used and referred to in this
Lease, shall be deemed to mean any one or more of the persons primarily or
secondarily liable for Tenant's obligations under this Lease. Any monies
received by Landlord from or on behalf of Tenant during the pendency of any
proceeding of the types referred to in Section 17.1(D) hereof shall be deemed
paid as compensation for the use and occupancy of the Premises and the
acceptance of any such compensation by Landlord shall not be deemed an
acceptance of Rental or a waiver on the part of Landlord of any rights under
Section 17.2 hereof.
ARTICLE 18
REMEDIES AND DAMAGES
SECTION 18.1.
(A) If any Event of Default shall occur, or this Lease and the Term
shall expire and come to an end as provided in Article 17 hereof:
(1) Tenant shall quit and peacefully surrender the Premises to
Landlord, and Landlord and its agents may immediately, or at any time after such
Event of Default or after the date upon which this Lease and the Term shall
expire and come to an end, re-enter the Premises or any part thereof, without
notice, either by summary proceedings, or by any other applicable action or
proceeding or otherwise (without being liable to indictment, prosecution or
damages therefor), and may repossess the Premises and dispossess Tenant and any
other persons from the Premises by summary proceedings or otherwise and remove
any and all of their property and effects from the Premises (and Tenant shall
remain liable for damages as provided herein or pursuant to law); and
(2) Landlord, at Landlord's option, may relet the whole or any
part or parts of-the Premises from time to time, either in the name of Landlord
or otherwise, to such tenant or tenants, for such term or terms ending before,
on or after the Fixed Expiration Date, at such rent or rentals and upon such
other conditions, which may include concessions and free rent periods, as
Landlord, in Landlord's sole discretion, may determine; provided, however, that
Landlord shall have no obligation to relet the Premises or any part thereof and
shall in no event be liable for refusal or failure to relet the Premises or any
part thereof, or, in the event of any such reletting, for refusal or failure to
collect any rent due upon any such reletting, and no such refusal or failure
shall operate to relieve Tenant of any liability under this Lease or otherwise
affect any such liability, and Landlord, at Landlord's option, may make such
Alterations, in and to the Premises as Landlord, in Landlord's sole discretion,
shall consider advisable or necessary in connection with any such reletting or
proposed reletting, without relieving Tenant of any liability under this Lease
or otherwise affecting any such liability.
(B) Tenant hereby waives the service of any notice of intention to
re-enter or to institute legal proceedings to that end that may otherwise be
required to be given under any
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present or future law. Tenant, on its own behalf and on behalf of all persons
claiming through or under Tenant, including all creditors of Tenant, does
further hereby waive any and all rights that Tenant and all such persons might
otherwise have under any present or future law to redeem the Premises, or to
re-enter or repossess the Premises, or to restore the operation of this Lease,
after (a) Tenant shall have been dispossessed by a judgment or by warrant of any
court, or (b) any re-entry by Landlord, or (c) any expiration or termination of
this Lease and the Term, whether such dispossess, re-entry, expiration or
termination is by operation of law or pursuant to the provisions of this Lease.
The words "re-entry", "re-enter" and "re-entered" as used in this Lease shall
not be deemed to be restricted to their technical legal meanings. In the event
of a breach or threatened breach by Tenant, or any persons claiming through or
under Tenant, of any term, covenant or condition of this Lease, Landlord shall
have the right to enjoin such breach and the right to invoke any other remedy
allowed by law or in equity as if reentry, summary proceedings and other special
remedies were not provided in this Lease for such breach. The right to invoke
the remedies hereinbefore set forth are cumulative and shall not preclude
Landlord from invoking any other remedy allowed at law or in equity.
SECTION 18.2.
(A) If this Lease and the Term shall expire and come to an end as
provided in Article 17 hereof, or by or under any summary proceeding or any
other action or proceeding, or if Landlord shall re-enter the Premises as
provided in Section 18.1 hereof, or by or under any summary proceeding or any
other action or proceeding, then, in any of said events:
(1) Tenant shall pay to Landlord all Fixed Rent, Additional
Rent and other items of Rental payable under this Lease by Tenant to Landlord to
the date upon which this Lease and the Term shall have expired and come to an
end or to the date of re-entry upon the Premises by Landlord, as the case may
be;
(2) Tenant also shall be liable for and shall pay to Landlord,
as damages, any deficiency ("DEFICIENCY") between the Rental for the period
which otherwise would have constituted the unexpired portion of the Term and the
net amount, if any, of rents collected under any reletting effected pursuant to
the provisions of Section 18.1(2) for any part of such period (after first
deducting from the rents collected under any such reletting all of Landlord's
expenses in connection with the termination of this Lease, Landlord's re-entry
upon the Premises and such reletting including, but not limited to, all
repossession costs, brokerage commissions, attorneys' fees and disbursements,
alteration costs and other expenses of preparing the Premises for such
reletting); any such Deficiency shall be paid in monthly installments by Tenant
on the days specified in this Lease for payment of installments of Fixed Rent;
Landlord shall be entitled to recover from Tenant each monthly Deficiency as the
same shall arise, and no suit to collect the amount of the Deficiency for any
month shall prejudice Landlord's right to collect the Deficiency for any
subsequent month by a similar proceeding; and
(3) whether or not Landlord shall have collected any
Deficiency as aforesaid, Landlord shall be entitled to recover from Tenant, and
Tenant shall pay to Landlord, on demand, in lieu of any further Deficiency as
and for liquidated and agreed final damages, a sum equal to the amount by which
the unpaid Rental for the period which otherwise would have constituted the
unexpired portion of the Term exceeds the then fair and reasonable rental value
of the Premises for the same period; if, before presentation of proof of such
liquidated damages
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to any court, commission or tribunal, the Premises, or any part thereof, are
relet by Landlord for the period which otherwise would have constituted the
unexpired portion of the Term, or any part thereof, the amount of rent reserved
upon such reletting shall be deemed, prima facie, to be the fair and reasonable
rental value for the part or the whole of the Premises so relet during the term
of the reletting.
(B) Tenant shall in no event be entitled to any rents collected or
payable under any reletting, whether or not such rents exceed the Fixed Rent
reserved in this Lease. Nothing contained in Article 17 hereof or this Article
18 shall be deemed to limit or preclude the recovery by Landlord from Tenant of
the maximum amount allowed to be obtained as damages by any statute or rule of
law, or of any sums or damages to which Landlord may be entitled in addition to
the damages set forth in this Section 18.2.
ARTICLE 19
FEES AND EXPENSES
SECTION 19.1. If an Event of Default shall have occurred, Landlord may (l)
perform the same for the account of Tenant, or (2) make any expenditure or incur
any obligation for the payment of money in connection with any obligation owed
to Landlord, including, but not limited to, reasonable attorneys fees and
disbursements in instituting, prosecuting or defending any action or proceeding,
and in either case the cost thereof with interest thereon at the Applicable Rate
shall be deemed to be Additional Rent hereunder and shall be paid by Tenant to
Landlord within ten (10) days after rendition of any bill or statement to Tenant
therefor. In addition, Tenant shall pay Landlord any reasonable attorneys fees
and disbursements incurred by Landlord in connection with any proceeding in
which the value for the use and occupancy of the Premises by Tenant is being
determined (whether or not any such proceeding results from a default by Tenant
under this Lease).
SECTION 19.2. If Tenant shall fail to pay any installment of Fixed Rent,
Additional Rent or any other item of Rental for a period longer than five (5)
days after the same shall have become due, Tenant shall pay to Landlord, in
addition to such installment of Fixed Rent, Additional Rent or other item of
Rental, as the Case may be, as a late charge and as Additional Rent, a sum equal
to interest at the Applicable Rate on the amount unpaid, computed from the date
such payment was due, without regard to any such grace period, to and including
the date of payment.
ARTICLE 20
NO REPRESENTATIONS BY LANDLORD
SECTION 20.1. LANDLORD AND LANDLORD'S AGENTS HAVE MADE NO REPRESENTATIONS,
PROMISES OR WARRANTIES EXPRESS OR IMPLIED, INCLUDING WITHOUT LIMITATION,
WARRANTIES OF SUITABILITY, HABITABILITY AND FITNESS FOR A PARTICULAR USE OR
PURPOSE WITH RESPECT TO THE PREMISES EXCEPT AS HEREIN EXPRESSLY SET FORTH, AND
NO RIGHTS, EASEMENTS OR LICENSES ARE ACQUIRED BY TENANT BY IMPLICATION OR
OTHERWISE EXCEPT AS EXPRESSLY SET FORTH HEREIN. TENANT SHALL ACCEPT POSSESSION
OF THE
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PREMISES IN ITS "AS IS" CONDITION ON THE COMMENCEMENT DATE, AND LANDLORD SHALL
HAVE NO OBLIGATION TO PERFORM ANY WORK OR MAKE ANY INSTALLATIONS IN ORDER TO
PREPARE THE PREMISES FOR TENANT'S OCCUPANCY. THE TAKING OF OCCUPANCY OF THE
WHOLE OR ANY PART OF THE PREMISES BY TENANT SHALL BE CONCLUSIVE EVIDENCE, AS
AGAINST TENANT, THAT TENANT ACCEPTS POSSESSION OF THE SAME AND THAT THE PREMISES
WERE IN GOOD AND SATISFACTORY CONDITION AT THE TIME SUCH OCCUPANCY WAS SO TAKEN.
All references in this Lease to the consent or approval of Landlord shall be
deemed to mean the written consent or approval executed by Landlord and no other
consent or approval of Landlord shall be effective for any purpose whatsoever.
ARTICLE 21
END OF TERM
SECTION 21.1. Upon the expiration or other termination of this Lease,
Tenant shall quit and surrender to Landlord the Premises, vacant, broom clean,
in good order and condition, ordinary wear and tear excepted, and Tenant shall
remove all of Tenant's Alterations as may be required pursuant to Article 6.
Tenant shall also remove all of Tenant's Property and all other personal
property and personal effects of all persons claiming through or under Tenant,
and shall pay the cost of repairing all damage to the Premises occasioned by
such removal. Any Tenant's Property or other personal property that remains in,
on or at the Premises after the termination of this Lease shall be deemed to
have been abandoned and either may be retained by Landlord as its property or
may be disposed of in such manner as Landlord may see fit. If Tenant's Property
or other personal property or any part thereof is sold, Landlord may receive and
retain the proceeds of such sale as the property of Landlord. Any expense
incurred by Landlord in removing or disposing of Tenant's Property or other
personal property or Alterations required to be removed as provided in Article
6, as well as the cost of repairing all damage to the Premises caused by such
removal, shall be reimbursed to Landlord by Tenant, as Additional Rent, on
demand.
SECTION 21.2. If the Expiration Date falls on a day which is not a
Business Day, then Tenant's obligations under Section 21.1 shall be performed on
or prior to such Business Day.
SECTION 21.3. If the Premises are not surrendered upon the expiration or
other termination of this Lease, Tenant hereby indemnifies Landlord against
liability resulting from delay by Tenant in so surrendering the Premises,
including any claims made by any succeeding tenant or prospective tenant founded
upon such delay and agrees to be liable to Landlord for (i) any payment or rent
concession which Landlord may be required to make to any tenant obtained by
Landlord for all or any part of the Premises in order to induce such tenant not
to terminate its lease by reason of the holding-over by Tenant and (ii) the loss
of the benefit of the bargain if any such tenant shall terminate its lease by
reason of the holding-over by Tenant.
SECTION 21.4. Tenant's obligations under this Article 21 shall survive the
expiration or termination of this Lease.
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ARTICLE 22
POSSESSION
SECTION 22.1. If Landlord shall be unable to deliver possession of the
Premises on the Commencement Date for any reason whatsoever, Landlord shall not
be subject to any liability therefor and the validity of this Lease shall not be
impaired thereby nor the Expiration Date extended, but the Commencement Date
shall be postponed until five (5) Business Days following notice from Landlord
that the Premises are available for occupancy by Tenant. Tenant expressly waives
any right to rescind this Lease under any present or future statute and further
expressly waives the right to recover any damages that may result from
Landlord's failure to deliver possession of the Premises on the Commencement
Date.
ARTICLE 23
NO WAIVER
SECTION 23.1. No act or thing done by Landlord or Landlord's agents during
the Term shall be deemed an acceptance of a surrender of the Premises, and no
agreement to accept such surrender shall be valid unless in writing signed by
Landlord. No employee of Landlord or of Landlord's agents shall have any power
to accept the keys to the Premises prior to the termination of this Lease. The
delivery of keys to any employee of Landlord or of Landlord's agents shall not
operate as a termination of this Lease or a surrender of the Premises.
SECTION 23.2. The failure of Landlord to seek redress for violation of, or
to insist upon the strict performance of, any covenant or condition of this
Lease shall not prevent a subsequent act, which would have originally
constituted a violation, from having all of the force and effect of an original
violation. The receipt by Landlord of Fixed Rent, Additional Rent or any other
item of Rental with knowledge of the breach of any covenant of this Lease shall
not be deemed a waiver of such breach. No provision of this Lease shall be
deemed to have been waived by Landlord, unless such waiver shall be in writing
and shall be signed by Landlord. No payment by Tenant or receipt by Landlord of
a lesser amount than the Rental then due and payable shall be deemed to be other
than on account of the earliest item(s) of Rental, or as Landlord may elect to
apply the same, nor shall any endorsement or statement on any check or any
letter accompanying any check or payment be deemed an accord and satisfaction,
and Landlord may accept such check or payment without prejudice to Landlord's
right to recover the balance due of the Rental or to otherwise pursue any other
remedy in this Lease provided. This Lease contains the entire agreement between
the parties and all prior negotiations and agreements are merged herein. Any
executory agreement hereafter made shall be ineffective to change, discharge or
effect an abandonment of this Lease in whole or in part unless such executory
agreement is in writing and signed by the party against whom enforcement of the
change, discharge or abandonment is sought.
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ARTICLE 24
WAIVER OF TRIAL BY JURY
SECTION 24.1. Tenant hereby waives trial by jury in any action or
proceeding brought by or against the Tenant with respect to any matters
whatsoever arising out of or in any way connected with this Lease, the
relationship of Landlord and Tenant, Tenant's use or occupancy of the Premises,
whether during or after the Term, or for the enforcement of any remedy under any
statute, emergency or otherwise. If Landlord shall commence any summary
proceeding against Tenant, Tenant will not interpose any counterclaim of
whatever nature or description in any such proceeding, and will not seek to
consolidate such proceeding with any other action which may have been or will be
brought in any other court by Tenant or Landlord.
ARTICLE 25
INABILITY TO PERFORM
SECTION 25.1. This Lease and the obligation of Tenant to pay Rental
hereunder and to perform all of the other covenants and agreements hereunder on
the part of Tenant to be performed shall in no way be affected, impaired or
excused because Landlord is unable to fulfill any of Landlord's obligations
under this Lease, expressly or implicitly to be performed by Landlord, or
because Landlord is unable to make or is delayed in making any repairs, or is
unable to supply or is delayed in supplying any services, if Landlord is
prevented from or delayed in so doing by reason of acts of God, casualty,
strikes or labor troubles, accident, governmental preemption in connection with
an emergency, Requirements, conditions of supply and demand which have been or
are affected by war or other emergency, or any other cause whatsoever, whether
similar or dissimilar to the foregoing, beyond Landlord's reasonable control
("UNAVOIDABLE DELAYS").
ARTICLE 26
NOTICES
SECTION 26.1.
(A) Except as otherwise expressly provided in this Lease, any bills,
statements, consents, notices, demands, requests or other communications given
or required to be given under this Lease ("NOTICE(S)") shall be in writing and
shall be deemed sufficiently given or rendered if delivered by hand (against a
signed receipt) or if deposited with a nationally recognized overnight courier
and in either case addressed:
IF TO TENANT:
4801 Woodway Drive, Suite 300E
Houston, Texas 77056
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WITH A COPY TO:
Bracewell & Patterson, L.L.P.
711 Louisiana St., Suite 2900
Houston, Texas 77002
Attn: Thomas W. Adkins
(a) at Tenant's address first set forth in this Lease or (b) at any
place where Tenant or any agent or employee of Tenant may be found
if given subsequent to Tenant's vacating, deserting, abandoning or
surrendering the Premises, and
IF TO LANDLORD:
17402 Bending Cypress
Cypress, Texas 77429
and any Mortgagee who may have requested the same, by Notice given
in accordance with the provisions of this Article 26, at the address
designated by such Mortgagee,
or to such other address(es) as either Landlord or Tenant may
designate as its new address(es) for such purpose by notice given to
the other in accordance with the provisions of this Article 26.
(B) Notices shall be deemed to have been rendered or given (a) on
the date delivered, if delivered by hand, or (b) on the day after being
deposited with a nationally recognized overnight courier as provided in Section
26.1(A) hereof.
ARTICLE 27
LANDLORD'S AGREEMENT ON WAIVER
SECTION 27.1. Landlord agrees that from time to time the Tenant shall
mortgage and grant security interest in the inventory, equipment, accounts,
general intangibles and other personal property of the Tenant (collectively, the
"Pledged Property") to Bank One, Texas, N.A., as Agent for a group of lenders
(in such capacity, the "Agent"), or to such other lender or lenders from time to
time, which Pledged Property may now or hereafter be situated upon the Premises.
For valuable consideration, the receipt of which is hereby acknowledged, by the
Landlord, the Landlord hereby waives all landlords' liens, whether contractual,
statutory, constitutional or otherwise that the Landlord now has or hereafter
may obtain against the Pledged Property, and all of the liens, security
interests, claims and other interests that the Landlord now has or hereafter may
obtain against the Pledged Property. The Landlord agrees that the Agent may, at
any time upon reasonable notice to the Landlord, enter and remove the Pledged
Property from the Premises. This waiver binds the Landlord, its successors, and
assigns.
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ARTICLE 28
BROKER
SECTION 28.1. Landlord represents and warrants to Tenant that Landlord has
not dealt with any broker or Person in connection with this Lease. Tenant
represents and warrants to Landlord that Tenant has not dealt with any broker or
Person in connection with this Lease. The execution and delivery of this Lease
by Tenant shall be conclusive evidence that Tenant acknowledges that Landlord
has relied upon the foregoing representation and warranty. Tenant shall
indemnify and hold harmless Landlord from and against any and all claims for
commission, fee or other compensation by any broker or Person who claims to have
dealt with Tenant in connection with this Lease and for any and all costs
incurred by Landlord in connection with such claims, including, without
limitation, attorneys' fees and disbursements. The provisions of this Article 28
shall survive the expiration or earlier termination of this Lease.
ARTICLE 29
INDEMNITY
SECTION 29.1. Tenant shall not do or permit any act or thing to be done
in, at or upon the Premises that may subject any Indemnitee to any liability or
responsibility for injury, damage to persons or property or to any liability by
reason of the existence or application of, compliance with or violation of any
Requirement, but shall exercise such control over the Premises as to protect
each Indemnitee fully against any such liability and responsibility. Tenant
shall indemnify and save harmless the Indemnitees from and against (a) all
claims of whatever nature against the Indemnitees arising from any act, omission
or negligence of Tenant or Persons Within Tenant's Control, (b) all claims
against the Indemnitees arising from any accident, injury or damage whatsoever
caused to any person or to the property of any person and occurring in or about
the Premises during the Term or during Tenant's occupancy of the Premises,
unless and to the extent caused by the gross negligence of Landlord or its
shareholders, officers and employees, (c) all claims against the Indemnitees
arising from any accident, injury or damage occurring outside of the Premises
but anywhere within or about the Premises, where such accident, injury or damage
results or is claimed to have resulted from an act, omission or negligence of
Tenant or Persons Within Tenant's Control, and (d) any breach, violation or
non-performance of any covenant, condition or agreement contained in this Lease
to be fulfilled, kept, observed and performed by Tenant. This indemnity and hold
harmless agreement shall include indemnity from and against any and all
liability, claims, fines, suits, demands, costs and expenses of any kind or
nature (including, without limitation, attorneys' fees and disbursements)
incurred in or in connection with any such claim or proceeding brought thereon,
and the defense thereof.
SECTION 29.2. If any claim, action or proceeding is made or brought
against any Indemnitee, against which claim, action or proceeding Tenant is
obligated to indemnify such Indemnitee pursuant to the terms of this Lease,
then, upon demand by the Indemnitee, Tenant, at its sole cost and expense, shall
resist or defend such claim, action or proceeding in the Indemnitee's name, if
necessary, by such attorneys as the Indemnitee may select, including, without
limitation, attorneys for the Indemnitee's insurer. The provisions of this
Article 29 shall survive the expiration or earlier termination of this Lease.
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ARTICLE 30
ADJACENT EXCAVATION
SECTION 30.1. If an excavation shall be made upon land adjacent to the
Premises, or shall be authorized to be made, Tenant shall, upon reasonable
advance notice, afford to the person or entity causing or authorized to cause
such excavation, a limited license to enter upon the Premises for the purpose of
doing such work as said person or entity deems necessary to preserve the walls
of any building located on the Premises from injury or damage and to support the
same by proper foundations without any claim for eviction or constructive
eviction, damages or indemnity against Landlord, or diminution or abatement of
Rental.
ARTICLE 31
RENEWAL OPTIONS
SECTION 31.1. Provided that the Tenant is not in default with respect to
any of its obligations to the Landlord under and pursuant to the terms and
conditions of this Lease at the time each Option (as such term is hereinafter
defined) is to be exercised, the Tenant shall have the option to renew this
Lease for two (2) additional five (5) year periods [the option with respect to
each additional five (5) year period is referred to herein as an "OPTION" and,
collectively, all of the options granted herein are referred to as the
"OPTIONS"] as follows:
OPTION PERIOD 1 shall commence on July 1, 2002 and shall continue up to
and including June 30, 2007.
OPTION PERIOD 2 shall commence on July 1, 2007 and shall continue up to
and including June 30, 2012.
(each of the aforementioned option periods is individually referred to
herein as an "OPTION PERIOD" and, collectively, all of the aforementioned
Option Periods are referred to herein as "OPTION PERIODS")
SECTION 31.2. Each Option granted to the Tenant pursuant to the provisions
of Section 31.1 hereof shall be exercised by the Tenant giving written notice to
the Landlord of the Tenant's intent to exercise the Option not less than
one-hundred eighty (180) days prior to the expiration of the Initial Term or not
less than one-hundred eighty (180) days prior to the expiration of the Option
Period which is then in effect, as the case may be. Time is of the essence in
the exercise of the Options and should Tenant fail to exercise any of said
Options by timely notice, said Options shall lapse and be of no further force or
effect.
SECTION 31.3. In the event that the Tenant exercises the Option with
respect to any Option Period, the Landlord and the Tenant hereby agree that this
Lease shall continue in full force and effect and remain unamended during the
applicable Option Period AND specifically, without limitation, that the Fixed
Rent payable by the Tenant to the Landlord during such Option Period shall be
increased on each anniversary date from and after the Commencement Date in
accordance with the provisions of Article 8 hereof.
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ARTICLE 32
RENT REGULATION
SECTION 32.1. If at any time or times during the Term of this Lease, the
Rental reserved in this Lease is not fully collectible by reason of any
Requirement, Tenant shall enter into such agreements and take such other steps
as Landlord may request and as may be legally permissible to permit Landlord to
collect the maximum rents that may from time to time during the continuance of
such legal rent restriction be legally permissible (and not in excess of the
amounts reserved under this Lease). Upon the termination of such legal rent
restriction (a) the Rental shall become and thereafter be payable hereunder in
accordance with the amounts reserved in this Lease for the remainder of the
Term, and (b) Tenant shall pay to Landlord, if legally permissible, an amount
equal to (i) the items of Rental that would have been paid pursuant to this
Lease but for such legal rent restriction less (ii) the rents paid by Tenant to
Landlord during the period or periods such legal rent restriction was in effect.
This provision shall survive the expiration or earlier termination of this Lease
to the maximum enforceable extent.
ARTICLE 33
COVENANT OF QUIET ENJOYMENT
SECTION 33.1. Landlord covenants that, upon Tenant paying all Fixed Rent
and Additional Rent and observing and performing all the terms, agreements,
covenants, provisions and conditions of this Lease on Tenant's part to be
observed and performed, Tenant may peaceably and quietly enjoy the Premises,
subject nevertheless to the terms and conditions of this Lease; provided,
however, that no eviction of Tenant by reason of the foreclosure of any Mortgage
now or hereafter affecting the Premises shall be construed as a breach of this
covenant nor shall any action by reason thereof be brought against Landlord, and
provided further that this covenant shall bind and be enforceable against
Landlord or any successor to Landlord's interest, subject to the terms hereof,
only so long as Landlord or any successor to Landlord's interest, is in
possession and is collecting rent from Tenant but not thereafter.
ARTICLE 34
MISCELLANEOUS
SECTION 34.1. This Lease is presented for signature by Tenant and it is
understood that this Lease shall not constitute an offer by or be binding upon
Landlord unless and until Landlord shall have executed and delivered a fully
executed copy of this Lease to Tenant.
SECTION 34.2. The obligations of Landlord under this Lease shall not be
binding upon Landlord named herein after the sale, conveyance, assignment or
transfer by such Landlord (or upon any subsequent landlord after the sale,
conveyance, assignment or transfer by such subsequent landlord) of its interest
in the Premises, as the case may be, and in the event of any such sale,
conveyance, assignment or transfer, Landlord shall be and hereby is entirely
freed and relieved of all covenants and obligations of Landlord under this Lease
thereafter arising, and the transferee shall be deemed to have assumed, subject
to the remaining provisions of this Section 34.2, all obligations of the
Landlord under this Lease arising after the effective date of the
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transfer. No trustee, partner, principal, shareholder, director or officer of
Landlord (collectively, the "PARTIES") shall have any direct or personal
liability for the performance of Landlord's obligations under this Lease, and
Tenant shall look solely to Landlord's interest in the Premises to enforce
Landlord's obligations hereunder and shall not otherwise seek any damages
against Landlord or any of the Parties whatsoever. Tenant shall not look to any
other property or assets of Landlord or any property or assets of any of the
Parties in seeking either to enforce Landlord's obligations under this Lease or
to satisfy a judgment for Landlord's failure to perform such obligations.
SECTION 34.3. Notwithstanding anything contained in this Lease to the
contrary, all amounts payable by Tenant to or on behalf of Landlord under this
Lease, whether or not expressly denominated Fixed Rent, Additional Rent or
Rental, shall constitute rent for the purposes of Section 502(b)(7) of the
Bankruptcy Code.
SECTION 34.4. Neither this Lease nor any memorandum of this Lease shall be
recorded without the prior written consent of the Landlord, which consent may be
withheld by the Landlord in its sole and absolute discretion.
SECTION 34.5. Except as otherwise expressly stated in this Lease, any
consent or approval required to be obtained from Landlord may be granted by
Landlord in its sole and absolute discretion. In any instance in which Landlord
agrees not to act unreasonably, Tenant hereby waives any claim for damages
against or liability of Landlord that Tenant may have based upon any assertion
that Landlord has unreasonably withheld or unreasonably delayed any consent or
approval requested by Tenant, and Tenant agrees that its sole remedy shall be an
action or proceeding to enforce any related provision or for specific
performance, injunction or declaratory judgment. If with respect to any required
consent or approval Landlord is required by the express provisions of this Lease
not to unreasonably withhold or delay its consent or approval, and if it is
determined in any such proceeding referred to in the preceding sentence that
Landlord acted unreasonably, the requested consent or approval shall be deemed
to have been granted; however, Landlord shall have no liability whatsoever to
Tenant for its refusal or failure to give such consent or approval. Tenant's
sole remedy for Landlord's unreasonably withholding or delaying consent or
approval shall be as provided in this Section 34.5.
SECTION 34.6. Landlord shall have the right at any time, and from time to
time, to amend unilaterally the provisions of this Lease if Landlord is advised
by its counsel that all or any portion of the Rental paid by Tenant to Landlord
hereunder is, or may be deemed to be, unrelated business taxable income within
the meaning of the United States Internal Revenue Code or regulations issued
thereunder, and Tenant agrees that it will execute all documents necessary to
effect any such amendment, provided that no such amendment shall increase
Tenant's payment obligations or other liability under this Lease nor reduce
Landlord's obligations hereunder.
SECTION 34.7. If Tenant shall remain in possession of the Premises after
the Expiration Date, without the execution by both Tenant and Landlord of a new
lease, Tenant, at the election of Landlord, shall be deemed to be occupying the
Premises as a Tenant from month-to-month, at a monthly rental equal to three
(3x) times the Rental payable during the last month of the Term, subject to all
the other conditions, provisions and obligations of this Lease insofar as the
same are applicable to a month-to-month tenancy.
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SECTION 34.8. This Lease shall be construed without regard to any
presumption or other rule requiring construction against the party causing this
Lease to be drafted. If any words or phrases in this Lease are stricken out or
otherwise eliminated, whether or not any other words or phrases have been added,
this Lease shall be construed as if the words or phrases so stricken out or
otherwise eliminated were never included in this Lease and no implication or
inference shall be drawn from the fact that such words or phrases were stricken
out or otherwise eliminated.
SECTION 34.9. If any of the provisions of this Lease, or the application
thereof to any person or circumstance, shall, to any extent, be invalid or
unenforceable, the remainder of this Lease, or the application of such
provisions to persons or circumstances other than those as to whom or which it
is held invalid or unenforceable, shall not be affected thereby and shall remain
valid and enforceable, and every provision of this Lease shall be valid and
enforceable to the fullest extent permitted by law.
SECTION 34.10. Landlord shall have the right to erect any gate, chain or
other obstruction or to close off any portion of the Premises to the public at
any time to the extent necessary to prevent a dedication thereof for public use.
SECTION 34.11. Tenant hereby represents to Landlord that it is not
entitled, directly or indirectly, to diplomatic or sovereign immunity and Tenant
agrees that in all disputes arising directly or indirectly out of this Lease
Tenant shall be subject to service of process in, and the jurisdiction of the
courts of, the State of Texas. The provisions of this Section 34.11 shall
survive the expiration of this Lease.
SECTION 34.12. This Lease contains the entire agreement between the
parties and all prior negotiations and agreements are merged into this Lease.
Except as provided in Section 34.6 this Lease may not be changed, abandoned or
discharged, in whole or in part, nor may any of its provisions be waived except
by a written agreement that (a) expressly refers to this Lease, (b) is executed
by the party against whom enforcement of the change, abandonment, discharge or
waiver is sought and (c) is permissible under the Mortgage(s).
SECTION 34.13. Any apportionment or prorations of Rental to be made under
this Lease shall be computed on the basis of a three hundred sixty (360) day
year, with twelve (12) months of thirty (30) days each.
SECTION 34.14. The laws of the State of Texas applicable to contracts made
and to be performed wholly within the State of Texas shall govern and control
the validity, interpretation, performance and enforcement of this Lease without
regard to principles of conflicts of law.
SECTION 34.15. If Tenant is a corporation, each person executing this
Lease on behalf of Tenant hereby covenants, represents and warrants that Tenant
is a duly incorporated or duly qualified (if foreign) corporation and is
authorized to do business in the State of Texas (a copy of evidence thereof to
be supplied to Landlord upon request); and that each person executing this Lease
on behalf of Tenant is an officer of Tenant and that he or she is duly
authorized to execute, acknowledge and deliver this Lease to Landlord (a copy of
a resolution to that effect to be supplied to Landlord upon request).
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SECTION 34.16. The captions are inserted only as a matter of convenience
and for reference and in no way define, limit or describe the scope of this
Lease nor the intent of any provision thereof.
SECTION 34.17. The covenants, conditions and agreements contained in this
Lease shall bind and inure to the benefit of Landlord and Tenant and their
respective legal representatives, heirs, successors, and, except as otherwise
provided in this Lease, their assigns.
SECTION 34.18. For the purposes of this Lease and all agreements
supplemental to this Lease, unless the context otherwise requires:
(A) The words "herein", "hereof", "hereunder" and "hereby"and words of
similar import shall be construed to refer to this Lease as a whole and not to
any particular Article or Section unless expressly so stated.
(B) Tenant's obligations hereunder shall be construed in every instance as
conditions as well as covenants, each separate and independent of any other
terms of this Lease.
(C) Reference to Landlord as having "no liability" or being "without
liability" shall mean that Tenant shall not be entitled to terminate this Lease,
or to claim actual or constructive eviction, partial or total, or to receive any
abatement or diminution of rent, or to be relieved in any manner of any of its
other obligations hereunder, or to be compensated for loss or injury suffered or
to enforce any other right or liability whatsoever against Landlord under or
with respect to this Lease or with respect to Tenant's use or occupancy of the
Premises.
(D) Reference to "termination of this Lease" or "expiration of this Lease"
and words of like import includes expiration or sooner termination of this Lease
and the Term and the estate hereby granted or cancellation of this Lease
pursuant to any of the provisions of this Lease or by law. Upon the termination
of this Lease, the Term and estate granted by this Lease shall end at noon on
the date of termination as if such date were the Fixed Expiration Date, and
neither party shall have any further obligation or liability to the other after
such termination except (i) as shall be expressly provided for in this Lease,
and (ii) for such obligations as by their nature under the circumstances can
only be, or by the provisions of this Lease, may be, performed after such
termination, and, in any event, unless expressly otherwise provided in this
Lease, any liability for a payment (which shall be apportioned as of such
termination) which shall have accrued to or with respect to any period ending at
the time of termination shall survive the termination of this Lease.
(E) Words and phrases used in the singular shall be deemed to include the
plural and vice versa, and nouns and pronouns used in any particular gender
shall be deemed to include any other gender.
(F) The rule of "ejusdem generis" shall not be applicable to limit a
general statement following or referable to an enumeration of specific matters
to matters similar to the matters specifically mentioned.
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IN WITNESS WHEREOF, Landlord and Tenant have duly executed this Lease as of the
day and year first above written.
"LANDLORD":
THOMAS J. BEATY
By: ____________________________
BONNIE J. BEATY
By: ____________________________
"TENANT":
ACCURATE AIR SYSTEMS, INC.
By: ____________________________
Name: __________________________
Title: _________________________
36
EXHIBIT 10.20
LEASE
THIS LEASE is dated as of the 1st day of July, 1997, by and between
NOTHUM DEVELOPMENT, L.L.C., an Arizona limited liability company ("Lessor"), and
TRI-CITY MECHANICAL, INC., an Arizona corporation ("Lessee").
W I T N E S S E T H:
ARTICLE 1
DEFINITIONS
The following terms used in this Lease shall have the meanings
described below:
BUILDINGS. All the buildings, and fixtures and equipment therein or
thereon situated upon the Demised Premises, during the Lease Term, and any and
all renewals, replacements, additions to and substitutions for any such
Buildings and fixtures and equipment.
DEFAULT RATE. Fifteen percent (15%) per annum.
DEMISED PREMISES. The real property, exclusive of the Buildings more
particularly described on EXHIBIT "A", together with the easements, rights,
privileges and appurtenances thereto.
EVENT OF DEFAULT. The occurrence of any event described in ARTICLE
17.
EXTENDED LEASE TERM. One (1) additional period of sixty (60) months,
commencing upon the expiration of the Initial Lease Term, when exercised by
Lessee in accordance with SS.2.02.
FEE MORTGAGE. A mortgage on the fee interest in the Demised
Premises, which shall be deemed to include a deed of trust and the note or other
credit instrument secured thereby.
FEE MORTGAGEE. A mortgagee under a Fee Mortgage, or the trustee and
beneficiary under a deed of trust.
FORCE MAJEURE. Any delay in Lessee's or Lessor's non-monetary
obligations caused by acts of God or the public enemy, or by casualty or by
strike, or by governmental restrictions upon the availability or use of labor or
materials necessary to perform such obligations, or by reason of any other fact,
matter or condition beyond the control of Lessee or Lessor, respectively.
FORECLOSURE. The exercise of remedies under a Fee Mortgage and the
enforcement of the rights of a beneficiary under a deed of trust and the
exercise of the power of sale thereunder and the tender and acceptance of a
warranty deed in lieu of foreclosure or forfeiture.
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IMPOSITIONS. All real estate taxes, personal property taxes, rental
taxes (whether denominated as rental, privilege, sales, transportation, excise
or otherwise), assessments (arising from an improvement district or otherwise),
sewer rents, water meter and water charges, levies, license and permit fees,
charges for public utilities and all other charges of whatsoever kind and nature
and whether any of the foregoing be general or special, ordinary or
extraordinary, or foreseen or unforeseen, which at any time during the Lease
Term may be imposed upon the rent and other payments due hereunder, the Demised
Premises, the Building and/or the Improvements.
IMPROVEMENTS. All improvements and structures other than Buildings
at any time during the Lease Term erected or situated upon the Demised Premises,
and any and all renewals, replacements, additions to and substitutions for any
such Improvements.
INITIAL LEASE TERM. The term commencing on the Rent Commencement
Date and ending upon the expiration of one hundred twenty (120) months
thereafter.
LEASE. This agreement.
LEASE DATE. The date first set forth above, which shall be deemed to
be the date of execution of this Lease by both parties.
LEASE TERM. Where no distinction is made, the Initial Lease Term
and/or the Extended Lease Term(s).
MINIMUM RENT.
(a) Forty-Four Thousand One Hundred Seventy-Five and No/100
Dollars ($44,175.00) representing the first month's Minimum Rent shall be
payable upon the execution hereof.
(b) Minimum Rent shall increase on each second anniversary of
the Rent Commencement Date by an amount equal to six percent (6%) of the Minimum
Rent due for the preceding month.
(c) Minimum Rent during the Extended Lease Term shall be
payable in accordance with EXHIBIT "B" attached hereto.
(d) Minimum Rent shall be payable on the first day of each
month (except as provided in subparagraph (a) above). If the Rent Commencement
Date is on other than the first day of the month, the monthly rent for the first
month and last month shall be prorated on a daily basis.
NEW IMPOSITIONS. Impositions arising as a result of the events more
particularly described in SS.5.07.
PAD. The aggregate of the Demised Premises and the Improvements and
Buildings thereon.
RENT COMMENCEMENT DATE. The date upon which the Lessor receives a
Certificate of Occupancy for the Building and Improvements.
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ARTICLE 2
DEMISED PREMISES--TERM OF LEASE--OPTION
ss.2.011. (a) Lessor, in consideration of the rents, covenants and
agreements hereinafter reserved, on the part of Lessee to be performed, leases
to Lessee, and Lessee leases from Lessor, the Pad, including all Buildings and
Improvements therein or thereon as of the Rent Commencement Date, for the Lease
Term, unless this Lease shall sooner terminate as hereinafter provided.
(b) Lessor hereby represents and warrants to Lessee that
it is the owner of fee simple title to the Demised Premises subject to all
matters of record.
ss.2.012. (a) Lessee shall have one (1) option to extend the Initial
Lease Term for an additional period of sixty (60) months, such Extended Lease
Term to begin upon the expiration of the Initial Lease Term. The same terms and
conditions as herein set forth shall apply to the Extended Lease Term (except
the option to renew), and the Minimum Rent shall be as set forth in ARTICLE 1.
If Lessee shall elect to exercise the aforesaid options, it shall do so by
giving written notice to Lessor not less than twelve (12) months prior to the
expiration of the Initial Lease Term.
(b) Notwithstanding the foregoing, Lessee may exercise
the option only if, at the time of notice of exercise of such option and as of
the date of the commencement of the Extended Lease Term, an Event of Default
does not then exist.
ARTICLE 3
RENT
ss.3.011. Lessee covenants and agrees to pay to Lessor during the
entire Lease Term, Minimum Rent (commencing on the Rent Commencement Date) at
the times, in the amounts and as provided in ARTICLE 1 and all other charges and
amounts at the time provided for herein together with all sales, rental, excise
or privilege taxes payable on such amounts. The Minimum Rent and other charges
shall be paid to Lessor by Lessee without notice or demand and without
abatement, deduction or set-off.
ss.3.012. Commencing on the Rent Commencement Date, Lessee covenants
and agrees to pay all Impositions to Lessor, or as otherwise provided herein.
ss.3.013. It is the purpose and intent of Lessor and Lessee that the
Minimum Rent shall be absolutely net to Lessor, so that this Lease shall yield,
net to Lessor, the Minimum Rent specified herein and that all costs, operating
expenses, Impositions, excise, rental, sales and privilege taxes, premiums,
fees, interest, charges, expenses, reimbursements and obligations of every kind
and nature whatsoever relating to the Pad, excepting only certain taxes of
Lessor as provided in SS.4.02 and any Fee Mortgage which may arise or become due
during or out of the term of this Lease, shall be paid or discharged by the
Lessee, and that Lessor shall be indemnified and saved harmless by Lessee from
and against such costs, operating expenses, Impositions, premiums, fees,
interest, charges, expenses, reimbursements and obligations, and Lessee
expressly covenants to pay all of the foregoing.
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ARTICLE 4
PAYMENT OF TAXES, ASSESSMENTS AND CARRYING CHARGES
ss.4.011. Lessee shall pay or cause to be paid (except as provided
in SS.4.02), before any fine, penalty, interest or cost may be added thereto,
all Impositions, provided, however, that:
(a) if, by law, any Imposition may at the option of the
Lessee be paid in installments (whether or not interest shall accrue
on the unpaid balance of such Imposition), Lessee may exercise the
option to pay the same, including any accrued interest on the unpaid
balance of such Imposition, in installments and, in such event,
shall pay only such installments as may become due during the term
of this Lease as the same respectively become due and before any
fine, penalty, further interest or cost may be added thereto; and
(b) any Imposition, except Impositions which have been
converted into installment payments by Lessee, as referred to in
SS.4.01(A), relating to a fiscal period of the taxing authority, a
part of which period is included within the Lease Term and a part of
which is included in a period of time after the expiration of the
Lease Term, shall, whether or not such Imposition shall be assessed
or become a lien upon the Demised Premises or the Building or the
Improvements, or shall become payable, during the Lease Term, be
adjusted between Lessor and Lessee as of the expiration of the Lease
Term, so that Lessee shall pay that portion of such Imposition which
that part of such fiscal period included in the period of time
before the expiration of the Lease Term bears to such fiscal period,
and Lessor shall pay the remainder thereof.
ss.4.012. Nothing herein contained shall require Lessee to pay
municipal, state or federal income, gift, estate, inheritance or excess profits
taxes assessed against Lessor.
ss.4.013. Lessee shall have the right to contest the amount or
validity, in whole or in part, of any Imposition by appropriate proceedings
diligently conducted in good faith, in which event, notwithstanding the
provisions of SS.4.01, Lessee may postpone or defer payment of such Imposition
if neither the Demised Premises, the Building nor the Improvements would by
reason of such postponement or deferment be in danger of being forfeited or
lost. Upon the termination of any such proceedings, Lessee shall pay the amount
of such Imposition or part thereof, if any, as finally determined in such
proceedings, the payment of which may have been deferred during the prosecution
of such proceedings.
ss.4.014. Lessor shall join in any proceedings referred to in
SS.4.03 if the provisions of any law, rule or regulation shall require that such
proceedings be brought by or in the name of Lessor, in which event Lessor shall
join in such proceedings or permit the same to be brought in its name, provided
that Lessor shall not ultimately be subjected to any liability for the payment
of any fees, including reasonable counsel fees, costs and expenses. Lessor may
retain independent counsel in connection with any such proceedings and Lessee
shall pay the actual, reasonable and necessary expenses therefor. Lessee shall
indemnify Lessor from and against all claims arising from Lessee's contest of
any Impositions.
ss.4.015. Lessor and Lessee agree to each furnish the other with
whatever information, documents or records that may be required and otherwise
cooperate so as to permit the Demised Premises
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to be assigned a separate Maricopa County Tax Roll number. Lessee agrees that
should the Demised Premises be separately assessed, Lessee shall pay such
separately assessed Imposition(s) according to this Article.
ss.4.016. In the event the Demised Premises are not separately
assessed, but are part of a larger parcel for assessment purposes (hereinafter
referred to as the "larger parcel") then Impositions for which Lessee is
responsible hereunder shall be a fractional portion of the Impositions on the
larger parcel the numerator of which shall be the total area of the Demised
Premises and the denominator of which shall be the total area of the larger
parcel as to the "land" portion of such assessment. If, however, there are
Buildings and Improvements on the Demised Premises, then the same calculation
shall be made by comparing the area of the Buildings on the Demised Premises to
the area of the buildings on the larger parcel and adding such amount to the
"land" amount to determine Lessee's total share. With respect to any Impositions
which under the laws then in force may be evidenced by improvement or other
bonds, or may be paid in annual installments, only the amount of such annual
installment (with appropriate proration for any partial year) and statutory
interest shall be included with the computation of the Impositions levied
against the Demised Premises.
ss.4.017. If at any time during the Lease Term, any authority having
the power to tax shall alter the methods and/or standards of taxation and
assessment, against the legal or equitable interests of Lessor or Lessor's
lender in the Demised Premises or the remainder of the Pad in whole or in part,
so as to impose a tax or taxes in lieu of or in addition to the tax or taxes in
existence as of the date of this Lease, such taxes or assessments shall be paid
by Lessee. Any special, unforeseen or extraordinary New Impositions, however
described, shall be considered as "taxes" for the purposes of this Lease,
excluding, however, from such taxes all general income taxes, gift taxes,
inheritance taxes and estate taxes.
ss.4.018. Upon Lessor's notice to Lessee given at least fifteen (15)
days prior to the first day of any month, Lessor may require Lessee to deposit
with Lessor, in monthly installments, an amount equal to one-twelfth (1/12) of
the sum of the estimated Impositions for the calendar year in which the notice
was given ("Impounds"). Such estimate shall be based upon the prior calendar
year's Impositions. The Impounds shall be payable at the same time and manner as
Minimum Rent is due and payable under this Lease. If the Impounds for the
Impositions for a calendar year are insufficient to fully discharge the
Impositions for that calendar year, Lessor may notify Lessee at any time after
the end of such calendar year, and Lessee shall within ten (10) days thereafter
deposit with Lessor an amount equal to such deficiency. If the amount Lessee has
paid in Impounds for the prior calendar year is greater than the amount of
actual Impositions for such calendar year, then such excess shall, at the option
of Lessee, be refunded to Lessee by February 15th of the subsequent calendar
year or applied to the current year's Impound payments. If Lessee shall commit
an Event of Default, then all Impound amounts then held by Lessor may be applied
to any amounts due under this Lease whether for Minimum Rent, Impositions, late
charges, interest or other charges, in any order Lessor may determine. Lessee
shall not be entitled to interest on Impounds. If Impositions are not being paid
by Lessor, Lessee has the right to pay Impositions directly. In the event Lessor
shall fail to pay, for any reason, any taxes, assessments or Impositions as they
become due, Lessee shall be given prompt notice thereof and, at the option of
Lessee, Lessee may require that all Impositions be deposited in escrow, with an
escrow company of Lessee's choosing. In that event, all costs associated with
the escrow shall be paid equally by Lessor and Lessee.
ARTICLE 5
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SURRENDER
ss.5.011. Lessee covenants and agrees to not hold over without the
express written consent of Lessor and shall on the last day of the Lease Term or
upon any earlier termination of this Lease, or upon any entry or re-entry by
Lessor upon the Demised Premises after an Event of Default, surrender and
deliver up the Pad to the Lessor and, subject to the provisions of SS.14.03(B),
in good order, condition and repair, reasonable wear and tear excepted.
ss.5.012. Any property of Lessee which shall remain on the Demised
Premises, or in the Buildings, after the termination or expiration of this Lease
and the removal of Lessee from the Demised Premises and the Buildings may, at
the option of Lessor, be deemed to have been abandoned by Lessee and either may
be retained by Lessor as its property or be disposed of in such manner as Lessor
may see fit.
ARTICLE 6
INSURANCE
ss.6.011. Lessor shall, during the course of construction of the
Building and the Improvements, keep the Pad and all fixtures and equipment
installed therein by Lessor insured against loss or damage by fire and against
loss or damage by such other risks now or hereafter embraced by "Special Form
Property Insurance," so-called, and against such other risks or hazards and in
such amounts as a Fee Mortgagee shall require. Thereafter, such insurance shall
be maintained by Lessee during the Lease Term for a sum not less than one
hundred percent (100%) of the full replacement value of the Buildings and
Improvements erected upon the Demised Premises and not less than one hundred
percent (100%) of the full replacement cost of the furniture, fixtures and
equipment. Such insurance shall also insure the interest of Lessor and any Fee
Mortgagee. A Standard Mortgagee Endorsement shall be provided for the benefit of
such Fee Mortgagee. Flood hazard insurance shall also be maintained by Lessee if
required by any Fee Mortgagee.
ss.6.012. In addition to the insurance required above, Lessee, at
its sole cost and expense (except as provided below), shall purchase and
maintain during the entire Lease Term:
(a) A "Commercial General Liability Insurance" policy,
so called, insuring against claims for bodily injury, death or
property damage, occurring in, on or about the Demised Premises, the
Building and Improvements and on, in or about the adjoining streets,
avenues, property and passageways, naming the Lessor and the Lessee
as the insureds, such insurance to afford minimum protection, during
the term of this Lease, of not less than the amounts required by any
Fee Mortgagee and in any event in an initial amount of not less than
Two Million Dollars ($2,000,000.00). Such amount shall be increased
upon the reasonable demand of Lessor. Reasonableness for the
purposes of this subparagraph shall be determined by comparing the
construction of the Building and Improvements and the use then being
made of the Pad with other similarly constructed and operating
facilities in the Phoenix metropolitan area.
(b) Such other insurance insuring against such risks, in
such amounts with such protective provisions as may be reasonably
required from time to time by any Fee
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Mortgagee. Reasonableness for the purposes of this subparagraph
shall be determined by comparing the construction of the Building
and Improvements and the use then being made of the Pad with other
similarly constructed and operating facilities in the Phoenix
metropolitan area.
(c) "Business Income (and Extra Expense) Commercial
Property Insurance - Rental Value only," so called, against loss of
rent due to fire and the risks now or hereafter embraced by "Special
Form Property Insurance," so-called, naming the Lessor as a loss
payee.
ss.6.013. All insurance provided for in this ARTICLE 6 shall be
effected under valid and enforceable policies issued by insurers of recognized
responsibility which are licensed to do business in the State of Arizona and
which have been approved by Lessor and any Fee Mortgagee as to the
qualifications of insurers and the amounts of insurance to be written by each.
Prior to the Rent Commencement Date, and thereafter not less than twenty (20)
days prior to the expiration dates of the expiring policies theretofore
furnished pursuant to this ARTICLE 6, originals of the policies or evidence
thereof on form ACORD 27, in the case of bodily injury and property damage
liability insurance, bearing notations evidencing the payment of premiums or
accompanied by other evidence of such payment, shall be delivered by Lessee to
the person or entity entitled to approve any insurance company as provided above
in this section.
ss.6.014. Subject to ARTICLE 14 and to the provisions of any Fee
Mortgage, the proceeds of any insurance required to be maintained by the
provisions of this Article shall be payable to Lessor, or if paid to Lessee,
Lessee shall immediately and simultaneously pay them to Lessor, and shall be
used to restore the Demised Premises, Buildings and Improvements to their
original approximate value, and to replace furniture, fixtures and equipment but
for any use allowed by this Lease.
ss.6.015. Each insurance policy shall, to the extent obtainable,
have attached thereto (a) an endorsement that such policy shall not be cancelled
or materially changed without at least thirty (30) days' prior written notice to
the Lessor and any Fee Mortgagee; and (b) an endorsement to the effect that no
act or omission of the Lessee shall invalidate the interest of such person or
entity entitled to such notice.
ss.6.016. Each policy of insurance shall name, as an additional
insured, the Lessor and, in addition, such other persons, firms or corporations
as may be required under the terms of any Fee Mortgage. Copies of such policies
shall be delivered to Lessor.
ss.6.017. If, notwithstanding the provisions of SS.6.05, any
insurance which Lessee is required to obtain and maintain is cancelled, Lessee
shall, before such cancellation is effective (or, if such cancellation is
effective upon receipt of notice, within five (5) business days of the date such
notice is received), replace such insurance with other insurance providing
essentially the same or better coverages and essentially the same or greater
indemnity amounts. Lessee shall promptly deliver to Lessor evidence of such
replacement insurance.
ss.6.018. If Lessee fails to obtain the replacement insurance as
required by SS.6.07, then Lessor may (but shall not be required to) procure such
replacement insurance on Lessee's behalf and charge Lessee the premiums together
with a ten percent (10%) handling charge, payable upon demand.
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ss.6.019. Lessor and Lessee each hereby waive any and all rights of
recovery against the other or against the officers, employees, agents and
representatives of the other on account of loss or damage occasioned to such
waiving party or its property or the property of others under its control to the
extent that such loss or damage is insured against under any Special Form
Property Insurance policy which either may have in force at the time of such
loss or damage. Lessee and Lessor shall, at the time of procuring the policies
of insurance required under this Lease, give notice to the insurance carrier or
carriers that the foregoing mutual waiver of right of recovery is contained in
this Lease and each party shall cause each insurance policy obtained by it to
provide that the insurance company waives any right of recovery, by way of
subrogation, against either party in connection with any damage covered by any
policy of insurance.
ARTICLE 7
LESSOR'S RIGHT TO PERFORM LESSEE'S COVENANTS
ss.7.011. If Lessee shall at any time fail to pay any sum,
Imposition, cost or expense other than the Minimum Rent as provided in ARTICLE 3
which it is obligated to pay under the terms of this Lease, then Lessor, after
fifteen (15) days' written notice to Lessee (or without notice or upon a shorter
notice period in case of an emergency), and without waiving or releasing either
party from any obligation under this Lease and without being considered an
election of remedies, may, but shall be under no obligation to pay any such sum,
Imposition, cost or expense; provided, however, that no such payment shall be
made if Lessee has in fact paid the same before the expiration of the time
period and has given notice to Lessor.
ss.7.012. If Lessee shall at any time fail to perform or observe any
covenant or condition contained in this Lease, the performance of which involves
something more than merely the payment of money, then Lessor, after thirty (30)
days' written notice to Lessee (or without notice or upon a shorter notice
period in case of an emergency), and without waiving or releasing Lessee from
any obligation and without being considered an election of remedies, may perform
the same for the account of Lessee and charge Lessee the actual cost of any such
performance; provided, however, that if Lessee has in fact performed its
obligation before the expiration of the notice period, or in the case of
performance which by its nature cannot be completed within the notice period,
has begun diligent performance of the same and is continuing such performance in
a diligent fashion, and has given Lessor notice of such performance, then in
such event, Lessor shall not commence such performance on its own part.
ss.7.013. All sums so paid or expended by Lessor and all costs and
expenses, including reasonable attorneys' fees, incurred by Lessor in connection
with the performance of any such act, together with interest thereon at the
Default Rate from the respective dates of Lessor's making of each such payment
or incurring of each such cost and expense, including reasonable attorneys'
fees, shall be paid by Lessee to Lessor on demand.
ARTICLE 8
REPAIRS AND MAINTENANCE OF THE DEMISED PREMISES
ss.8.011. Throughout the entire Lease Term, Lessee, at its sole cost
and expense, shall take good care of the Demised Premises, the Building and
Improvements, and all plumbing, electrical and
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HVAC systems located thereon or therein and all furniture, fixtures and
equipment located therein and shall keep the same in first class order and
condition, and make all necessary repairs and replacements thereto, interior and
exterior, structural and nonstructural, ordinary and extraordinary or radical,
foreseen and unfore seen with due diligence and in good faith. When used in this
ARTICLE 8, the term "repairs" shall include all necessary replacements, renewals
and alterations. All repairs made by Lessee shall be at least equal in quality
and class to the original work. Lessee shall do, or cause others to do, all
necessary repairs of supporting walls and walls of the Building and comply with
all laws and ordinances with respect thereto and do every other act or thing for
the safety and preservation thereof which may be necessary by reason of any
excavation, subsurface construction, remodeling or other building operation upon
any adjoining property or street, avenue, alley, or passageway. After the
initial construction of the Building and Improvements, any subsequent
modifications, improvements or alterations to the Pad, the cost of which exceeds
Five Thousand Dollars ($5,000.00), shall require Lessor's prior written consent
to the plans therefor. Upon the expiration or earlier termination of this Lease,
all electrical, plumbing and HVAC systems located on, in or under the Pad and
all fixtures and equipment (except Lessee's personal property and equipment not
attached to the Building) shall be surrendered to Lessor in good operating and
clean condition, normal wear and tear excepted.
ss.8.012. The necessity for and adequacy of repairs to the Demised
Premises, the Buildings and Improvements and the furnishings and equipment
therein pursuant to SS.8.01 shall be measured by the standard which is
appropriate for buildings of similar construction and class, provided that
Lessee shall in any event make all repairs necessary to avoid any structural
damage or injury to the Buildings.
ss.8.013. Subject to the provisions of SS.8.05, Lessee shall put,
keep and maintain all portions of the Demised Premises, the Buildings and
Improvements and the sidewalks, curbs, landscaping, entrances, passageways and
all areas adjoining the same in a first class condition, clean and orderly, free
of dirt, vermin, rubbish and unlawful obstructions.
ss.8.014. Lessor shall not be required to furnish any services or
facilities, equipment or fixtures, or to make any repairs or alterations in or
to the Pad and Lessee hereby assumes the full and sole responsibility for the
condition, operation, repair, replacement, maintenance and management of the
Pad. Lessee will inspect the Demised Premises on the Rent Commencement Date and
will accept the Demised Premises in its "as is" condition, subject to any
punchlist items and the provisions of SS.8.05.
ss.8.015. (a) Lessee shall not use the Demised Premises as a storage
facility for any "Hazardous Substances," but Lessee may use and sell in a lawful
manner on the Demised Premises those Hazardous Substances which are normal and
customary in the conduct of Lessee's business. Lessee shall not install or use
any underground storage tank or other underground receptacle on the Demised
Premises, whether or not for Hazardous Substances.
(b) Lessee hereby agrees to indemnify Lessor and hold
Lessor harmless for, from and against any and all losses, liabilities, including
strict liability, damages, injuries, expenses, including reasonable attorneys'
fees, costs of any settlement or judgment and claims of any and every kind
whatsoever (including, without limitation, any losses, liabilities, including
strict liability, damages, injuries, expenses, including reasonable attorneys'
fees, costs of any settlement or judgment or claims asserted or arising under
any Environmental Law [as defined in ss.8.05(c)(ii)]) paid, incurred or suffered
by, or asserted against, Lessor by any person or entity or governmental agency
for, with respect to, or as a direct or indirect result of, the presence on or
under or the escape, seepage, leakage, spillage, discharge, emission,
discharging
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or release from or otherwise occurring on the Demised Premises of any Hazardous
Substances during Lessee's possession of the Pad, except as caused by Lessor.
(c) (i) For purposes of this Lease, "Hazardous
Substances" shall mean and include any contaminant, pollutant or hazardous or
toxic substances, materials or wastes or other environmentally regulated
materials including, but not limited to, those substances, materials and wastes
listed in the United States Department of Transportation Table (49 CFR 172.101)
or by the Environmental Protection Agency as hazardous substances, materials and
wastes or which are or become regulated under any applicable local, state or
federal law, code or ordinance, and all rules and regulations promulgated
thereunder, including, without limitation, any material, waste or substance
which is (i) petroleum, (ii) asbestos, (iii) polychlorinated biphenyls, (iv)
designated as a "Hazardous Substance" pursuant to Section 311 of the Clean Water
Act, 33 U.S.C. Section 1251 et seq. (33 U.S.C. Section 1321), or listed pursuant
to Section 307 of the Clean Water Act (33 U.S.C. Section 13171, (v) defined as a
"hazardous waste" pursuant to Section 1004 of the Resource Conservation and
Recovery Act, 42 U.S.C. Section 6901 et seq. (42 U.S.C. Section 6903) or (vi)
defined as a "Hazardous Substance" pursuant to Section 101 of the Comprehensive
Environmental Response, Compensation and Liability Act, 42 U.S.C. Section 9601
et seq. (42 U.S.C. Section 9601).
(ii) For purposes of this Lease, "Environmental
Laws" shall mean and include all state, federal and local laws, codes and
ordinances, and all rules and regulations promulgated thereunder, governing or
in any way relating to the generation, handling, manufacturing, treatment,
storage, use, transportation, spillage, leakage, dumping, discharge or disposal
(whether legal or illegal, accidental or intentional) of any Hazardous
Substances.
(d) If Lessee receives any notice of (i) the happening
of any material event involving the spill, release, leak, seepage, discharge or
cleanup of any Hazardous Substance into or upon (A) the air, (B) soils or any
improvements located thereon, (C) soil vapors, (D) surface water or groundwater,
or (E) the sewer, septic system or waste treatment, storage or disposal system
servicing the Demised Premises (any of which is hereafter referred to as a
"Hazardous Discharge"), or (ii) any complaint, order, citation, claim, directive
or notice with regard to (F) air emissions, (G) spills, releases or discharges
to soils or any improvements located thereon, soil vapors, surface water,
groundwater or the sewer, septic system or waste treatment, storage or disposal
systems servicing the Demised Premises, (H) noise emissions, (I) solid or liquid
waste disposal, (J) the use, generation, storage, transportation or disposal of
Hazardous Substances, or (K) other environmental, health or safety matters
affecting Lessee, the Demised Premises, any improvements located thereon, or the
business therein conducted (any of which is hereafter referred to as an
"Environmental Complaint"), then Lessee shall immediately notify Lessor orally
and in writing of said notice.
(e) Lessor shall have the right but not the obligation,
and without limitation of Lessor's rights under this Lease, to enter onto the
Demised Premises or to take such other actions as it deems necessary or
advisable to clean up, remove, resolve or minimize the impact of, or otherwise
deal with, any such Hazardous Substance or Environmental Complaint following
receipt of any notice from any person or entity asserting the existence of any
Hazardous Substance or an Environmental Complaint pertaining to any part of the
Premises which could result in an order, suit or other action against Lessee or
which, in the reasonable opinion of Lessor, could jeopardize its interest in the
Premises.
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(f) Lessor hereby represents and warrants to Lessee that
it has received no notice of any violation of Environmental Laws, the existence
of any Hazardous Substances on the Demised Premises, any Environmental
Complaints, any Hazardous Discharges, or any other environmental conditions
relating to the Demised Premises other than as set forth in the Phase I
__________ prepared by __________ and dated ______________, 19__, a copy of
which was received by Lessee on or about July __, 1997.
ARTICLE 9
COMPLIANCE WITH LAWS, ORDINANCES AND REGULATIONS
ss.9.011. Throughout the entire Lease Term, Lessee, at its sole cost
and expense, shall promptly comply with all present and future laws, ordinances,
orders, rules, regulations and requirements of all federal, state and municipal
governments, any national or local Insurance Rating Bureau, or any other body
exercising functions similar to those of any of the foregoing, which may be
applicable to the Demised Premises, the Buildings or the Improvements, or any
part thereof, or the sidewalks, curbs, passageways, alleys, entrances, coverings
or roof-like structures placed upon or extending over any sidewalk, or any space
adjacent thereto, or to the use or manner of use of the Demised Premises, the
Building or the Improvements, or any part thereof, or the owners, lessees or
occupants thereof. The foregoing shall include the matters set forth in SS.8.05.
Lessor hereby represents and warrants to Lessee that it has received no notice
that the Demised Premises are not in compliance with any law, ordinance, order,
rule, regulation or requirement of any federal, state or municipal governments,
or any other body exercising functions similar to those of any of the foregoing.
ss.9.012. Lessee shall likewise observe and comply with, or shall
cause to be observed and complied with, all the requirements of the general
comprehensive liability insurance, the "Special Form Property Insurance," so
called, and any other insurance policies at any time in force with respect to
the Demised Premises, the Building and Improvements.
ss.9.013. Lessee shall have the right, after prior written notice to
Lessor, to contest by appropriate legal proceedings, diligently conducted in
good faith, in the name of Lessee or Lessor or both, without cost or expense to
Lessor, the validity or application of any law, ordinance, order, rule,
regulation or requirement of the nature referred to herein, subject to the
following:
(a) If by the terms of any such law, ordinance, order,
rule, regulation or requirement, compliance therewith pending the
prosecution of any such proceeding may legally be delayed without
the incurrence of any lien, charge, liability or penalty of any kind
against the Demised Premises, the Building or the Improvements or
Lessee's leasehold interest therein and without subjecting Lessor to
any liability, civil or criminal, for failure so to comply
therewith, Lessee may delay compliance therewith until the final
deter mination of such proceeding.
(b) If any lien, charge or civil liability would be
incurred by reason of any such delay, Lessee nevertheless, on the
prior written consent of Lessor (such consent not to be unreasonably
withheld), may contest as aforesaid and delay as aforesaid, provided
that such delay would not subject Lessor to criminal liability and
Lessee (i) furnishes to
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Lessor security, reasonably satisfactory to Lessor against any loss
or injury by reason of such contest or delay, and (ii) prosecutes
the contest with due diligence and in good faith.
(c) Lessor shall, at Lessee's sole cost and expense,
including reasonable attorneys' fees, execute and deliver any
appropriate papers which may be necessary or proper to permit Lessee
to contest the validity or application of any such law, ordinance,
order, rule, regulation or requirement. Lessee shall indemnify
Lessor from any loss, cost or expense arising from such proceedings.
ARTICLE 10
CONSTRUCTION; DISCHARGE OF LIENS
ss.10.01. Lessor shall be responsible for the construction of the
Building and Improvements, in accordance with the provisions of this ARTICLE 10.
ss.10.02. Lessor has caused to be prepared the outline
specifications and site plan for the Building and Improvements attached hereto
as EXHIBITS "C" AND "D" (the "Preliminary Plans"). If Lessor has not already
done so, Lessor shall choose an architect who shall cause to be prepared final
plans for the construction of the Building and Improvements based upon the
Preliminary Plans (the "Final Plans").
ss.10.03. After preparation of the Final Plans Lessor shall award a
construction contract to a contractor. The contractor shall commence and
diligently prosecute to completion, the construction of the Building and
Improvements in substantial conformance with the Final Plans. Lessor's approval
of the Final Plans for the Building and Improvements, shall not be deemed a
representation or warranty that the Final Plans comply with all laws and
ordinances. Lessor shall have no liability whatsoever for the Building or
Improvements or construction defects or the failure of the contractor to
construct the Buildings and Improvements in accordance with the Final Plans and
all laws and ordinances. Lessor shall, and hereby does, assign to Lessee, on a
non-exclusive basis all of the contractor's warranties and all other warranties
in respect of such construction. Title to the Buildings and Improvements shall
be in Lessor at all times. Lessor agrees, in its construction contract with a
contractor, to give Lessee the right, during construction, to pay for additions
to the construction project, at Lessee's sole expense, including additional
contractor supervision costs and changes to work already completed. All such
additions shall be communicated to the contractor through Lessor. The
construction contract shall provide that Lessee or Lessee's subcontractor shall
have reasonable access to the property to construct any Improvements or
additions to the job site, with the consent of the contractor, and after
approval of same by Lessor, such consent not to be unreasonably withheld.
ss.10.015. Lessee shall not create or permit to be created or to
remain, and shall, as to any matter arising after the Lease Date caused by
Lessee, discharge, any lien, encumbrance or charge (levied on account of any
Imposition or any mechanic's or materialman's lien or any mortgage, security
interest or otherwise) which might be or become a lien, encumbrance or charge
upon the Demised Premises or the Building or any part thereof or the income
therefrom having a priority or preference over or ranking on a parity with the
interest of Lessor in the Demised Premises or the Building or Improvements or
any part
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thereof or the income therefrom, or which would have a parity or priority over
any Fee Mortgage and Lessee shall not suffer any other matter or thing whereby
the interest of Lessor or a Fee Mortgagee in the Demised Premises or any part
thereof or Lessor's interest in the Demised Premises, the Building and
Improvements or the income therefrom might be impaired; provided that any
Imposition may, after the same becomes a lien on the Demised Premises or the
Building, be paid or contested in accordance with ARTICLE 4 and any mechanic's,
laborer's or materialman's lien may be discharged in accordance with SS.10.02.
In order to further assure Lessor that no mechanic's, laborer's or materialmen's
lien will be placed or remain against the Pad, Lessee, prior to any construction
by Lessee costing more the Five Thousand Dollars ($5,000.00), shall furnish to
Lessor a bond or other assurances satisfactory to Lessor that such persons shall
be paid.
ss.10.026. If any mechanic's or materialman's lien shall at any time
be filed against the Demised Premises or the Building or Improvements or any
part thereof (other than in connection with the initial construction
contemplated by ARTICLE 10), Lessee, within thirty (30) days after notice of the
filing thereof, shall cause the same to be discharged of record by payment,
deposit, bond, order of a court of competent jurisdiction or otherwise. If
Lessee shall fail to cause such lien to be discharged within such period, then,
in addition to any other right or remedy, Lessor may, but shall not be obligated
to, discharge the same either by paying the amount claimed to be due or by
procuring the discharge of such lien by deposit or by bonding proceedings, and
in any such event Lessor shall be entitled, if Lessor so elects, to compel the
prosecution of an action for the enforcement of such lien by the lienor and to
pay the amount of the judgment in favor of the lienor with interest, costs and
allowances. Lessee agrees to reimburse and to pay to the Lessor on demand any
amount so paid by Lessor and all costs and expense, including reasonable
attorneys' fees, incurred by Lessor in connection therewith, together with
interest thereon at the Default Rate from the respective dates of Lessor's
notice to Lessee of the making of the payment or the incurring of the cost and
expense, including such reasonable attorneys' fees.
ARTICLE 11
NO WASTE
ss.11.011. Lessee shall not do or suffer any waste to the Demised
Premises or the Building or Improvements.
ARTICLE 12
USE OF DEMISED PREMISES
ss.12.011. Lessee shall continuously use the Pad for warehouse,
general office, storage and metal fabrication and for no other purposes. Lessee
shall not use or allow the Demised Premises or the Building or the Improvements
or any part thereof to be used or occupied for any unlawful purpose or in
violation of any laws and shall not suffer any act to be done or any condition
to exist on the Demised Premises or the Building or Improvements or any part
thereof or any article to be brought thereon, which may be dangerous, or which
may, in law, constitute a nuisance, public or private, or which may make void or
voidable any insurance then in force with respect thereto. Notwithstanding the
foregoing permitted uses, the Demised Premises shall not be used for an adult
bookstore, adult novelty shop, theater, adult theater, bar, nightclub, place of
adult performances or the sale of pornography.
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ss.12.012. Lessee shall not suffer or permit the Demised Premises or
the Building or Improvements or any portion thereof, to be used by the public,
as such, without restriction or in such manner as might reasonably tend to
impair Lessor's title to the Demised Premises or to Lessor's reversionary
interest in the Building and Improvements, or in such manner as might reasonably
make possible a claim or claims of adverse possession by the public, as such, or
of implied dedication of the Demised Premises or the Building or the
Improvements or any portion thereof.
ARTICLE 13
ENTRY ON DEMISED PREMISES BY LESSOR
ss.13.011. In addition to Lessor's right of entry under any other
provision of this Lease, Lessee shall permit Lessor and its authorized
representatives to enter the Pad at all reasonable times after reasonable notice
for the purpose of (a) inspecting the same, and (b) making any necessary repairs
thereto and performing any work therein that may be necessary by reason of
Lessee's failure to make any such re pairs or perform any such work or to
commence the same for thirty (30) days after written notice from Lessor or
without notice in case of an emergency. Nothing herein contained shall create or
imply any duty upon the part of Lessor to make any such repairs or do any such
work.
ss.13.012. Lessor shall have the right to enter the Pad at all
reasonable times during usual business hours and after reasonable telephone
notice to Lessee for the purpose of showing the same to prospective purchasers,
mortgagees, or lessees. Lessor may place "for sale" and/or "for lease" signs on
the Demised Premises.
ARTICLE 14
DAMAGE OR DESTRUCTION
ss.14.011. In case of damage to or destruction of the Demised
Premises or the Building or Improvements by fire or other casualty, Lessee, at
Lessee's sole cost and expense, shall restore, repair, replace, rebuild or alter
the same as nearly as possible to their value, condition and character
immediately prior to such damage or destruction. Such restoration, repairs,
replacements, rebuilding or alterations shall be commenced with due diligence,
and in good faith, and prosecuted with due diligence and in good faith, subject
to Force Majeure. In the event of damage to or the destruction of the Demised
Premises and/or the Building and Improvements resulting in a loss exceeding in
the aggregate Two Thousand Five Hundred Dollars ($2,500.00), Lessee shall
promptly give written notice thereof to Lessor.
ss.14.012. All insurance money shall be paid to and held by Lessor,
or if paid to Lessee, Lessee shall immediately and simultaneously pay the
insurance money to Lessor, and Lessor shall then pay such insurance money to
Lessee during the course of reconstruction on account of such damage or
destruction, less the actual cost, fees and expenses, if any, incurred in
connection with the adjustment of the loss, and any amount deposited for
demolition and reconstruction shall be applied to the payment of the cost of the
demolition, restoration, repairs, replacement, rebuilding or alterations,
including the cost of temporary repairs or the protection of property pending
the completion or permanent restoration, repairs, replacements, rebuilding or
alterations (all of which temporary repairs, protection of property and
permanent restoration,
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repairs, replacement, rebuilding or alterations are hereinafter collectively
referred to as the "restoration"). Upon the completion of, and payment for, the
restoration, any balance of the insurance money at the time available for
distribution shall be paid to Lessee.
ss.14.013. If the Demised Premises and the Buildings and
Improvements shall be damaged or destroyed by fire or other casualty within two
(2) years prior to the expiration of the Lease Term and the cost of restoration
exceeds the sum of Two Hundred Fifty Thousand Dollars ($250,000.00), during any
Lease Term, as estimated by a licensed architect or a licensed professional
engineer, selected by Lessee and approved in writing by Lessor (such approval
not to be unreasonably withheld and, if Lessor fails to act thereon within ten
(10) days from time of receipt thereof, Lessor shall be deemed to have approved
Lessee's selection) Lessee shall have the option of:
(a) restoring, repairing, replacing, rebuilding or
altering the Demised Premises, Building and Improvements as provided
in this Lease, or
(b) terminating this Lease by written notice to Lessor
given within sixty (60) days after such destruction or damage.
ss.14.014. In the event of a termination under SS.14.03.(B), Lessee
shall not be entitled to any portion of the proceeds of any insurance except for
insurance which covers possessions of Lessee which Lessee has the right to
remove pursuant to SS.8.01, including but not limited to, the fire insurance,
all of which shall become the sole property of the Lessor.
ss.14.015. At the time of a termination under SS.14.03.(B), Lessee
shall at once surrender and deliver up the Demised Premises and the Building and
Improvements and the furnishings, equipment and records therein into the
possession and use of Lessor and remove all of its personal effects unrelated to
the operation of the Demised Premises. Lessee upon such termination, surrender
and removal, shall be released and discharged from any and all obligations that
would have otherwise thereafter accrued had this Lease not been so terminated.
ARTICLE 15
CONDEMNATION
ss.15.011. If at any time during the Lease Term, title to the whole
or materially all of the Demised Premises shall be taken by the exercise of the
right of condemnation or eminent domain, or by agreement between Lessor, Lessee
and those authorized to exercise such right, this Lease shall terminate and
expire on the date of such taking, and the Minimum Rent required to be paid by
Lessee shall be appor tioned and paid to the date of such taking. For purposes
of this SS.15.01 "materially all of the Demised Premises" shall be deemed to
have been taken if the portion of the Demised Premises not so taken cannot be so
repaired or reconstructed so as to constitute a complete rentable structure
capable of producing a pro portionately fair and reasonable net annual income,
after the payment of all expenses thereof and all Minimum Rent and other charges
required to be paid by Lessee hereunder and after performance of all covenants,
agreements, terms and provisions herein and by law provided to be performed and
paid by Lessee. The average net annual income produced by the Demised Premises
during the two (2) year period (or such
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shorter period if this Lease has not been in existence for two (2) years)
immediately preceding such a taking shall be deemed to constitute a fair and
reasonable net annual income for the purposes of this SS.15.01.
ss.15.012. In the event of the taking of the whole or materially all
of the Demised Premises at any time during the Lease Term, the rights of Lessor
and Lessee to share in the net proceeds of any award for the Demised Premises,
Building and Improvements and damages upon any such taking shall be as follows
and in the following order of priority:
(a) To Lessor, that portion of the award that shall
represent compensation for the value of the Demised Premises the
Building and Improvements.
(b) To Lessor, an amount representing the excess, if
any, of the fair market value of the Leasehold for the Lease Term
over the Minimum Rent payable hereunder.
(c) To Lessee (to the extent available after the payment
in (a) and (b) above), the proceeds attributable to Lessee's
personal property.
ss.15.013. If at any time during the Lease Term, title to less than
the whole or less than materially all of the Demised Premises shall be taken as
aforesaid, all of the award or awards resulting from said condemnation shall be
held by Lessor and applied and paid over to the cost of demolition, repair and
restoration in the same manner and subject to the same conditions as those
provided in SS.SS.14.01 and 14.02 hereof with respect to insurance and other
monies. Any balance remaining in the hands of Lessor after payment of such costs
of demolition, repair and restoration as aforementioned, shall be retained by
Lessor and the Minimum Rent adjusted as provided in SS.15.04.
ss.15.014. If title to less than the whole or less than materially
all of the Demised Premises shall be taken as aforesaid, this Lease shall
continue, but the Minimum Rent thereafter payable by Lessee shall be reduced
from the date of such partial taking in the same proportion as the number of
square feet in the Demised Premises left after the taking bears to the total
number of square feet in the Demised Premises immediately prior to such taking.
Notwithstanding the foregoing, there shall be no adjustment or abatement of
Minimum Rent in the event that a portion of the Demised Premises are taken or
dedicated to the public for the purposes of streets, roads, drainage, utilities,
or other easements and such takings or dedications have no material detrimental
impact on the business then being conducted on the Demised Premises.
ss.15.015. If the temporary use of the whole or any part of the
Demised Premises or the Building or Improvements shall be taken by any lawful
power or authority, by the exercise of the right of condemnation or eminent
domain, or by agreement between Lessee and those authorized to exercise such
right, Lessee shall give prompt notice thereof to Lessor, and the term of this
Lease shall not be reduced or affected in any way. Lessee shall continue to pay
in full the Minimum Rent and other charges required to be paid hereunder,
without reduction or abatement, and Lessee shall be entitled to receive for
itself any award or payment made for such use.
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ARTICLE 16
MORTGAGES, ASSIGNMENTS, SUBLEASES AND
TRANSFERS OF LESSEE'S INTEREST
ss.16.011. Lessee shall not assign, mortgage or transfer this Lease
or sublease the whole or any portion of the Pad without Lessor's written
consent, which consent shall not be unreasonably withheld. Lessor may request
detailed information on the finances and operating history of any proposed
assignee or sublessee. Lessor shall not be deemed to have unreasonably withheld
its consent if it reasonably disapproves the financial condition or operational
history of the proposed sublessee or assignee. Upon any assignment to which
Lessor has consented, and the assumption of this Lease by the assignee, Lessee
shall not be released from any obligations under this Lease falling due and
arising out of events occurring after the date of the assignment and assumption.
Lessor may condition its consent on the sublessee or assignee agreeing to pay
Minimum Rent and other charges hereunder directly to Lessor rather than Lessee.
ss.16.012. Lessor's consent to any single assignment, sublease or
other transfer of the whole or any portion of the Pad shall not be deemed to be
a consent to any subsequent assignment, sublease or other transfer.
ss.16.03. Assignment, subleasing or any other transfer of this Lease
shall not affect the viability or the right of Lessee to exercise any option in
this Lease.
ARTICLE 17
DEFAULT
ss.17.011. The following occurrences shall be deemed Events of
Default ("Events of Default"):
(a) if any monetary sum due hereunder, including without
limitation, Minimum Rent and Impositions, shall not be paid within
seven (7) days after written notice that same was not paid when due
and payable as to the first such notice in any twelve (12) month
period and within three (3) days after written notice that the same
was not paid when due and payable as to all subsequent notices in
any twelve (12) month period;
(b) Any failure by Lessee to observe or perform any
other provision, covenant or condition of this Lease to be observed
or performed by Lessee where such failure continues for thirty (30)
days after written notice thereof by Lessor to Lessee, provided that
if the nature of such failure is such that the same cannot
reasonably be cured within such thirty (30) day period, Lessee shall
not be deemed to have committed an Event of Default if it shall
commence such cure within such thirty (30) day period after Lessor's
notice and thereafter rectify and cure said failure within ninety
(90) days;
(c) Abandonment of the Demised Premises by Lessee; or
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(d) A general assignment by Lessee for the benefit of
creditors, or the filing by or against Lessee of any proceeding
under any insolvency or bankruptcy law, unless in the case of a
proceeding filed against Lessee the same is dismissed within sixty
(60) days, or the appointment of a trustee or receiver to take
possession of all or substantially all of the assets of Lessee,
unless possession is restored to Lessee within thirty (30) days, or
any execution or other judicially authorized seizure of all or
substantially all of Lessee's assets located upon the Demised
Premises or of Lessee's interest in this Lease, unless such seizure
is discharged within thirty (30) days, or Lessee's convening of a
meeting of its creditors or any class thereof for the purpose of
effecting a moratorium upon or composition of its debts;
(e) Any occurrence of one or more of the events set
forth in SS.17.01(A), (B), (C) or (D) which is thereafter cured
whether or not Lessor is obligated under this Lease to accept
Lessee's tender of cure and whether or not such cure was timely
made, but which has occurred in three (3) consecutive months or in
any four (4) months of any twelve-month period.
ss.17.012. In the event of an Event of a Default by Lessee, Lessor,
in addition to any other remedies available to it at law or in equity and
without being considered an election of remedies, at its option, may without
further notice or demand of any kind to Lessee or any other person:
(a) Declare the Lease Term ended and reenter the Demised
Premises and the Buildings and take possession thereof and remove
all persons therefrom, and Lessee shall have no further claim
thereon or hereunder, except for any personal effects that Lessee
uses on a day-to-day basis; or
(b) Without declaring this Lease ended, reenter the
Demised Premises and the Buildings and occupy the whole or any part
thereof for and on account of Lessee and collect any unpaid rentals
and other charges, which have become payable, or which may
thereafter become payable; or
(c) Even though Lessor may have reentered the Demised
Premises and the Buildings, thereafter elect to terminate this Lease
and all of the rights of Lessee in or to the Demised Premises and
the Buildings.
ss.17.013. Should Lessor have reentered the Demised Premises and the
Buildings under the provisions of SS.17.02(B), Lessor shall not be deemed to
have terminated this Lease, or the liability of Lessee to pay any Minimum Rent
or other charges thereafter accruing, or to have terminated Lessee's liability
for damages under any of the provisions hereof, by any such reentry or by any
action, in unlawful detainer or otherwise, to obtain possession of the Demised
Premises, unless Lessor shall have notified Lessee in writing that it has
elected to terminate this Lease. Lessee further covenants that the service by
Lessor of any notice pursuant to the unlawful detainer statutes of the State
where the Pad is situated and the surrender of possession pursuant to such
notice shall not (unless Lessor elects to the contrary at the time of or at any
time subsequent to the serving of such notices and such election is evidenced by
a written notice to Lessee) be deemed to be a termination of this Lease.
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ss.17.014. Should Lessor elect to terminate this Lease pursuant to
the provisions of subparagraph SS.17.02(A) OR (C) above, Lessor may recover from
Lessee as damages, the following:
(a) The worth at the time of award of any unpaid Minimum
Rent which had been earned at the time of such termination; plus
(b) the worth at the time of award of the amount by
which the unpaid Minimum Rent which would have been earned after
termination until the time of award exceeds the amount of such
rental loss Lessee proves could have been reasonably avoided; plus
(c) the worth at the time of award of the amount by
which the unpaid Minimum Rent for the balance of the term after the
time of award exceeds the amount of such rental loss that Lessee
proves could be reasonably avoided; plus
(d) any other amount necessary to compensate Lessor for
all the detriment proximately caused by Lessee's failure to perform
its obligations under this Lease or which in the ordinary course of
things would be likely to result therefrom, including, but not
limited to any costs or expenses incurred by Lessor in (i) retaking
possession of the Demised Premises and the Buildings, including
reasonable attorneys' fees therefor, (ii) maintaining or preserving
the Demised Premises and the Buildings after such Event of Default,
(iii) preparing the Demised Premises and the Buildings for reletting
to a new tenant, including repairs (iv) leasing commissions, or (v)
any other costs necessary or appropriate to relet the Demised
Premises and the Buildings; plus
(e) at Lessor's election, such other amounts in addition
to or in lieu of the foregoing as may be permitted from time to time
by the laws of the State where the Pad is situated.
ss.17.015. As used in SS.17.04 (A) and (B), the "worth at the time
of award" is computed by allowing interest at the Default Rate. As used in
SS.17.04 (C), the "worth at the time of award" is computed by discounting such
amount at the discount rate of the Federal Reserve Bank situated nearest to the
location of the Pad at the time of award plus one percent (1%).
ss.17.016. For all purposes of this Article, the term "other
charges" shall be deemed to be all sums required to be paid by Lessee pursuant
to the terms of this Lease. All such sums, other than the Minimum Rent, shall be
computed on the basis of the greatest monthly amount thereof accruing during the
immediately preceding sixty (60) month period, except that if it becomes
necessary to compute such amount before such a sixty (60) month period has
occurred then such amount shall be computed on the basis of the greatest monthly
amount thereof accruing during such shorter period.
ss.17.017. In the event of an Event of Default by Lessee, Lessor may
at its option permit all of Lessee's fixtures, furniture, equipment,
improvements, additions and alterations to remain on the Demised Premises and in
that event, and continuing during the length of said Events of Default, Lessor
shall have the right to take the exclusive possession of such items and to use
same, rent or charge free, until all Events of Defaults are cured or, at its
option, at any time during the term of this Lease, to require Lessee to
forthwith remove same. In the event of any entry or taking possession of the
Demised Premises and the
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Buildings as aforesaid, Lessor shall offer to Lessee the opportunity to remove
Lessee's own personal effects that are used on a day-to-day basis. In the event
Lessee declines after reasonable notice, Lessor shall have the right, but not
the obligation, to remove therefrom all or any part of the personal property
located therein and may place the same in storage at a public warehouse at the
expense and risk of the Lessee or owner or owners thereof. In the event of any
entry or taking possession of the Demised Premises after an Event of Default,
Lessor shall use its reasonable good faith efforts to re-let the Demised
Premises.
ss.17.018. The waiver by Lessor of any breach of any term, covenant
or condition herein contained shall not be deemed to be a waiver of such term,
covenant or condition or of any subsequent breach of the same or any other term,
covenant or condition herein contained. The subsequent acceptance of amounts due
hereunder by Lessor shall not be deemed to be a waiver of any preceding breach
by Lessee of any term, covenant or condition of this Lease, other than the
failure of Lessee to pay the particular rental so accepted, regardless of
Lessor's knowledge of such preceding breach at the time of acceptance of such
rental. No covenant, term, or condition of this Lease shall be deemed to have
been waived by Lessor unless such waiver be in writing signed by Lessor.
ss.17.019. If Lessee shall fail to pay, when the same is due and
payable, any Minimum Rent or any other charges or amounts hereunder (including
without limitation, the late charge provided for in SS.17.10), or if Lessor
shall advance any sums which Lessee is obligated to pay, or if Lessor incurs any
expense on account of Lessee committing an Event of Default, such amounts shall
bear interest at the Default Rate from the date after the due date (or in the
event Lessor expends any sums, from the date of such expenditure) until paid.
ss.17.10. If Lessee shall fail to pay, during the first six (6)
months of the Lease Term within ten (10) days after the same is due and payable,
and thereafter throughout the Lease Term within five (5) days after the same is
due and payable, any Minimum Rent or any other charges or amounts hereunder,
Lessee shall pay to Lessor a late payment charge in the amount of five percent
(5%) of the amount then due to cover Lessor's additional administrative expenses
necessitated by Lessee's failure to make timely payment; provided, however,
Lessor may not enforce such late payment charge for any Minimum Rent or any
other charges or amounts hereunder due while Mike Nothum, Jr. is the president
of Lessee and has the authority to direct the payment of such amounts. Lessor
shall not be obligated to accept any payments which have accrued a late payment
charge unless accompanied by the late payment charge. This provision for a late
payment charge shall be in addition to all of Lessor's other rights and remedies
under this Lease or at law or in equity, and shall not be construed as
liquidated damages or as limiting Lessor's remedies in any manner.
ss.17.11. The remedies given to Lessor in this Article shall be in
addition and supplemental to all other rights or remedies which Lessor may have
at law, in equity or by statute.
ARTICLE 18
INDEMNITY--LIABILITY OF LESSOR
ss.18.011. Lessee agrees to indemnify, and save harmless, Lessor and
its partners and their respective officers, directors, agents, Fee Mortgagees
and employees from and against all liability (statutory or otherwise), claims,
suits, demands, damages, judgments, costs, interest and expenses (including
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counsel fees and disbursements) to which any of the same may (except insofar as
it arises out of any wrongful act or negligence thereof) be subject or suffer by
reason of, or by reason of any claim for, any injury to, or death of, any person
or damage to property (including any loss of use thereof) or otherwise arising
from or in connection with the use of, or from any work or thing whatsoever done
in, any part of the Demised Premises (other than by Lessor or its employees or
agents) during the Lease Term or during the period of time, if any, prior
thereto during which Lessee has been given access for the purpose of doing work
or otherwise, or arising from any condition of the Demised Premises resulting
from any Event of Default by Lessee under this Lease or from any act or
negligence of Lessee or any of its officers, directors, agents, con tractors,
servants, employees, licensees or invitees. In the event any action or
proceeding is brought against Lessor its partners or their respective officers,
directors, agents, Fee Mortgagees or employees, and upon notice from Lessor,
Lessee shall defend the same at Lessee's expense by counsel satisfactory to
Lessor.
ss.18.012. Lessor agrees to indemnify, and save harmless Lessee and
its officers, directors, agents, and employees from and against all liability
(statutory or otherwise) claims, suits, demands, damages, judgments, costs,
interest and expenses (including counsel fees and disbursements) to which any of
the same may (except insofar as it arises out of any wrongful act or negligence
thereof) be subject or suffer by reason of, or by reason of any claim for, any
entry to, or death of, any person or damage to property (including any loss of
use thereof) or otherwise arising from or in connection with Lessor's negligent
or intentional wrongful acts in or around the Pad (other than by Lessee or its
employees or agents) during the Lease Term. In the event any action or
proceeding is brought against Lessee, its partners or their respective officers,
directors, agents or employees, arising out of any of the foregoing, and upon
notice from Lessee, Lessor shall defend the same by Lessor's expense by counsel
satisfactory to Lessee.
ss.18.013. The liability of Lessor to Lessee for any default by
Lessor under the terms of this Lease shall be limited to the interest of Lessor
in the Pad and Lessee agrees to look solely to Lessor's interest in the Pad for
the recovery of any judgment from Lessor, it being understood and agreed that
Lessor or its respective trustees, directors, officers, partners, employees,
agents, beneficiaries or security holder shall not be bound by or assume any
personal liability for any obligations of Lessor and such parties' respective
properties shall not be subject to the claims of any other person or party in
respect of any such liability. The limitation of liability provided in this
paragraph is in addition to, and not in limitation of, any limitation of
liability applicable to Lessor provided by law or any other contract, agreement
or instrument.
ARTICLE 19
NOTICES
ss.19.011. All notices, demands or requests by either party to the
other shall be deemed to have been properly served or given if sent by United
States registered or certified mail, return receipt requested, postage prepaid,
addressed to the parties at the addresses listed below, or to such other address
as a party may from time to time designate by written notice to the other.
Lessor: Michael Nothum, Jr.
NOTHUM DEVELOPMENT, L.L.C.
1741 South Holbrook Lane
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Tempe, Arizona 85281
With a copy to: Scott A. Rose, Esq.
O'CONNOR, CAVANAGH, ET AL.
One East Camelback Road, Suite 1100
Phoenix, Arizona 85012-1656
Lessee: Bill George
COMFORT SYSTEMS USA, INC.
4801 Woodway, Suite 300 East
Houston, Texas 77056
ss.19.012. Notices, demands or requests which may or shall be served
or given by certified or registered mail hereunder shall be deemed sufficiently
served or given for all purposes when deposited in the mail. Any notice, demand
or request may be personally delivered (which shall include delivery by express
courier service) addressed as set forth above, and shall be effective upon
receipt.
ARTICLE 20
QUIET ENJOYMENT--CONVEYANCE AND MORTGAGES BY LESSOR--
SUBORDINATION AND ATTORNMENT
ss.20.011. Lessee upon timely paying the Minimum Rent and fully
keeping, observing and performing all the terms, covenants, agreements,
provisions, conditions and limitations of this Lease on Lessee's part to be
kept, observed and performed, shall quietly have and enjoy the Demised Premises
during the Lease Term without hindrance or molestation by Lessor or anyone
lawfully claiming by, or through Lessor.
ss.20.012. In the event Lessor herein or any successor owner of the
Demised Premises shall convey or otherwise dispose of the Demised Premises,
then, upon the transfer of any insurance policies, and other monies or any other
securities belonging to Lessee held by Lessor pursuant to the provisions of this
Lease, to any such purchaser of the Demised Premises, all liabilities and
obligations on the part of Lessor or successor owner as Lessor under this Lease,
accruing after such conveyance or disposal, shall cease and terminate and each
successor purchaser of the Demised Premises shall, without further agreement, be
bound by Lessor's covenants and obligations but only during the period of such
ownership respectively. Nothing herein contained shall be construed to release
Lessor or any successor owner as Lessor from any liability or obligation which
otherwise matured prior to the effective date of such conveyance or disposal.
20.013. This Lease is and shall automatically be subject to any Fee
Mortgages which now or in the future may affect the Pad or any portion thereof
and to all renewals, additions, modifications, consolidation, replacements and
extensions thereof; and Lessee covenants and agrees, within ten (10) days after
Lessor's written request, to execute, acknowledge and deliver upon request any
and all documents or instruments requested by Lessor or necessary or proper to
confirm the subordination of this Lease to any Fee Mortgages or any amendments
thereto. The subordination provided herein is conditional upon Lessee's receipt
from all Fee Mortgagees, of a non-disturbance agreement essentially providing
that so long as Lessee has not committed an Event of Default, the Fee Mortgage
shall not disturb the possession of Lessee.
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ss.20.014. Notwithstanding anything to the contrary set forth
herein, Lessee hereby attorns and agrees to attorn to any person, firm or
corporation purchasing or otherwise acquiring the Pad, Demised Premises or the
real property thereunder or any portion thereof at any sale or other proceeding
or pursuant to the exercise of any rights, powers or remedies under a Fee
Mortgage, as if such person, firm or corporation had been named as Lessor
herein, it being intended hereby that if this Lease is terminated, cut off or
otherwise defeated by reason of any act or actions by the owner or holder of any
such Fee Mortgage, then, at the option of any such person, firm or corporation
so purchasing or otherwise acquiring the Pad or any portion thereof, this Lease
shall continue in full force and effect.
ARTICLE 21
CERTIFICATES BY LESSOR AND LESSEE
ss.21.011. Both Lessor and Lessee agree at any time and from time to
time upon not less than twenty (20) days' prior written notice by the other
party, to execute, acknowledge and deliver to the other party a statement in
writing certifying that this Lease is unmodified and in full force and effect
(or if there have been modifications, that the Lease is in full force and effect
as modified and stating the modifications), and the dates to which the Minimum
Rent has been paid, and stating whether or not the other party is in default in
keeping, observing or performing any term, covenant, agreement, provision,
condition or limitation contained in this Lease and, if in default, specifying
each such default, it being intended that any such statement delivered pursuant
to this SS.21.01 may be relied upon by the other party or any prospective
purchaser or Fee Mortgagee or any assignee of any Fee Mortgagee or any proposed
purchaser.
ss.21.012. Lessee's failure to deliver such statement within such
time shall be conclusive upon Lessee (a) that this Lease is in full force and
effect, without modification except as may be represented by Lessor; (b) that
there are no uncured defaults in Lessor's performance; (c) that there are no
uses of the Demised Premises which are prohibited by this Lease, and any
federal, state or local statute, rule or regulation and that such uses conform
with applicable zoning codes; and (d) that not more than one month's rent has
been paid in advance.
ARTICLE 22
COVENANTS TO RUN WITH THE LAND
ss.22.011. The terms, covenants, agreements, provisions, conditions
and limitations herein contained shall be construed as covenants running with
the land and shall bind and inure to the benefit of Lessor, its successors and
assigns, and Lessee, its successors and assigns, if any, except as otherwise pro
vided herein.
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ARTICLE 23
NON-MERGER OF ESTATES
ss.23.011. The leasehold estate of Lessor and the leasehold estate
of the Lessee shall at all times be separate and apart, and shall in no event be
merged, notwithstanding the fact that this Lease or the leasehold estate created
hereby, or any interest in either thereof, may be held directly or indirectly by
or for the account of any person who shall own the fee estate in the Demised
Premises, and Lessee's interest in the Lease; and no such merger of estates
shall occur by operation of law, or otherwise, unless and until all persons at
the time having any interest in the fee interest in the Demised Premises and all
persons having any interest in the Lease or the leasehold estate shall join in
the execution of a written instrument effecting such merger of estates.
ARTICLE 24
APPROVAL
ss.24.011. Whenever in this Lease the approval or consent of any
party is required or desired, unless otherwise expressly provided, such party
shall not withhold or delay its approval or consent unreasonably, and unless a
different time limit is provided in any section of this Lease, such approval or
disapproval shall be given within twenty (20) days following receipt of request
for such approval or consent, and if not so given, the same shall conclusively
be deemed to have been approved by said party. Provided, however, any such
request for approval or consent shall specifically refer to this SS.24.01 and
shall also state that the party receiving the notice has twenty (20) days to
approve or consent and that if it fails to do so, the approval or consent shall
conclusively deemed to have been approved or consented to.
ARTICLE 25
MEMORANDUM OF LEASE
ss.25.011. This Lease shall not be recorded, but a memorandum of
this Lease shall be executed, delivered and recorded by the parties at the
election of either party.
ARTICLE 26
SECURITY DEPOSIT
ss.26.01. If at any time during the Lease Term Mike Nothum, Jr. is
no longer the president of Lessee and authorized to direct the payment of
Minimum Rent or any other charges or amounts hereunder, in addition to Minimum
Rent, Lessee shall pay to Lessor a Security Deposit in the amount of Forty-Four
Thousand One Hundred Seventy-Five and No/100 Dollars ($44,175.00). Said deposit
shall be held by Lessor without liability for interest, as security for the
faithful performance by Lessee of all of the terms of this Lease to be observed
and performed by Lessee.
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ss.26.02. If any sum payable by Lessee to Lessor shall be overdue
and unpaid or should Lessor make payments on behalf of Lessee, or if Lessee
shall fail to perform any of the terms of this Lease, then Lessor may, at its
option and without prejudice to any other remedy that Lessor may have on account
thereof, appropriate and apply the entire Security Deposit, or so much thereof
as may be necessary to compensate Lessor, toward the payment of Minimum Rent or
Impositions or loss or damage sustained by Lessor due to such breach on the part
of Lessee; and Lessee shall upon demand restore the Security Deposit to the
original sum.
ss.26.03. Lessor may deliver the Security Deposit to the purchaser
of Lessor's interest in the Demised Premises and thereupon Lessor shall be
discharged from any further liability with respect to the Security Deposit.
ARTICLE 27
SIGNS
ss.27.011. At its own expense, Lessee shall be allowed to place and
install any lawful signs on the Demised Premises as allowed by the City of
Chandler and any deed restrictions that may affect the Demised Premises.
ARTICLE 28
MISCELLANEOUS
ss.28.011. This Lease constitutes the entire agreement between the
parties hereto with respect to the matters set forth herein and supersedes any
and all other prior written or oral agreements or understandings with respect to
this transaction. This Lease may not be modified in any respect except by
instruments signed in writing by both parties hereto.
ss.28.012. In the event of any action or proceeding brought by
either party against the other under this Lease the prevailing party shall be
entitled to recover for the fees of its attorneys in such action or proceeding
such amount as the court may adjudge as reasonable attorneys' fees.
ss.28.013. The covenants and conditions herein contained shall,
subject to the provisions as to assignment, apply to and bind the heirs,
successors, executors, administrators and assigns, if any, of the parties
hereto.
ss.28.014. The words "Lessor" and "Lessee" as used herein shall
include the plural as well as the singular. Words used in masculine gender
include the feminine and neuter. The marginal headings and titles to the
paragraphs of this Lease are not a part of this Lease and shall have no effect
upon the construction or interpretation of any part hereof.
ss.28.015. This Lease, its construction, validity and effect, shall
be governed and construed by and in accordance with the laws of the State of
Arizona.
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ss.28.016. It is understood and agreed between the parties hereto
that their relationship at all times shall remain that of Lessor and Lessee, and
that nothing herein contained shall be deemed, held or construed as the creation
of a partnership or joint venture as between the parties hereto in the conduct
of Lessee's business; nor shall Lessor be liable for any debts, liabilities or
obligations incurred by Lessee in the conduct of its business.
ss.28.017. If any provision of this Lease shall be determined to be
void by any court of competent jurisdiction, then such determination shall not
affect any other provisions of this Lease and all such other provisions shall
remain in full force and effect; and it is the intention of the parties hereto
that if any provision of this Lease is capable of two constructions, one of
which would render the provision void and the other of which would render the
provision valid, then the provision shall have the meaning which renders it
valid.
ss.28.018. Time is of the essence of this Lease and each and all of
its provisions.
ss.28.019. The waiver by Lessor of any term, covenant or condition
herein contained shall not be deemed to be a waiver of such term, covenant or
condition or any subsequent breach of the same or any other term, covenant or
condition herein contained. The subsequent acceptance of rent hereunder by
Lessor shall not be deemed to be a waiver of any preceding breach by Lessee of
any term, covenant or condition of this Lease, other than the failure of Lessee
to pay the particular rental so accepted, regardless of Lessor's knowledge of
such preceding breach at the time of acceptance of such rent.
ss.28.10. All the terms, covenants and conditions contained in this
Lease to be performed by either party, if such party shall consist of more than
one person or organization, shall be deemed to be joint and several.
ss.28.11. Lessee promises, covenants and agrees to not remain in
possession of all or any part of the Demised Premises after the expiration of
the Lease Term, without the express written consent of Lessor. No acceptance of
Minimum Rent and no act or statement by any employee, servant or agent of Lessor
shall constitute the consent of Lessor to Lessee's holding over. Should Lessee
hold over without the express written consent of Lessor, such tenancy shall be
at the sufferance of Lessor, and not a renewal hereof or an extension for any
further term, and in such case, Minimum Rent and other monetary sums due here
under shall be payable at three (3) times the amount set forth in this Lease and
at the time specified in this Lease and such tenancy at sufferance shall be
subject to every other term, covenant and agreement contained herein. Lessee
understands that Lessor is relying on Lessee's covenant to not hold over and to
surrender the Demised Premises at the termination of the Lease Term. In the
event Lessee holds over, Lessee shall be liable for all Lessor's direct and
consequential damages, including costs, fees, expenses, damages and attor neys'
fees incurred by Lessor as a result of Lessee's holding over without Lessor's
express written consent, including, but not limited to, damages and expenses
incurred by Lessor for its inability to deliver possession of the Demised
Premises to a new lessee.
ss.28.12. Lessee and Lessor each hereby represent and warrant to the
other party that it has had no dealings with any real estate broker, finder or
agent in connection with the negotiations of this Lease and that it knows of no
real estate broker, company, finder or agent who is or might be entitled to a
commission in connection with the execution of this Lease and Lessee and Lessor
each covenant and agree to indemnify and save the other party harmless from any
and all loss, cost and liability that may arise from a breach of this warranty.
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ss.28.13. No representations, inducements, understanding or anything
of any nature whatsoever, made, stated or represented by Lessor or anyone acting
for or on Lessor's behalf, either orally or in writing, have induced Lessee to
enter into this Lease, and Lessee acknowledges, represents and warrants that
Lessee has entered into this Lease under and by virtue of Lessee's own
independent investigation.
ss.28.14. If Lessor desires to finance, refinance or sell the
Demised Premises, any part thereof or the Building of which the Demised Premises
are a part, Lessee and all guarantors of Lessee's performance hereunder shall
deliver to any potential lender or purchaser designated by Lessor such financial
statements of Lessee and such guarantors as may be reasonably required by such
lender or purchaser, including but not limited to Lessee's financial statements
for the past three (3) years. All such financial statements shall be received by
Lessor and such lender or purchaser in confidence and shall be used only for the
purposes herein set forth.
IN WITNESS WHEREOF, the Lessor and Lessee have each caused this
Lease to be executed the day and year first above written.
LESSOR:
NOTHUM DEVELOPMENT, L.L.C.,
an Arizona limited liability company
By: ________________________________
Michael Nothum, Jr., Member
LESSEE:
TRI-CITY MECHANICAL, INC.,
an Arizona corporation
By: ________________________________
Its: _______________________________
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EXHIBIT "A"
[To Lease between NOTHUM DEVELOPMENT, L.L.C. and TRI-CITY MECHANICAL, INC. dated
July __, 1997]
DEMISED PREMISES
Approximately 6.5 acres located in Chandler, Arizona on Galveston
Road, east of 56th Street.
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EXHIBIT "B"
[To Lease between NOTHUM DEVELOPMENT, L.L.C. and TRI-CITY MECHANICAL, INC. dated
July ___, 1997]
EXTENDED LEASE TERM MINIMUM RENT
Upon receipt by Lessor of a notice that Lessee is exercising an
option to extend the Initial Lease Term as provided in ss.2.02 of the Lease,
Lessor and Lessee shall attempt to determine the market rent for the Extended
Lease Term, with the market rent to reflect the Minimum Rent which are of a type
then typical in the rental market and to be based on the market rental for new
leases being executed as of one year prior to the expiration of the Initial
Lease Term including periodic increases (the "Valuation Date"). In determining
the market rent for the Extended Lease Term, due consideration shall be given,
among other things, to the length of the Extended Lease Term; the amount of the
Minimum Rent; whether or not such Minimum Rent should be subject to periodic
Consumer Price Index or other adjustments; allowances to Lessee for, and the
making by Lessor of improvements; liability of Lessee for reimbursable expenses;
and the respective maintenance responsibilities of Lessor and Lessee; provided,
however, the market rent for the Extended Lease Term shall not be less than the
Minimum Rent in effect at the end of the Initial Lease Term; the effect of all
such considerations shall be reflected in the Minimum Rent and periodic
adjustments to Minimum Rent; no other provisions of this Lease shall be
modified; and Lessor shall have no tenant improvement construction obligations.
Lessor, within thirty (30) days after the later of the Valuation
Date or the receipt of Lessee's option notice, shall present Lessee in writing
with the proposed market rental. If Lessee is dissatisfied with the proposed
market rental presented by Lessor, Lessee may, by delivery to Lessor of notice
within ten (10) days thereafter, elect to rescind Lessee's exercise of the
option, in which event all rights of Lessee under this EXHIBIT "B" shall
terminate. If Lessee does not so rescind Lessee's notice of exercise, then
Lessee shall, within thirty (30) days after receipt of Lessor's proposed market
rental, either accept the market rental proposed by Lessor or present Lessor in
writing with its proposed market rental. Within five (5) days thereafter, Lessor
shall either accept Lessee's proposal market rental or notify Lessee that the
proposed market rental is unacceptable. If the proposed market rental is
unacceptable to Lessor, and/or if Lessor and Lessee are unable to agree as to
the renewal market rental at least six (6) months prior to the expiration of the
Initial Lease Term, Lessor and Lessee will jointly appoint an appraiser to
determine whether the market rental (including adjustment provisions) first
proposed by Lessor or the market rental (including adjustment provisions) first
proposed by Lessee is the rental which most accurately reflects the fair market
rental at the Valuation Date. If Lessor and Lessee fail to agree upon an
appraiser with five (5) months prior to the expiration of the Initial Lease
Term, such appraiser will be appointed by the then President of the Local
Chapter of The American Society of Appraisers and will be experienced in the
appraisal of office, commercial and industrial properties in the Phoenix
metropolitan area. The decision of such appraiser will be in writing and in
duplicate; will be delivered to each of the parties to the Lease; and will
either select all aspects of Lessor's first proposal (including adjustment
provisions) or of Lessee's first proposal (including adjustment provisions) as
the market rental provisions most reflective of the fair market conditions at
the Valuation Date. The fair market rental provisions selected by the appraiser
shall then be the rental rate provisions for the Extended Lease Term, subject to
the limitations and adjustments to such market rental rate
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set forth in this EXHIBIT "B" for determining the actual rental payable for the
Extended Lease Term. The fee of the appraiser will be paid equally by Lessor and
Lessee. If no determination is made prior to the commencement of the Extended
Lease Term, Lessee will continue to pay to Lessor the Minimum Rent with
bi-annual adjustments in effect at the end of the Initial Lease Term immediately
preceding such Extended Lease Term and, upon such fair market rental being
determined, Lessee will pay to Lessor the difference between the rent already
paid by Lessee for the Extended Lease Term and the actual amount of rent
attributable to the Extended Lease Term through the date of such determination.
Upon the determination of the fair market rental as aforesaid, the parties will
enter into an amendment to the Lease stating the Minimum Rent for the Extended
Lease Term.
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EXHIBIT "C"
[To Lease between NOTHUM DEVELOPMENT, L.L.C. and TRI-CITY MECHANICAL, INC. dated
July ___, 1997]
OUTLINE SPECIFICATIONS
31
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EXHIBIT "D"
[To Lease between NOTHUM DEVELOPMENT, L.L.C. and TRI-CITY MECHANICAL, INC. dated
July ___, 1997]
SITE PLAN
32
EXHIBIT 10.21
LEASE AGREEMENT
THIS AGREEMENT made and entered into the 1st day of November, 1996 by and
between SAMUEL MATTHEWS LAWRENCE, JR., hereinafter referred to as "Lessor", and
the S.M. LAWRENCE COMPANY, INCORPORATED, a Tennessee corporation, hereinafter
referred to as "Lessee"; witnesseth:
1. PREMISES AND TERM. For and in consideration of the rents herein
reserved and of the covenants and agreements herein contained on the part of the
part of the Lessee to be kept, observed, and performed, the Lessor has demised
and leased, and does by these presents demise and lease unto the Lessee that
certain described real estate, together with the improvements thereon, more
fully described on the attached Exhibit "A", which Exhibit "A" is, by this
reference, made a part of this Lease Agreement.
TO HAVE AND TO HOLD the premises therein described with all the rights,
privileges, easements, and appurtenances thereunto belonging unto the Lessee for
the term commencing on November 1, 1996 and ending on the 31st day of October,
1997
2. RENTAL. The rental to be paid by Lessee to Lessor shall be the sum of
One Hundred Ten Thousand Four Hundred Dollars ($110,400.00) and same shall be
payable in equal monthly payments of NINE THOUSAND TWO HUNDRED DOLLARS AND NO
100 ($9,200.00) per month in advance.
3. USE OF PREMISES. Unless Lessor's written consent to other uses be first
obtained, Lessee's use of the demised premises shall be confined to
manufacturing, warehousing, selling, fabricating, office, engineering and
research purposes incidental thereto. Lessee shall not use or occupy the
premises for any unlawful purpose and shall comply with all laws, ordinances,
rules and regulations, and all covenants, conditions and restrictions of record
applicable to the premises or the use or occupancy thereof. Lessee shall neither
commit nor permit any waste or nuisance on the premises, nor use the premises or
any part thereof or permit the same to be used in any manner that will impair
the structural strength of or injure any building or improvement on the premises
or adjacent thereto. Lessee shall not do or permit any act on the premises or
permit the use of the same
<PAGE>
in any manner that will violate or make inoperative any policy of fire or other
hazard insurance carried on the premises or any part thereof.
4. LESSOR'S COVENANTS. The Lessor agrees:
A. That Lessee, on paying the rental herein specified and observing
Lessee's agreements hereof, shall and may peaceably and quietly have, hold, and
enjoy the premises during the term hereof unless and until terminated as herein
provided.
B. That all machinery, equipment, fixtures, and appurtenances
installed by Lessee, the cost of which shall not have been paid by Lessor,
regardless of how attached or affixed to the premises, shall be deemed to remail
personal property and may be removed prior to the termination of this lease, but
Lessee shall repair any damages occasioned by such removal.
C. That Lessee may at any time during the term hereof, at its sole
risk and expense, do such remodeling, altering, or adding to the demised
premises as it may desire to do.
D. To give Lessee immediate notice in writing of any proposal for a
taking by the exercise of eminent domain or otherwise of any portion of the
demised premises by public authority.
5. LESSEE'S COVENANTS. The rent shall be net to Lessor and toward this
end, the Lessee agrees:
A. To pay when due the rent and all charges for water, gas,
electricity, heat, power, sewer, garbage, and other services supplied to it at
the demised premises.
B. To maintain all improvements on the demised property in as good
condition as when received, including but not limited to repairs to the walls,
roof, interior and exterior of the improvements on the leased premises, all
plate glass, all windows, all plumbing, sewer, lighting,
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heating, and other utility systems, all roads and/or parking areas located on
the leased premises including the removal of snow and ice, and shall keep the
premises clean and neat, and to do so as needed without notice from the Lessor.
C. To save Lessor harmless and indemnified from any injury, loss,
claim or damage to any person or personal property while on or about the
premises unless same be due to the negligence or lawful misconduct of Lessor.
D. To permit Lessor of his agents to examine the premises at
reasonable times.
E. To procure any licenses or permits required by any use of the
premises by Lessee.
F. To pay to the public authorities charged with the collection
thereof, on or before the last day that the same may be paid without interest or
penalty, all real estate taxes and government impositions in lieu of or in
substitution for real estate taxes and all betterment assessments, which taxes,
impositions or assessments are levied or assessed on the premises including
payment of a pro-rata share of any taxes levied for the year, any part of which
is included in this lease term.
G. To keep the buildings on the demised premises insured against
fire, the perils covered by the extended coverage, with vandalism, malicious
mischief doverage as a minimum, such insurance to be written in companies
reasonably satisfactory to Lessor, the cost of such insurance to be paid by
Lessee.
H. To carry with respect to the demised premises, with insurance
companies reasonably acceptable to Lessor, public liability insurance with
limits of not less than One Hundred
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Thousand Dollars ($100,000.00) for injury to any one person, and Five Hundred
Thousand Dollars ($500,000.00) for damage in any one accident, and property
damage insurance with limits of not less than Twenty-Five Thousand ($25,000.00).
Lessor shall be named as additional insured on all such policies as his interest
may appear.
I. Peaceably to yield up the premises at the end of the term as the
same may be extended hereunder in as good a state of repair as at the
commencement thereof, ordinary wear and tear and damage by fire and other
casualty alone excepted.
J. Not to assign this lease or permit any transfer thereof by
operation of law, or sublet all or any part of the premises.
6. MUTUAL COVENANTS OF LESSOR AND LESSEE. It is covenanted and agreed by
and between Lessor and Lessee:
A. In case during this lease the premises, or any part thereof,
shall be taken by any exercise of the right of eminent domain or substantially
damaged by any public or other authority, or shall receive any substantial
direct or consequential damage thereby, which results in the Lessee being
deprived of the use and occupation of twenty-five percent (25%) of the floor
area in any one building or of such area of the demised premises as renders same
unsuitable for the continuation of the Lessee, this lease may be terminated
either on the date possession is taken by the taking authority or when such
damage occurs. Lessee must make such election within forty-five (45) days
following the taking and/or damage and must evidence same by written notice to
Lessor within the forty-five (45) day period. In the event Lessee does not elect
to terminate, a just proportion of the rent shall be abated until the premises
shall have been put in usable condition by the Lessor. The
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<PAGE>
Lessor shall have the option to terminate this lease agreement if, in its
opinion, the loss or damage from property so taken renders it impracticable or
undesirable to continue with such lease. This option to the Lessee must be
exercised within forty-five (45) days after such taking or damage and must be
evidenced by written notice of such intention given to Lessee within the
forty-five (45) day period.
B. Lessor reserves and excepts all rights to damages to the premises
and buildings and the leasehold hereby created now accrued or hereafter accruing
by reason of any exercise of the right of eminent domain and by way of
confirmation, Lessee hereby grants to Lessor all Lessee's rights to such damages
and covenants to execute and deliver such further instruments of assignment
thereof as Lessor may from time to time request.
C. In case any portion of the building situated on the demised
premises as presently contemplated shall be rendered permanently untenable
during the term of this lease by fire or other casualty with respect to which
Lessee is required to insure, Lessee may require Lessor, at Lessor's expense, to
the extent only of the insurance proceeds received by Lessor, forthwith to
replace, restore or rebuild the damaged, injured or destroyed portions thereof
to substantially the same condition as existing immediately prior to the damage,
injury or destruction, or Lessee itself may replace, restore or rebuild the
damaged, injured or destroyed premises, requiring contribution for Lessor for
the cost of such replacement, restoration or rebuilding to the extent of the
insurance proceeds paid to Lessor as a result of such damage, injury or
destruction. If the injury or damage to the building is such that the Lessee is
deprived of the use and Occupancy of more than fifty percent (50%) of the floor
area, then at the election of Lessee, this lease may be terminated forthwith.
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<PAGE>
If Lessee elects not to terminate the lease, and it is impractical to repair or
restore the damaged building, then, if Lessee shall so elect, such building
shall be replaced with a structure of corresponding floor area representing the
then current design, the design or location of such structure to be selected by
Lessor after consultation with Lessee and so far as Lessor shall deem practical,
in compliance with Lessee's wishes. It is understood that in no event shall
Lessor's obligation to restore replace or rebuild, or to make contribution
exceed in amount the sum of the insurance proceeds shall be insufficient to pay
for the cost of such replacement, restoration or rebuilding of such damaged or
destroyed portions of the premises, and Lessee has by written notice requested
Lessor to replace, restore or rebuild, then Lessee shall pay the additional sum
or sums required, above such insurance proceeds received. Repair, restoration
and rebuilding need not include alterations, changes or improvements made by and
at the expense of Lessee, nor fixtures and equipment which the Lessee was
entitled to remove.
D. If Lessee shall neglect or fail to perform or observe any of the
Lessee's covenants herein, and such neglect or failure shall continue for more
than five (5) days after written notice thereof to Lessee with respect to the
covenant to pay rent, and more than fifteen (15) days after written notice to
Lessee thereof with respect to any other of Lessee's covenants, or if the
leasehold hereby created shall be taken on execution, or by other process of
law, or if any assignment shall be made of Lessee's property for the benefit of
creditors, or if a receiver, guardian, conservator, trustee in bankruptcy or
similar officer shall be appointed to take charge of all or any part of Lessee's
property by a court of competent jurisdiction, or if Lessee commits any act of
bankruptcy, or if a petition is filed by Lessee under any bankruptcy law, or if
a petition is filed against Lessee under any
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bankruptcy law and the same shall not be dismissed within ninety (90) days from
the date upon which it is filed, then, and in any of such cases, Lessor lawfully
may immediately or at any time thereafter and without demand or notice, enter
upon the premises or any part thereof in the name of the whole and repossess the
same as of Lessor's former estate, and expel Lessee and those claiming through
or under Lessee and remove their effects, forcibly if necessary, without being
deemed guilty of any manner of trespass and without prejudice to any remedies
which might otherwise be used for arrears of rent or preceding breach of
covenant, and upon such entry this Lease shall terminate; and Lessee covenants
that, in case of such termination or in case of termination under the provisions
of statute by reason of the default of Lessee, Lessee will forthwith pay to
Lessor as damages a sum equal to the amount by which the rent called for
hereunder for the remainder of the original term, or if extended, of any such
extended term, exceeds the fair rental value of the premises for the remainder
of the original term or any extension thereof.
E. No consent or waiver, express or implied, by Lessor, to or of any
breach of any covenant, condition or duty of Lessee, shall be construed as a
consent or waiver to or of any other breach of the same or any other covenant,
condition or duty. All notices hereunder shall be served by hand delivery or by
registered mail and, if intended for Lessor shall be addressed to Lessor at P.O.
Box 638, Jackson, Tennessee, or to such other address as may be requested by
Lessor in writing, and if intended for Lessee, shall be addressed to 245
Preston, Jackson, Tennessee. Unless repugnant to the context, the words "Lessor"
and "Lessee" appearing herein shall be construed to refer to the person or
persons, natural or corporate, named above as Lessor or as Lessee as the case
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may be, and the heirs, executors, administrators, successors and assigns of such
person or persons, and those claiming through or under them or any of them.
F. If Lessee shall abandon or vacate the premises, the same may be
relet by Lessor for such rent, and upon such terms as it may deem fit, and
Lessor agrees to use reasonable efforts to so relet to minimize damages; and if
a sufficient sum shall not be thus realized monthly after paying the expense of
such reletting and collecting to satisfy the rent hereby reserved, Lessee agrees
to satisfy and pay all deficiencies as the same may become due during each month
of the remaining period of this lease, it is agreed by the parties hereto that
the demised premises shall not be deemed to have been vacated or abandoned by
Lessee as referred to in this or any other paragraph of this lease so long as a
watchman shall be maintained on the premises by Lessee.
IN WITNESS WHEREOF, the parties hereto have individually, or by their duly
authorized officer, hereunto set their hands the day and date above written
/S/ SAM LAWRENCE, JR.
S.M. LAWRENCE COMPANY, INC.
BY /S/ FRANK LAWRENCE
President
<PAGE>
STATE OF TENNESSEE
COUNTRY OF MADISON
Personally appeared before me SARAH C. SEELEY, a Notary Public in and for
said State and County, duly appointed, commissioned, qualified and action,
SAMUEL MATTHEWS LAWRENCE, JR., the within named Lessor, with whom I am
personally acquainted, and who acknowledged that he executed the foregoing Lease
Agreement for the purposes therein contained.
WITNESS, my hand and seal, at office, this 1ST day of NOVEMBER, 1996.
/S/ SARAH C. SEELEY
NOTARY PUBLIC
My Commission expires:
3-19-2000
STATE OF TENNESSEE
COUNTY OF MADISON
BEFORE ME, SARAH C. SEELEY , a Notary Public in and for the said State of
County, personally acquainted, and who, upon oath, acknowledged himself to be
President of S.M. Lawrence Co., Inc., the within named Lessee and that he as
such President, being authorized so to do, executed the foregoing Lease
Agreement for the purposes therein contained.
WITNESS, my hand and seal, at office, this 1ST day of NOVEMBER, 1996.
/S/ SARAH C. SEELEY
NOTARY PUBLIC
My Commission expires:
3-19-2000
<PAGE>
EXHIBIT "A"
BEGINNING at a stake in the north margin of Preston Street in the Third Ward of
the City of Jackson, TN, at its intersection with the west right-of-way margin
of the old Illinois Central Railroad Company (now Illinois Central Gulf); runs
thence north with said west margin of right-of-way 600 feet to a stake; runs
thence westwardly and parallel to the north right-of-way margin of Preston
Street to a stake in the east margin of the right-of-way of the old Gulf, Mobile
& Ohio Railroad Company (now also Illinois Central Gulf); runs thence in a
southerly direction with the eastern margin of said right-of-way to a stake in
the north margin of Preston Street; thence in an easterly direction with the
north margin of Preston Street to the point of beginning.
Also included is the building at 251 Preston Street known as the pipe
fabricating shop (Quanset Hut), and the metal building at the rear of the
property known as the sheet metal building.
EXHIBIT 10.22
LEASE AGREEMENT
THIS AGREEMENT made and entered into this 1st day of April, 1986 by K and
P Warehouse #1, Grand Rapids, Michigan, 49508, hereinafter called "Lessor", and
Quality Trane Heating and Cooling, Inc., Grand Rapids, Michigan, 49508,
hereinafter called "Lessee".
W I T N E S S E T H
The Lessor, in consideration of Lessee's Covenants and agreements herein
contained, has demised and leased, and by these presents does demise and lease
unto Lessee, premises located in 3395 Kraft Avenue, Kent County, State of
Michigan.
The Parties hereto further mutually covenant and agree as follows:
1.1 RENTAL Lessee covenants and agrees to pay to Lessor as rental for said
premises during the original one (1) year term hereof an agreed rental of One
Hundred Ninety Two Thousand and 00/100 Dollars ($192,000.00), payable in equal
monthly installments of Sixteen Thousand and 00/100 Dollars ($16,000,00) in
advance, payable on the first day of each month during the term hereof.
1.2 This is a gross lease and all other charges such as utilities,
insurance, real property taxes shall be included in rental payments.
2.1 TERM. The term of this Lease shall be one (1) year, commencing April
1, 1986.
2.2 LEASE YEAR. "Lease Year" shall mean each twelve (12) month period,
beginning with the first day of the term of the Lease, and each yearly
anniversary thereof, provided that the beginning date of the term of this Lease
is on the first of the month.
<PAGE>
3.1 WAIVER OF SUBROGATION. The parties hereto desire to eliminate the
right of either party to assign by way of subrogation, to any insurance company
carrying insurance on their respective properties, any cause of action which any
of the parties hereto may have against the other party, because of negligence,
resulting in any loss to property which is thus insured, and now, therefore, it
is agreed by the parties hereto as follows:
(a) Lessor and Lessee each mutually waive and relinquish any and all
rights and release the other from any claims for loss or damage which they, or
it, might have against the other on account of any claims for loss or damage to
property owned by it or them caused by the alleged negligence of the other
party, or their or its employees or persons on the within demised premises and
common area facilities by permission of the other party, as to which loss or
damage the party suffering the same is protected by insurance coverage and as to
which the party suffering the same is reimbursed by an insuror.
(b) Each of the parties hereto will use good faith efforts to
procure from the carrier of the insurance on its property an endorsement on all
its policies of insurance carried by it, substantially in the following
language:
"It is hereby stipulated that this insurance shall not be
invalidated should the insured waive in writing prior to a loss any
or all right of recovery against any party for loss occurring to the
property described herein or affected thereby."
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4.1 MAINTENANCE OF PREMISES. It is agreed by the parties thereto as
follows:
(a) Except as otherwise provided in this Lease, Lessee agrees to
maintain and to make all necessary repairs to the demised premises, and to keep
the demised premises and all improvements in the same condition as of the date
it takes possession excepting reasonable wear and tear.
(b) Lessee further covenants to operate and keep the demised
premises in clean and sanitary condition according to all applicable laws and
codes.
(c) Lessee shall maintain and keep in good condition for the term of
this Lease and renewals thereof, the driveways and parking areas.
(d) Lessee agrees that it will make no structural changes or
alterations in the building on the demised premises without first obtaining the
written consent of the Lessor. The Lessee shall have the right of making such
non-structural alterations in and about the demised premises as Lessee may
determine are desirable in connection with its business operation under this
Lease.
(e) Lessor agrees to make all necessary structural repairs and
repairs to the exterior roof as needed.
5.1 DAMAGE OR DESTRUCTION AND RESTORATION OF FIRE OR CASUALTY DAMAGE. If
the demised premises shall be damaged or destroyed by fire or other casualty,
Lessor at Lessor's sole cost and expense, shall promptly and diligently proceed
to repair, rebuild or replace such building or other improvements, so as to
restore them to the condition in which they were immediately prior to such
damage or destruction. During any period of reconstruction to the extent
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that the leased premises are not usable by the Lessee, the rents shall be abated
for that portion of the building.
6.1 DEFAULTS: REMEDIES. Defaults. The occurrence of any one or more of the
following events shall constitute a default and breach of this Lease by Lessee.
(a) The vacating and abandonment of the premises by Lessee.
(b) The failure of Lessee to make any payment of rent or any other
payment required to be made by Lessee hereunder, as and when due, where such
failure shall continue for a period of fifteen (15) days after written notice
thereof from Lessor to Lessee.
(c) The failure by Lessee to observe or perform any of the
covenants, conditions or provisions of this Lease to be observed or performed by
Lessee, other than described in Paragraph (b) above, where such failure shall
continue for a period of thirty (30) days provided that Lessee shall not be
deemed to be in default if more than 30 days is required to cure such default
and Lessee commences such cure within said (30) day period and thereafter
diligently prosecutes such cure to completion; provided further, that if the
nature of Lessee's default is such that it is not reasonably susceptible of
being cured, Lessee shall be deemed to be in default immediately after written
notice thereof has been given by Lessor to Lessee.
(d) (i) The making by Lessee of any general assignment, or general
arrangement for the benefit of creditors; (ii) the filing by or against Lessee
for a petition to have Lessee adjudged a bankrupt or a petition for
reorganization or arrangement under any law relating to bankruptcy (unless, in
the case of a petition filed against Lessee, the same is dismissed within 60
days); (iii) the appointment of a trustee or receiver to take possession of
substantially all of Lessee's
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assets located at the demised premises or of Lessee's interest in the Lease,
where possession is not restored to Lessee within (30) days; or (iv) the
attachment, execution or other judicial seizure of substantially all of Lessee's
assets located at the demised premises or of Lessee's interest in the Lease,
where such seizure is not discharged within (30) days.
(e) The levy under execution upon the leasehold interest of Lessee
or the attachment thereof by process of law, provided such levy or attachment is
not discharged or stayed by appeal or otherwise within a period of sixty (60)
days.
(f) The recording of this instrument as set forth in Paragraph 13.2
herein.
6.2 RIGHT TO CURE DEFAULTS. If Lessee shall fail to comply fully with any
of its obligations under this Lease (including, without limitation, its
obligations to make repairs, comply with all laws, ordinances and regulations
and pay all bills for utilities), then Lessor shall have the right, at its
option after notice to Lessee (except that in an emergency, notice is not
required) to cure such breach at Lessee's expense. Lessee agrees to reimburse
Lessor as additional rental for all costs and expenses incurred as a result
thereof together with interest thereon promptly upon demand, at a rate equal to
the "Prime Rate" (as hereinafter defined) plus one and one half percent
(1-1/2%). If, however, payment of interest at such rate by Lessee (or by the
Tenant then in possession having succeeded to the Lessee's interest in
accordance with the terms of this Lease) should be unlawful, I.E., violative of
the usury statutes or otherwise, then "interest" shall, as against such party,
be computed at the maximum lawful rate payable by such party. "Prime Rate" shall
mean the rate being charged at the time in question by Michigan National Bank
(Lansing Office) for short-term (90 day) unsecured loans made to its preferred
customers.
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7.1 COVENANT OF QUIET ENJOYMENT. Lessor covenants that Lessee, upon
performing its covenants and agreements herein set forth, shall and may
peacefully and quietly have, hold and enjoy demised premises during the term
hereof and any renewal terms.
8.1 RETURN OF PREMISES AT EXPIRATION OF LEASE. Lessee agrees upon
termination hereof, to return demised premises to Lessor in as good condition as
the same are or may be put by either party, reasonable wear and tear excepted.
9.1 EMINENT DOMAIN. If the whole of the leased premises shall be taken by
any public authority under the power of eminent domain, the lease term shall
cease as of the day possession shall be taken by such public authority, and
Lessee shall pay rent up to that date with an appropriate refund by Lessor of
such rent as may have been paid in advance for any period subsequent to the date
possession is taken. If less than all of the leased premises shall be so taken,
the lease shall cease only on the parts so taken as of the day possession shall
be taken by such public authority; and Lessee shall pay rent up to that day with
appropriate refund by Lessor of such rent as may have been paid in advance for
any period subsequent to the date possession is taken and thereafter the rental
shall be equitably adjusted. Lessor shall, at its expense, make all necessary
repairs or alterations to the basic building and exterior work so as to
constitute the remaining premises a complete architectural unit, provided that
Lessor shall not be obligated to undertake any such repairs and alterations if
the cost thereof exceeds the award. If the leased premises so taken leaves space
no longer suitable for Lessee for the purposes set forth in this Lease, then the
lease term shall cease and Lessee shall pay rent up to the day possession is
taken, with an appropriate refund by Lessor of such rent as may have been paid
in advance for any period subsequent to the date of
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the taking of possession. If more than twenty-five percent (25%) of the floor
area of the building in which the leased premises are located shall be taken
under the power of eminent domain, Lessor may, by 60 days' advance notice in
writing to Lessee delivered on or before the day of surrendering possession to
the public authority, terminate this Lease and rent shall be paid or refunded as
of the date of termination. Compensation awarded for any taking under the power
of eminent domain, whether for the whole or a part of the leased premises, shall
be the property of Lessor.
10.1 OPTION TO RENEW. Provided this lease is not in default, Lessor, at
its sole discretion, may provide an option to renew this Lease for an additional
three (3) year term on the same terms and conditions as provided herein, except
that increases in the operating cost of utilities, property taxes and insurance
over the base year rental period will be passed on to Lessee.
11.1 ESTOPPEL CERTIFICATE.
(a) Lessee shall, at any time upon not less than ten (10) days prior
written notice from Lessor, execute, acknowledge and deliver to Lessor a
statement in writing (i) certifying that this Lease is unmodified and in full
force and effect (or if modified, stating the nature of such modification and
certifying that this Lease, as so modified, is in full force and effect), and
stating the date to which the rent and other charges are paid in advance, if
any, and (ii) acknowledging that there are not, to Lessee's knowledge, any
uncured defaults on the part of the Lessor hereunder, or specifying such
defaults if any care claimed. Any such statement may be conclusively relied upon
by any prospective purchaser or encumbrance of the premises.
(b) Lessee's failure to deliver such statement within such time
shall be conclusive upon Lessee (i) that this Lease is in full force and effect,
without modification except as may be
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represented in good faith by Lessor, (ii) that not more than one month's rent
has been paid in advance, (iii) that there are no uncured defaults in Lessor's
performance.
11.2 RECORDING. Lessee shall not record this Lease without Lessor's prior
written consent and such recordation shall, at the option of Lessor, constitute
a noncurable default of Lessee hereunder. Either party shall, upon request of
the other, execute, acknowledge and deliver to the other, a "short form"
memorandum of this Lease for recording purposes.
11.3 COVENANTS AND CONDITIONS. Each provision of this Lease performable by
Lessor or Lessee shall be deemed both a covenant and a condition.
11.4 ATTORNEY'S FEES. If either party brings an action to enforce the
terms hereof or declare rights hereunder, the prevailing party in any such
action shall be entitled to recover reasonable attorney's fees as fixed by the
Court.
11.5 HOLDING OVER. If Lessee remains in possession of the premises or any
part thereof after the expiration of the term hereof, without the express
consent of Lessor, such occupancy shall be a tenancy from month to month at a
rental in the amount of the last monthly rental plus all other charges payable
hereunder, and upon all the terms hereof applicable to a month to month tenancy.
11.6 CORPORATE AUTHORITY. If Lessee is a corporation, each individual
executing this Lease on behalf of said corporation represents and warrants that
he is duly authorized to execute and deliver this Lease on behalf of said
corporation, in accordance with a duly adopted resolution of the Board of
Directors of said corporation, and that this Lease is binding upon said
corporation in accordance with its terms. If Lessee is a corporation, Lessee
shall, within (30) days after
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execution of this Lease, deliver to Lessor a certified copy of a resolution of
the Board of Directors of said corporation authorizing or ratifying the
execution of this Lease.
12.1 USE. Lessee agrees that, unless and to the extent that Lessee shall
obtain Lessor's prior written approval, Lessee will not use or allow to be used,
the demised premises, for any purpose other than Warehousing, subject, however,
to zoning ordinances, all rules, regulation, laws, ordinances, statutes and
requirements of all governmental authorities and the Board of Fire Insurance
Underwriters, and any similar bodies, having jurisdiction thereof, which Lessee
agrees to comply with at its sole cost and expense, and such conditions,
restrictions and other encumbrances, if any, to which the demised premises are
subject at the time of execution and delivery of this Lease.
13.1 CONDITION OF PREMISES. Lessee hereby accepts the demised premises in
their condition existing as of the date of the execution hereof, except for
completion of construction to Lessee's satisfaction, subject to all applicable
zoning, municipal, county and state laws, ordinances and regulations governing
this Lease subject thereto and to all matters disclosed thereby and by any
exhibits attached hereto. Lessee acknowledges that neither Lessor nor Lessor's
agent has made any representation or warranty as to the suitability of the
demised premises for the conduct of Lessee's business. Lessee agrees to accept
the parking lots and roadways in their present condition. Lessor has the right
to pave the parking lots and roadways at its sole discretion.
14.1 LESSOR DEFINED. The term "Lessor" as used in this Lease means only
the owner or the mortgagee in possession for the time being of the demised
premises, or the owner of a lease of the land of the demised premises, and/or
the buildings and improvements thereon, so that in the event of and upon any
assignment, sale of demise of Lessor's interest in the demised premises,
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Lessor shall be and hereby is entirely freed and relieved of all obligations of
Lessor hereunder, except obligations accrued prior to the effective date of such
assignment, provided that the assignee, or purchaser assumes and agrees to
observe and perform all obligations of Lessor hereunder, and provided further
that the then Lessee is given notice of such assignment, sale or lease.
15.1 NOTICES. Any notice required or permitted to be given hereunder shall
be in writing and may be served personally or by certified mail, return receipt
requested or Proof of Mailing addressed to Lessor and Lessee respectively at the
addresses set forth on the first page of this Lease.
16.1 MORTGAGES. Lessee agrees to execute any instrument to evidence
priority or subordination of this Lease over, or to any mortgage or deed of
trust from time to time as may be required by Lessor, provided that in the event
of subordination, the Mortgagee or Trustee under any such mortgage or deed of
trust shall acknowledge the validity of this Lease, and agree to provide for its
continuance and not to disturb Lessee's possession so long as the Lessee is not
in default hereunder.
17.1 CONTENTS INSURANCE. Lessee shall carry, at its own expense, all fire
and casualty insurance on its own fixtures, equipment and inventory located on
the leased premises.
18.1 ASSIGNMENT AND SUBLETTING. Lessee shall not have the right to
sublease the premises or assign its rights under this Lease in whole or in part
without Lessor's prior written consent (which will not be unreasonably withheld)
first obtained. Notwithstanding any such sublease or assignment, however, the
Lessee named herein and all assignees of its interest hereunder
-10-
<PAGE>
shall remain liable for the performance of all Lessee's obligations contained in
this Lease unless released in writing.
18.2 ASSIGNMENT BY LESSOR. The Lessor shall have the right to assign its
rights under this Lease in whole or in part and/or sell, or transfer its estate
in the demised premises, subject to all of the Lessee's rights and interests
hereunder.
19.1 ADVERTISING DISPLAY. Lessor and Lessee agree that all signs and
advertising displayed outside of the demised premises shall be only that which
advertises the business carried on upon the demised premises, and that Lessor
shall control the location, character and size thereof, and that no sign shall
be displayed excepting such as shall be approved in writing by Lessor, all such
approvals not to be unreasonably withheld.
20.1 BINDING EFFECT. This agreement shall be binding upon and the benefits
hereof shall insure to the heirs, successors and assigns of the parties hereto.
IN WITNESS WHEREOF, the parties hereto have caused this instrument to be
executed this 1st day of April, 1986.
WITNESS: LESSOR:
_____________________________ _____________________________
Robert Powers, K & P Warehouse #1
_____________________________ _____________________________
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<PAGE>
LESSEE:
_____________________________ _____________________________
Gordon Kamstra, Quality Trane
_____________________________ _____________________________
-12-
<PAGE>
SECOND AMENDMENT TO LEASE
THIS SECOND AMENDMENT TO LEASE is made this __________ day of May, 1992,
between ROBERT J. POWERS, d/b/a K & P WAREHOUSE #1, whose address is 3395 Kraft
Avenue, S.E., Grand Rapids, Michigan 49512, as Lessor, and QUALITY AIR HEATING &
COOLING, INC., a Michigan corporation, whose address is 3395 Kraft Avenue, S.E.,
Grand Rapids, Michigan 49512, as Lessee, with reference to the following:
RECITALS
A. Lessor and Lessee (then known as Quality Trane Heating and Cooling,
Inc.) entered into a Lease Agreement dated April 1, 1986 for premises (the
"Premises") located at 3395 Kraft Avenue, S.E., Grand Rapids, Michigan (the
"Lease Agreement").
B. The Lease Agreement was amended by an amendment dated April 1, 1990
(the "First Amendment").
C. Underlying Michigan Strategic Fund bond issues with respect to the
Premises and contiguous premises commonly known as 3427 Kraft Avenue, S.E.,
Grand Rapids, Michigan are being refunded. The refunding bond issue is known as
the "Michigan Strategic Fund Adjustable Rate Demand Limited Obligation Revenue
Refunding Bonds K & P Warehouse Project" dated as of May 1, 1992" (the "Bonds").
This Second Amendment is made in connection with the issuance of the Bonds.
AGREEMENT
In consideration of their mutual covenants, the parties agree as follows:
1. Lessor and Lessee hereby cancel the First Amendment and agree that the
First Amendment is of no effect.
2. The first sentence following the word "Witnesseth" in the Lease
Agreement is deleted in its entirety and the following is inserted in its place:
Lessor, in consideration of Lessee's covenants and agreements herein
contained, has demised and leased, and by these presents does demise
and lease unto Lessee premises located at 3395 Kraft Avenue, S.E.,
Grand Rapids, Michigan (the "Premises") and premises located at 3427
Kraft Avenue, S.E., Grand Rapids, Michigan ("Property No. 2"). The
parties acknowledge that the rights of Lessee with respect to
Property No. 2 are subject to the rights of Envirotronics, Inc., a
Michigan corporation, as lessee under a lease dated September 14,
-1-
<PAGE>
1987 between K & P Warehouse No. 2, as lessor, and Envirotronics,
Inc., as lessee, as such lease may be amended or renewed (the
"Second Lease") for a portion of Property No. 2.
3. Paragraph 1.1 of the Lease Agreement is deleted in its entirety and the
following is inserted in its place:
Lessee covenants and agrees to pay to Lessor as monthly rental
during the term of the Lease, for the Premises and for Property No.
2 the greater of (a) Eighteen Thousand Four Hundred and 00/100
Dollars ($18,400) or (b) one-twelfth (1/12) of the sum of (i) all
costs and charges required to be paid by Lessor under this Agreement
and by the lessor under the Second Lease, on an annualized basis,
including without limitation, utilities, insurance, real property
taxes, and repairs required to be made by Lessor under this
Agreement and by the lessor under the Second Lease, and (ii) the
scheduled annual debt service, including principal and interest,
required to be paid on the Bonds, as this amount may change from
time to time. Rental shall be payable in advance on the first day of
each month during the term of this Lease Agreement.
4. Paragraph 2.1 is deleted in its entirety and the following is inserted
in its place:
The remaining term of this Lease shall be thirteen (13) years,
commencing May 1, 1992 and terminating April 30, 2005.
5. Paragraph 10.1 of the Lease Agreement is deleted in its entirety.
6. This Second Amendment to Lease Agreement shall be effective as of May
1, 1992.
7. As modified by this Second Amendment to Lease, the Lease Agreement is
ratified and affirmed.
ROBERT J. POWERS, d/b/a
K & P WAREHOUSE NO. 1, Lessor
_________________________________
Robert J. Powers
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<PAGE>
QUALITY AIR HEATING & COOLING,
INC., Lessee
_________________________________
Robert J. Powers, President
-3-
<PAGE>
April 1, 1990
This agreement made and entered into this first day of April, 1990 by Robert
Powers DBA K & P Warehouse #1, Grand Rapids, MI 49508 herein after called
"lessor," and Quality Air Heating and Cooling, Inc., Grand Rapids, MI 49508
herein after called "lessee."
WITNESSETH
Both Parties agree to extend the terms of the lease dated April 1, 1986 with the
following modifications:
A. Lessor's name is to be Quality Air Heating & Cooling, Inc.
B. The term of this lease shall be one (1) year, commencing April 1,
1990.
C. Rental shall be $220,800 payable in monthly installments of $18,400.
D. Option to renew this lease for an additional three (3) year term
shall be granted on the same terms and conditions as paragraph 10.1
of the original lease agreement.
In witness whereof, the parties here to have caused this instrument to be
executed this 1st day of April, 1990.
Witness: Lessor:
__________________________ _________________________________
Robert Powers, K & P Warehouse #1
Lessor:
__________________________ _________________________________
Robert Powers,
Quality Air Heating & Cooling, Inc.
EXHIBIT 10.23
COMMERCIAL AND INDUSTRIAL LEASE
J&J INVESTMENTS; LANDLORD AND CONTRACT SERVICE, INC; TENANT
COMMERCIAL AND INDUSTRIAL LEASE
THIS LEASE made and entered into this 1ST day of March, 1997, by and between J&J
INVESTMENTS hereinafter called "Landlord," and CONTRACT SERVICE, INC.
hereinafter called "Tenant."
WITNESSETH:
In consideration of the covenants and promises contained herein and other good
and valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, it is agreed by the parties hereto as follows:
I. DEFINITIONS:
1. DEMISED PREMISES:
Landlord hereby leases to Tenant and Tenant hereby leases from Landlord
all those certain premises consisting of a two-story masonry block building
containing approximately 21,000 square feet, situated on a parcel of land in a
complex known as 3210 and 3222 Washington Street (240 West 3222 South) in the
City of South Salt Lake, State of Utah (the Demised Premises') for the term and
upon the rental herein set forth. The complex commonly known as 3210 and 3222
Washington Street, South Salt Lake City, Utah, is shown on Exhibit A attached
hereto ( the 'Complex').
Tenant shall also have the right to the exclusive use of the fenced yard and
parking areas located on the property of the Complex fronting on Washington
Street and the joint use of the fenced yard located at the rear of the property
of the Complex fronting on 300 West Street with any other tenants of the
property of the Complex. However, this right shall be subject to the exclusive
control and management of Landlord. Landlord shall have the right, from time to
time, to establish and modify and enforce reasonable rules and regulations with
respect to parking."
2. PROPORTIONATE SHARE:
As used in Section III, paragraphs 1 (a), 3, 5 and 6 and elsewhere
herein, "proportionate share" or "tenant's share" means that fraction, the
numerator of which is the number of square
<PAGE>
feet leased by the Tenant in the Demised Premises and the denominator which is
the number of square feet in the Complex.
II. TERM:
TO HAVE AND TO HOLD said premises unto Tenant for a term of five years
beginning on 1st day of March, l997, and ending on the 28th day of February,
2002.
III. TERMS AND CONDITIONS OF LEASE:
This Lease is made on the following terms and conditions, which are
expressly agreed to by Landlord and Tenant:
1. BASE RENT: The Tenant agrees to pay as base rental to Landlord, at the
address specified in this Lease or at such other place Landlord may from
time to time designate in writing, the sum of: SIX HUNDRED SIXTY SEVEN
THOUSAND FIFTY SIX AND 00/100 DOLLARS ($667,056). Said sum to be lawful
money of the United States payable as follows: $ 17,560 less $2,620 (a
previous deposit received) shall be paid upon the execution of this
Lease of which $10,060.00 represents the first month's rent and of which
$7500.00 represents the security deposit. Then beginning on April 1,
1997 and until February 28, 1998 Tenant shall pay Landlord the sum of
$10,060.00. Then beginning March 1, 1998 and on the first day of the
month of each month thereafter until February 28, 1999 the Tenant shall
pay $10,563.00 to the Landlord. Then beginning on March 1, 1999 and on
the first day of each month thereafter until February 28, 2000 the
Tenant shall pay $11,091.00 to the Landlord. Then beginning March 1,
2000 and on the first day of each month thereafter until February 28,
2001 the Tenant shall pay $11,646.00 to the Landlord. Then beginning
March 1, 2001 and on the first day of each month thereafter until
February 28, 2002 the Tenant shall pay $12,228.00 to the Landlord.
(a) ADDITIONAL RENT: In addition to Tenant's monthly base rent, Landlord
will collect from Tenant its proportionate share of the operating
expenses attributable to the Demised Premises on a monthly basis. The
following items are included as operating expenses:
1. Real estate taxes
2. Fire and liability insurance
3. Common utilities and water and sewer charges
The estimated cost for 1997 is 3.55 cents per square foot or $745 per
month. At year
2
<PAGE>
end the actual operating costs shall be determined by Landlord and any
adjustment in such estimate shall be made with appropriate additional
payments by or refunds to Tenant, as appropriate.
(b) SECURITY DEPOSIT: Tenant contemporaneously with the execution of
this lease, has deposited with Landlord the sum of $7500.00
receipt of which is hereby acknowledged by Landlord, said
deposit being given to secure the faithful performance by the
Tenant of all of the terms, covenants and conditions of this
lease by the Tenant to be kept and performed during the term
hereof. Tenant agrees that if the Tenant shall fail to pay the
rent herein reserved promptly when due, said deposit may, at the
option of the Landlord (but Landlord shall not be required to)
be applied to any rent due and unpaid, and if the Tenant
violates any of the other terms, covenants and conditions of
this Lease, said deposit shall be applied to any damages
suffered.
Nothing contained in this paragraph shall in any way diminish or
be construed as waiving any of the Landlord's other remedies as
provided herein, or by law. If the security deposit is applied
by Landlord for the payment of overdue rent or other sums due
and payable to Landlord by Tenant hereunder, then Tenant shall,
on the written demand of Landlord, forthwith remit to Landlord a
sufficient amount in cash to restore said security deposit to
its original amount, and Tenant's failure to do so within
fifteen (15) days after receipt of such demand, shall constitute
a breach of this lease. Should Tenant comply with all of the
terms, covenants and conditions of this lease and promptly pay
all of the rental herein provided for as it falls due, and all
other sums payable by Tenant to Landlord hereunder, said
security deposit shall be returned in full to Tenant at the end
of the term of this lease, or upon the earlier termination of
this lease pursuant to the provisions hereof, except in the
event the demised premises are sold as a result of the exercise
of any power of sale under any mortgage or deed of trust, in
which event this lease shall be automatically amended to delete
any reference to this paragraph and Tenant shall be entitled to
immediate reimbursement of its security deposit from the party
then holding said deposit.
(c) LATE CHARGES: In the event Tenant fails to pay said rental
(including any additional rental due hereunder) within ten (10)
days of the due date, a late charge of ten percent (10%) shall
be due and payable to Landlord.
2. RENEWAL OPTIONS: Provided that the Tenant is not in default under this
Lease, Tenant shall have the option to renew the Term of this Lease as
to the entire Demised Premises for a period of (60) months (the "First
Renewal Term" ) to commence at the expiration of the initial Term of
this lease, and to renew the First Renewal Term of this Lease as to the
entire Demised Premises for an additional period of sixty (60) months
(the "Second Renewal
3
<PAGE>
Term") to commence at the expiration of the First Renewal Term. Tenant
must exercise its option to renew by delivering written notice of such
election to Landlord not less than six (6) months nor more than twelve
(12) months prior to the expiration of the Term or the First Renewal
Term, as applicable. Any such renewal of this Lease shall be upon the
same terms and condition of this Lease, except:
(a) The Leasehold improvements will be provided to Tenant in their
then-existing condition (on an "as is basis") at the time each
Renewal Term commences; and
(b) At the time the First Renewal Term and the Second Renewal Term
commence Landlord may adjust the Base Rent under the initial
term (i) during the first Renewal Term, up to the Prevailing
Market Rate, as hereinafter defined, and (ii) during the Second
Renewal Term, up to the Prevailing Market Rate. The term
"Prevailing Market Rate" shall mean the base rent per square
foot of rentable area being charged for similar space in
comparable premises in comparable location in Salt Lake City,
Utah at the time the Renewal Terms commence; notwithstanding
paragraph (b) above.
(c) During each Renewal Term, the Base Rate shall escalate by at
least five percent (5%) over the prior year's rental rate.
3. AUTHORIZED USE: Tenant shall use the Demised Premises for the following
purpose, and for no other purpose whatsoever, without the written
consent of Landlord first had and obtained: officing, sales, workshop,
sheet metal fabrication, warehousing distribution.
Tenant shall not commit or knowingly permit any waste of the Demised
Premises or use the same for any unlawful purpose. The Tenant will comply with
all applicable federal, state and local laws, ordinances and regulations
relating to the Demised Premises and its use and operation by the Tenant.
(a) Hazardous Material:
1. Tenant agrees not to keep, use or permit to be kept or
used on the Demised Premises any flammable fluids,
explosives or any "hazardous substance," "solid waste,"
or "hazardous waste" as said terms are defined in 42
U.S.C. 9601(14), and 40 C.F.R. 261.1 et seq. in
violation of applicable law without the prior written
permission of Landlord.
2. Tenant shall comply with all obligations imposed by
environmental laws and all other restrictions and
regulations upon the use, generation, storage or
disposal of Hazardous Materials by tenant, its agents or
employees at, to or from the Demised
4
<PAGE>
Premises.
3. Tenant shall deliver promptly to Landlord true and
correct copies of all notices received by Tenant from
any governmental authority with respect to the use,
generation, storage or disposal by Tenant of Hazardous
Materials at, to or from the Demised Premises and shall
immediately notify Landlord both by telephone and in
writing of any unauthorized discharge of Hazardous
Materials by Tenant that Tenant reasonably believes
imposes and imminent hazard to the Demised Premises, the
public or the environment.
4. Tenant shall complete fully, truthfully and promptly any
questionnaires sent by Landlord with respect to Tenant's
generation, storage and disposal of Hazardous Materials
at, to or from the Demised Premises, which
questionnaires are required by governmental authorities.
5. If Landlord conducts any environmental inspections as a
result of its reasonable belief that Tenant's activities
have or are likely to result in a violation of
environmental laws or a release of Hazardous Materials
on the Demised Premises and such violation by Tenant has
actually occurred, then Tenant shall pay to Landlord as
additional rent, the costs incurred by Landlord for such
inspections.
6. Tenant shall cease immediately upon notice form Landlord
any activity which violates any environmental laws.
7. After notice to and approval by Landlord, which approval
shall not be unreasonably withheld, Tenant shall
promptly remove, cleanup, dispose of or otherwise
remediate, in accordance with environmental laws and
good commercial practice, any Hazardous Materials on,
under or about the Demised Premises caused by Tenant's
acts on the Demised Premises.
8. Tenant agrees to indemnify, defend and hold Landlord and
its officers, partners, directors, shareholders,
employees and agents harmless from any claims,
judgments, damages, fines, penalties, costs, liabilities
( including sums paid in settlement of claims) or loss,
including attorneys' fees, consultants' fees, and expert
fees which arise during or after the term of this lease
or renewals thereof in connection with the presence of
Hazardous Materials in the soil, ground water or soil
vapor on or under the Demised Premises or the Complex
caused by the acts or negligent omissions of Tenant, its
officers, employees or agents. Without limiting the
generality of the foregoing, this indemnification
obligation of Tenant shall survive the expiration of
this Lease and specifically covers costs incurred in
connection with any investigation of site conditions or
any clean up,
5
<PAGE>
remedial, removal or restoration work required by any
federal, state or local governmental agency or political
subdivision because of the presence or suspected
presence of Hazard Materials in the soil, ground water
or soil vapor on or under the Demised Premises and the
Complex caused by the acts or negligent omissions of
Tenant, its officers, employees or agents.
(b) ADA. Tenant shall comply with the Americans with Disabilities
Act of 1990 (ADA) and the regulations promulgated thereunder
relating to any alterations, additions or improvements which
Tenant makes to the Demised Premises. Tenant hereby expressly
assumes all responsibility for compliance with the ADA relating
to the interior, non-structural portions of the Demised Premises
and Tenant's specific use of the Demised Premises. Any
alterations to the interior, non-structural portions of the
Demised Premises made by Tenant for the purpose of complying
with the ADA or which otherwise require compliance with the ADA,
shall be done in accordance with the provisions of this Lease;
provided, that Landlord's consent to such alterations shall not
constitute either Landlord's assumption, in whole or in part, of
Tenant's responsibility for compliance with the ADA, or a
representation or confirmation by Landlord that such alterations
comply with the provisions of the ADA."
4. PAYMENT OF TAXES AND OTHER ASSESSMENTS: Tenant shall pay its
proportionate share when they are due of all property taxes, license
fees and assessments levied or imposed which are attributable to the
Demised Premises or measured by the rent payable hereunder during the
term of this Lease or any extension thereof, by Federal, state,
municipal or other governmental authority excluding federal income tax
or gift tax; provided, however, that no law or practice postponing the
payment of such taxes, assessments or charges until after the
termination of this Lease shall relieve Tenant of the obligation to make
such payments. Payment of such taxes shall be made by Tenant to Landlord
not later than thirty (30) days following the date on which Landlord
provides Tenant with written evidence of such taxes in the form of a
copy of the tax return or notice. If Tenant fails to pay any of such
taxes, charges or other impositions when due, Landlord may pay the same
under the provisions of paragraph 20, hereinafter set forth. Anything
herein to the contrary notwithstanding, if Tenant deems excessive or
illegal any such tax or assessment, Tenant may defer payment thereof so
long as the validity or the amount thereof is contested by Tenant in
good faith, in which case Tenant shall furnish to Landlord a bond, in
form reasonably satisfactory to Landlord, in an amount equal to the
amount of taxes or assessments so contested, w bond shall guarantee the
payment thereof with interest and penalties thereon.
5. CONDITION OF THE PREMISES: Tenant accepts the Demised Premises in the
condition they are in at the time of its taking thereof. Tenant agrees,
if, during the term of this Lease, Tenant shall change the usual method
of conducting Tenant's business on the Demised Premises, or should
Tenant install thereon or therein any new facilities, Tenant will, at
the sole cost and expense of Tenant, make alterations or improvements in
or to the
6
<PAGE>
Demised Premises which may be required by reason of any Federal or state
law, or by any municipal ordinance, oprr regulation applicable thereto.
Landlord warrants that the building, on date of occupancy, meets all
currently applicable Federal, state and municipal laws and ordinances.
6. TENANT'S PAYMENT FOR PROPERTY INSURANCE: Tenant shall pay its
proportionate share of insurance maintained by the Landlord which are
attributable to the Demised Premises against the perils of fire, the
"extended coverages", vandalism and mischief, and all risks to the
building as well as coverage for six months rent loss due to business
interruption from the covered risks. The amount of insurance coverage
shall be in an amount equal to ninety percent (90%) of the replacement
value of the Demised Premises. Tenant shall be responsible for any
damage to premises as a result of forced entry into the Demised Premises
or burglary thereof. Also, Tenant shall maintain insurance coverage for
Tenant's personal property improvements, and alterations to the
premises. This insurance shall cover the same risks and shall be for the
same percentage of replacement value as the insurance maintained by the
Landlord. The proceeds from such insurance shall be used to replace
Tenant's personal property and to restore its improvements and
alterations. Both Landlord and Tenant shall be named as coinsureds for
this coverage maintained by the Tenant. Landlord shall be given thirty
(30) days notice prior to cancellation or termination of this insurance
policy.
7. REPAIR AND CARE OF BUILDING AND PAYMENT OF UTILITIES BY TENANT: Tenant
shall pay all charges, when due, including but not limited to charges
for water, heat, gas, electricity and other public utilities used on the
Demised Premises, including all replacements of light bulbs, tubes,
ballasts and starters within a reasonable time after they burn out.
Tenant agrees, at its sole cost and expense, to keep the interior of the
Demised Premises and the grounds outside the Demised Premises in good
condition, and to keep the sidewalks, driveways and parking lots of the
Demised Premises free from snow and ice, and agrees to pay for all
labor, materials and other repairs to, and replacement of, the
electrical wiring, plumbing, air-conditioning and heating systems.
Tenant shall also be responsible to clean and paint the interior of the
Demised Premises such that it is returned to Landlord in the same
condition as received by Tenant, normal wear and tear excepted.
Tenant also agrees to pay its proportionate share for:
1. Mowing of grass, care of shrubs, and general
landscaping, if any;
2. The cleaning and painting of the exterior of the
premises as reasonably deemed desirable by the Landlord
for maintaining the Demised Premises in a clean,
attractive and sanitary condition; and
3. The removal of snow and ice, as may be reasonably
possible, from driveways and
7
<PAGE>
parking lots.
8. REPAIR OF BUILDING BY LANDLORD: Landlord agrees for the term of this
Lease, at Landlord's sole cost and expense to maintain the roof in good
condition and repair, and to repair any latent defects in the exterior
walls, floor joists, and foundations, and to repair any defects or any
damage that might result from acts of Landlord or Landlord's
representatives. Landlord shall not, however, be obligated to repair any
such damage until written notice of the need of repair shall have been
given to Landlord by Tenant and, after such notice is so given, Landlord
shall have a reasonable time in which to make such repairs.
9. ALTERATIONS OF BUILDING AND INSTALLATION OF FIXTURES AND OTHER
APPURTENANCES: Tenant may, with written consent of Landlord, which
consent shall not be unreasonably withheld or delayed, but at Tenant's
sole cost and expense in a good and workmanlike manner, make such
alterations and repairs to the Demised Premises as Tenant may require
for the conduct of its business without, however, materially altering
the basic character of the building or improvements, or weakening any
structure on the Demised Premises. Tenant shall have the right, with the
written permission of Landlord, to erect, at Tenant's sole cost and
expense, such temporary partitions, including office partitions, as may
be necessary to facilitate the handling of Tenant's business and to
install telephone and telephone equipment and wiring, and electrical
fixtures, additional lights and wiring and other trade appliances. Any
alterations or improvements to the Demised Premises, including
partitions, all electrical fixtures, lights and wiring shall, at the
option of Landlord, become the property of Landlord, at the expiration
or sooner termination of this Lease. Should Landlord request Tenant to
remove all or any part of the above mentioned items, Tenant shall do so
prior to the expiration of this Lease and repair the Demised Premises as
described below. Temporary moveable shelves, bins, and machinery
installed by Tenant shall remain the property of Tenant and may be
removed by Tenant at any time; provided, however, that all covenants,
including rent due hereunder to Landlord shall have been complied with
and paid. At the expiration or sooner termination of this Lease, or any
extension thereof, Tenant shall remove said shelves, bins and machinery
and repair, in a good workmanlike manner, all damage done to the Demised
Premises by such removal.
10. ERECTION AND REMOVAL OF SIGNS: Tenant may, if building policy and city
ordinances permit, place suitable signs on the Demised Premises for the
purpose of indicating the nature of the business carried on by Tenant in
said premises; provided, however that such signs shall be in keeping
with other signs in the district where the Demised Premises are located;
and provided, further, that the location and size of such signs shall be
approved by Landlord prior to their erection. Signs shall be removed
prior to the expiration of this lease and any damage to the Demised
Premises caused by installation or removal of signs shall be repaired at
expenses of the Tenant. All work shall be completed in a good
workmanlike manner.
11. GLASS: Tenant agrees to immediately replace, at its sole cost and
expense, all glass into
8
<PAGE>
the Demised Premises if broken or damaged during the term of this Lease
with glass of the same quality as that broken or damaged.
12. RIGHT OF ENTRY BY LANDLORD: Tenant, shall permit inspection of the
Demised Premises during reasonable business hours by Landlord or
Landlord's agents or representatives for the purpose of ascertaining the
condition of the Demised Premises and in order that Landlord may make
such repairs as may be required to be made by Landlord under the terms
of this Lease. Sixty (60) days prior to the expiration of this Lease,
Landlord may post suitable notice on the Demised Premises that the same
are "For Rent" an may show the Demised Premises to prospective tenants
at reasonable times. Landlord may not, however, thereby unnecessarily
interfere with the use of Demised Premises by Tenant.
13. ASSIGNMENT AND SUBLETTING: Neither this Lease nor any interest herein
may be assigned by Tenant voluntarily or involuntarily, or by operation
of law, and neither all nor any part of the Demised Premises shall be
sublet by Tenant without the written consent of Landlord first had or
otherwise obtained; however, Landlord agrees not to withhold its consent
unreasonably for Tenant to assign or sublet the Demised Premises. In the
event the Demised Premises should be sublet, as herein provided, at an
increased rental, fifty (50%) percent of said increase shall be paid to
Landlord by Tenant as additional rental. Any assignment or subletting
shall not release Tenant from its obligations under this lease.
Notwithstanding the preceding paragraph, Tenant may transfer, assign or
sublet this Lease to an "Affiliate," as hereinafter defined, without
Landlord's consent. An Affiliate shall mean (i) a person or entity that
controls or is controlled by or under common control with Tenant, (ii) a
person or entity that survives a merger or consolidation with or into
Tenant and (iii) a person or entity to which all or substantially all of
the assets of Tenant may be sold, transferred or conveyed, whether by
operation of law, by contract or otherwise. The term "control" means,
with respect to an entity, the ownership, directly or indirectly, of
more than fifty percent (50%) of the voting securities of such entity,
or the power to direct the management or policies of such entity,
whether by operation of law, by contract or otherwise. With respect to
either party's assignment or subletting permitted hereunder without the
other party's consent, the assigning party shall provide written notice
of such assignment or subletting to the other party within thirty (30)
days of the effective date of such assignment or sublet.
14. DAMAGE OR DESTRUCTION: If the Demised Premises or any part thereof shall
be damaged or destroyed by fire or other casualty, Landlord shall
promptly repair all such damage and restore the Demised Premises without
expense to Tenant, subject to delays due to adjustment of insurance
claims, strikes and other causes beyond Landlord's control. If such
damage or destruction shall render the Demised Premises untenable in
whole or in part, the rent shall be abated wholly or proportionately as
the case may be until the damage shall be repaired and the Demised
Premises restored. If the damage or destruction shall be so extensive as
to require the substantial rebuilding, i.e., expenditure of fifty (50%)
percent
9
<PAGE>
or more of replacement cost of the building or buildings on the demised
premises, Landlord or Tenant may elect to terminate this Lease by
written notice to the other given within thirty (30) days after the
occurrence of such damage or destruction. Landlord and Tenant hereby
release each other from responsibility for loss or damage occurring on
or to the Demised Premises or the premises of which they are a part or
to the contents of either thereof, caused by fire or other hazards
ordinarily covered by fire and extended coverage insurance policies and
each waives all rights of recovery against the other for such loss or
damage. Willful misconduct lawfully attributable to either party,
whether in whole or in part a contributing cause of the casualty giving
rise to the loss or damage, shall not be excused under the foregoing
release and waiver.
15. INJURIES AND PROPERTY DAMAGE: Tenant agrees to indemnify and hold
harmless Landlord of and from any and all claims of any kind or nature
arising from Tenant's use of the Demised Premises during the term
hereof, and Tenant hereby waives all claims against Landlord for damage
to goods, ware, merchandise or for injury to persons in and upon the
Demised Premises from any cause whatsoever, except such as might result
from the negligence of Landlord or Landlord's representatives or from
failure of Landlord to perform its obligation hereunder within a
reasonable time after notice in writing by Tenant requiring such
performance by Landlord. Tenant shall at all times during the term
hereof keep in effect in responsible companies, acceptable to Landlord,
liability insurance in the names of and for the benefit of Tenant and
Landlord with limits as follows:
Bodily Injury, $2,000,000.00 each occurrence; Property Damage,
$100,000.00; or in lieu thereof, a combined limit of bodily
injury and property damage liability of not less than
$2,000,000.00.
Such insurance may, at Tenant's election, be carried under any general
blanket coverage of Tenant. A renewal policy shall be procured not less than ten
(10) days prior to the expiration of any policy. Each original policy or a
certified copy thereof, or a satisfactory certificate of the insurer evidencing
insurance carried with proof of payment of the premium shall be provided by
Tenant upon the request of Landlord. Tenant shall have the right to settle and
adjust all liability claims and all other claims against the insuring companies,
but without subjecting Landlord to any liability or obligation.
16. SURRENDER OF PREMISES: Tenant agrees to surrender the Demised Premises
at the expiration, or sooner termination, of the term of this Lease, or
any extension thereof, in the same condition as when said premises were
delivered to Tenant, or as altered, pursuant to the provisions of this
Lease, ordinary wear, tear and damage by the elements excepted, and
Tenant shall remove all of its personal property. Tenant agrees to pay a
reasonable cleaning charge should it be necessary for Landlord to
restore or cause to be restored the premises to the same condition as
when said premises were delivered to Tenant.
10
<PAGE>
17. HOLDOVER: Should the Landlord permit Tenant to holdover the Demised
Premises or any part thereof, after the expiration of the term of this
Lease, then and unless otherwise agreed in writing, such holding over
shall constitute a tenancy from month-to-month only, and shall in no
event be construed as a renewal of this Lease and all provisions of this
Lease not inconsistent with a tenancy from month-to-month shall remain
in full force and effect. During the month-to-month tenancy, Tenant
agrees to give Landlord thirty (30) days prior written notice of its
intent to vacate premises. Tenant agrees to vacate the premises upon
thirty (30) days prior written notice from Landlord. The rental for the
month-to-month tenancy shall be equal to 150% of the rental payable for
the last month of the previous term of this Lease.
18. QUIET ENJOYMENT: If and so long as Tenant pays the rents reserved by
this Lease and performs and observes all the covenants and provisions
hereof, Tenant shall quietly enjoy the demised premises, subject,
however, to the terms of this Lease, and Landlord will warrant and
defend Tenant in the enjoyment and peaceful possession of the demised
premises throughout the terms of this Lease.
19. WAIVER OF COVENANTS: The failure of any party to enforce the provisions
of this Lease shall not constitute a waiver unless specifically stated
in writing, signed by the party whose rights are deemed waived,
regardless of a party's knowledge of a breach hereunder.
20. DEFAULT: If Tenant shall make default in the fulfillment of any of the
covenants and conditions hereof except default in payment of rent,
Landlord may, at its option, after fifteen (15) days prior notice to
Tenant, make performance for Tenant and for the purpose advance such
amounts as may be necessary. Any amounts so advanced, or any expense
incurred, or sum of money paid by Landlord by reason of the failure of
Tenant to comply with any covenant agreement, obligation or provision of
this Lease, or in defending any action to which Landlord may be
subjected by reason of any such failure for any reason of this Lease,
shall be deemed to be additional rent for the Demised Premises and shall
be due and payable to Landlord on demand. The acceptance by Landlord of
any installment of fixed rent, or of any additional rent due under this
or any other paragraph of this lease, shall not be a waiver of any other
rent then due nor of the right to demand the performance of any other
obligation of the Tenant under this Lease. Interest shall be paid to
Landlord on all sums advanced by Landlord at an annual interest rate of
2% over the prime rate charged by FIRST SECURITY BANK.
If Tenant shall make default in fulfillment of any of the covenants or
conditions of this Lease (other than the covenants for the payment of
rent or other amounts) and any such default shall continue for a period
of thirty (30) days after notice, then Landlord may, at its option,
terminate this Lease by giving Tenant written notice of such termination
and, thereupon, this Lease shall expire as fully and completely as if
that day were the date definitely fixed for the expiration of the term
of this Lease and Tenant shall quit and surrender the Demised Premises.
21. DEFAULT IN RENT, INSOLVENCY OF TENANT: If Tenant shall make default in
the payment of the rent reserved hereunder, or any part thereof, or in
making any other payment
11
<PAGE>
herein provided for, and any such default shall continue for a period of
ten (10) days, after written notice to Tenant, or if the Demised
Premises or any part thereof shall be abandoned or vacated or if Tenant
shall be legally dismissed therefrom by or under any authority other
than Landlord, or if Tenant shall file a voluntary petition in
bankruptcy or if Tenant shall file any petition or institute any
proceedings under any insolvency or United States Bankruptcy Code or any
amendment thereto hereafter made, seeking to effect its reorganization
or a composition with its creditors, or if any proceedings based on the
insolvency of Tenant or relating to bankruptcy proceedings are commenced
and remain unstayed for forty-five (45) days, a receiver or trustee
shall be appointed for Tenant or the Demised Premises or if any
proceedings shall be commenced for the reorganization of Tenant or if
the leasehold estate created hereby shall be taken on execution or by
any process of law or if Tenant shall admit in writing its inability to
pay its obligations generally as they become due, then Landlord, in
addition to any other rights or remedies it may have, shall have the
immediate right of re-entry and may remove all persons and property from
the Demised Premises. Such property may be removed and stored in a
public warehouse or elsewhere at the cost of and for the account of
Tenant. Landlord may elect to reenter, as herein provided, or Landlord
may take possession pursuant to this Lease and relet the Demised
Premises or any part thereof for such term or terms (which may be for a
term extending beyond the term of this Lease) and at such rental or
rentals and upon such other terms and conditions as Landlord in the
exercise of Landlord's sole discretion may deem advisable with the right
to make alterations and repairs to said premises. Upon each subletting,
Tenant shall be immediately liable for and shall pay to Landlord, in
addition to any indebtedness due hereunder, the costs and expenses of
such reletting including advertising costs, brokerages fees, any
reasonable attorney's fees incurred and the cost of such alterations and
repairs incurred by Landlord, and the amount, if any, by which the rent
reserved in this Lease for the period of such reletting (up to but not
beyond the term of this Lease) exceeds the amount agreed to be paid as
rent for the Demised Premises for said period by such reletting. If
Tenant has been credited with any rent to be received by such reletting
and such rents shall not be promptly paid to Landlord by the new Tenant,
such deficiency shall be calculated and paid monthly by Tenant. No such
re-entry or taking possession of the Demised Premises by Landlord shall
be construed as an election by Landlord to terminate this Lease unless
the termination thereof be decreed by a court of competent jurisdiction
or stated specifically by the Landlord in writing addressed to Tenant.
Notwithstanding any such reletting without termination, Landlord may at
any time thereafter elect to terminate this Lease for such previous
breach. Should Landlord at any time terminate this Lease for any breach,
in addition to any other remedy Landlord may have, Landlord may recover
from Tenant all damages Landlord may incur by reason of such breach,
including the cost of recovering the Demised Premises including
attorney's fees, court costs, and storage charges and including the
worth at the time of such termination of the excess, if any, of the
amount of rent and charges equivalent to rent reserved in this Lease for
the remainder of the stated term over the then chargeable rent on the
premises for the remainder of the stated term, all of which amounts
shall be immediately due and payable from Tenant to Landlord. In no
event, shall this Lease or any rights or privileges hereunder be an
asset of Tenant under any bankruptcy, insolvency or reorganization
proceedings.
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<PAGE>
22. ENFORCEMENT: In the event either party shall enforce the terms of this
Lease by suit or otherwise, the party at fault shall pay the costs and
expenses incident thereto, including reasonable attorney's fees.
23. FAILURE TO PERFORM COVENANT: Any failure on the part of either party to
this Lease to perform any obligations hereunder, other than Tenant's
obligation to pay rent, and any delay in doing any act required hereby
shall be excused if such failure or delay is caused by any strike,
lockout, governmental restriction or any similar cause beyond the
control of the party so failing to perform, to the extent and for the
period that such continues.
24. RIGHTS OF SUCCESSORS AND ASSIGNS: The covenants and agreements contained
in this Lease will apply to, inure to the benefit of, and be binding
upon the parties hereto, their heirs, distributees, executors,
administrators, legal representatives, permitted assigns, and upon their
respective successors in interest except as expressly otherwise
hereinabove provided.
25. TIME: Time is of the essence of this Lease and every term, covenant and
condition herein contained.
26. LIENS: Tenant agrees not to permit any lien for monies owing by Tenant
to remain against the Demised Premises for a period of more than thirty
(30) days following discovery of the same by Tenant; provided, however,
that if tenant posts a bond in the amount of the lein nothing herein
contained shall prevent Tenant, in good faith and for good cause from
contesting the claim or claims of any person, firm or corporation
growing out of Tenant's operation of the Demised Premises or costs of
improvements by Tenant on the said premises, and the postponement of
payment of such claim or claims, until such contest shall finally be
decided not to be a violation of this Lease or any covenant thereof.
Should any such lien be filed and not released or discharged or action
not commenced to declare the same invalid within thirty (30) days after
discovery of the same by Tenant, Landlord may at Landlord's option (but
without any obligation so to do) pay and discharge such lien and may
likewise pay and discharge any taxes, assessments or other charges
against the Demised Premise which Tenant is obligated hereunder to pay
and which may or might become a lien on said premises. Tenant agrees to
repay any sum so paid by Landlord upon demand therefor, as provided for
in paragraph 20 herein.
27. SUBORDINATION: This Lease shall be subject and subordinate to all
mortgages, deeds of trust and related security instruments which may now
or hereafter encumber the Demised Premises and to all renewals,
modifications, consolidations, replacements and extensions thereof and
to each advance made thereunder, provided that Tenant has received from
the holder thereof an agreement that Tenant will not be disturbed in its
possession of the Demised Premises, or have its rights under this Lease
modified or terminated other than pursuant to the terms of this Lease.
In the event of the enforcement by the trustee or the beneficiary under
any such mortgage or deed of trust of the remedies provided for by law
or by such mortgage or deed of trust, Tenant will, upon the request of
any person or party succeeding to the interest of said trustee or
beneficiary as a result of such enforcement (and
13
<PAGE>
subject to the aforesaid recognition of Tenant's rights under the
Lease), automatically become the tenant of, and attorn to, such
successor in interest without change in the terms or provisions of this
Lease.
28. DEFAULT BY LANDLORD: Except where the provisions of this Lease grant
Tenant an express, exclusive remedy, or expressly deny Tenant a remedy,
if:
(a) Landlord fails to pay amount payable by Landlord hereunder and
such failure to pay continues and remains unremedied for a
period of fifteen (15) days after written notice thereof given
by Tenant to Landlord; or
(b) Landlord fails to perform or observe any covenant, term,
provision or condition of this Lease that interferes in any
material respect with Tenant's use and enjoyment of the Demised
Premises, and such failure continues for a period of thirty (30)
days after written notice thereof given by Tenant to Landlord;
provided, however, if the nature of the default is such that it
cannot be cured with the exercise of Landlord's reasonable and
good faith efforts within the thirty (30) day period, Landlord
shall have up to ninety (90) days from the date of Tenant's
notice to cure such default, provided Landlord undertakes such
curative action within the thirty (30) day period and diligently
and continuously proceeds with such curative action using
Landlord's reasonable and good faith efforts;
then, Tenant may deliver a second notice to Landlord, and if such default shall
continue uncured by Landlord and/or its mortgagee for an additional thirty (30)
days after the delivery of such second notice, Tenant shall have the right to
exercise one or more of the following options, but not (i) and (ii)
simultaneously: (i) Tenant may cure the default which, in the case of a monetary
default, may be effected by the withholding of or offsetting against rent, and
Landlord shall reimburse Tenant (which reimbursement may be effected through the
withholding of or offsetting against rent) for all reasonable sums expended in
so curing said default, (ii) Tenant may terminate this Lease and (iii) Tenant
may pursue all other remedies at law or in equity to which Tenant may be
entitled. Tenant may not terminate this Lease because of Landlord's default
unless specifically permitted pursuant to this paragraph or unless otherwise
specifically provided in this Lease. Tenant specifically agrees that the cure of
any default by and Landlord mortgagee shall be deemed a cure by Landlord under
this Lease.
29. CONSTRUCTION OF LEASE: Words of any gender used in this Lease shall be
held to include any other gender, and words in the singular number shall
be held to include the plural when the sense requires.
30. SIGNING OF DOCUMENTS: Tenant shall sign and deliver any instrument or
documents necessary or appropriate to evidence any such attornment or
subordination or agreement to do so. Such subordination and attornment
documents may contain such provisions as are customarily required by any
ground Landlord, beneficiary under a deed of trust or mortgagee. If
Tenant fails to do so within ten (10) days after written request, Tenant
14
<PAGE>
hereby makes, constitutes and irrevocably appoints Landlord, or any
transferee successor of Landlord, the attorney-in-fact of Tenant to
execute and deliver any such instrument or document.
31. ESTOPPEL CERTIFICATES:
(a) Upon Landlord's written request, Tenant shall execute,
acknowledge and deliver to Landlord a written statement
certifying: (i) that none of the terms or provisions of this
Lease have been changed (or if they have been changed, stating
how they have been changed); (ii) that this Lease has not been
canceled or terminated; (iii) the last date of payment of the
Base Rent and other charges and the time period covered by such
payment; (iv) that Landlord is not in default under this Lease
(or, if Landlord is claimed to be in default, stating why); and
(v) such other matters as may be reasonably required by Landlord
or the holder of a mortgage, deed of trust or lien to which the
Property is or becomes subject. Tenant shall deliver such
statement to Landlord within ten (10) days after Landlord's
request. Any such statement by Tenant may be given by Landlord
to any prospective purchaser or encumbrancer of the Property.
Such purchaser or encumbrancer may rely conclusively upon such
statement as true and correct.
32. TENANT'S FINANCIAL CONDITION: Within ten (10) days after written request
from Landlord, Tenant shall deliver to Landlord most recent financial
statements made as are reasonably required by Landlord to verify the net
worth of Tenant, or any assignee, subtenant, or guarantor of Tenant. In
addition, Tenant shall deliver to any lender designated by Landlord any
financial statements required by such lender to facilitate the financing
or refinancing of the Property. Tenant represents and warrants to
Landlord that each such financial statement is a true and accurate
statement as of the date of such statement. All financial statements
shall be confidential and shall be used only for the purposes set forth
herein.
33. PARAGRAPH HEADINGS: The paragraph headings as to the contents of
particular paragraphs herein, are inserted only for convenience and are
in no way to be construed as part of such paragraph or as a limitation
on the scope of the particular paragraph to which they refer.
34. NOTICES: It is agreed that all notices required or permitted to be given
hereunder, or for purposes of billing, process, correspondence, and any
other legal purposes whatsoever, shall be deemed sufficient if given by
a communication in writing by United States mail, postage prepaid and
certified and addressed as follows:
If to Landlord, at the following address:
J&J investments
15
<PAGE>
2030 MapleHollow Way
Bountiful, Utah 84010
(801) 292-6546
If to Tenant, at the following address:
Contract Service Inc.
PO Box 65429
Salt Lake City, Utah 84165-0429
35. GOVERNING LAW: The terms of this Agreement shall be governed by and
construed in accordance with Utah law.
36. DOCUMENTATION: The parties hereto agree to execute such additional
documentation as may be necessary or desirable to carry out the intent
of this Agreement.
37. CONTINGENCY REGARDING USE: This Lease is contingent upon there being no
restrictions, covenants, agreements, laws, ordinances, rules or
regulations, which would prohibit Tenant from using the above described
premises for the purposes described herein.
38. INDEMNIFICATION OF LANDLORD: Tenant, as a material part of the
consideration to be rendered to Landlord under this Lease, shall hold
Landlord exempt and harmless from any damage or injury to any person, or
the goods, wares and merchandise of any person, arising from the use of
the Demised Premises by Tenant, or from the failure of the Tenant to
keep the premises in good condition and repair, as herein provided.
39. EMINENT DOMAIN: If at any time during the term of this Lease the entire
Demised Premises or any part thereof shall be taken as a result of the
exercise of the power of eminent domain or by an agreement in lieu
thereof, this Lease shall terminate as to the part so taken as of the
date possession is taken by the condemning authority. If all or any
substantial portion of the Demised Premises shall be taken, Landlord may
terminate this Lease at its option, by giving Tenant written notice of
such termination within thirty (30) days of such taking. If all or a
portion of the premises taken are so substantial that Tenant's use of
the Demised Premises is substantially impaired, Tenant may terminate
this Lease pursuant to this Article. Unless terminated as herein
provided for, this Lease shall remain in full force and effect, except
that the rent payable by Tenant hereunder shall be reduced in the
proportion that the area of the premises so taken bears to the total
premises. Landlord shall be entitled to and Tenant hereby assigns to
Landlord the entire amount of any award in connection with such taking.
Nothing in this Article shall give Landlord any interest in or preclude
Tenant from seeking, on its own account, any award attributable to the
taking of personal property or trade fixtures belonging to Tenant, or
for the interruption of Tenant's business.
16
<PAGE>
41. ENTIRE AGREEMENT: This Lease constitutes the entire agreement and
understanding between the parties with respect to the subject matter
hereof and supersedes all prior discussions, understandings and
agreements.
42. REPRESENTATION REGARDING AUTHORITY: The persons who have executed this
Lease represent and warrant that they are duly authorized to execute
this Lease in their individual or representative capacity as indicated.
Amendment of this Lease may not be altered or amended except by a
subsequent written agreement executed by all of the parties hereto.
43. REVIEW OF DOCUMENTS: The parties hereto represent that they have read
and understand the terms of this Lease, and that they have sought legal
counsel to the extent deemed necessary in order to protect their
respective interests.
44. KEYS & LOCKS: Tenant, upon the termination of the Tenancy, shall deliver
to the Landlord all the keys to the offices, rooms and restrooms which
have been furnished to the Tenant.
45. AUCTION, FIRE OR BANKRUPTCY SALE: Tenant shall not conduct any auction
nor permit any fire or bankruptcy sale to be held on the Demised
Premises.
46. CARPETING DAMAGE AND CHAIRMATS: Tenant agrees to be responsible for the
replacement of carpeting in the Demised Premises.
47. MEDIATION AND ARBITRATION. If any dispute or claim in law or equity
arises out of this Lease, Tenant and Landlord agree in good faith to
attempt to settle such dispute or claim by mediation under the
Commercial Mediation rules of the American Arbitration Association. If
such mediation is not successful in resolving such dispute or claim,
then such dispute or claim shall be decided by neutral binding
arbitration before a single arbitrator in accordance with the Commercial
Arbitration rules of the American Arbitration Association in Salt Lake
City, Utah. Judgment upon the award rendered by the arbitrator may be
entered in any court having jurisdiction thereof. However, this
paragraph does not apply to disputes or claims arising under Section 78,
Chapter 36, of the Utah Code.
17
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused these presents to be
executed as of the day and year first above written.
LANDLORD: TENANT:
J&J INVESTMENTS CONTRACT SERVICE, INC.
BY: ____________________________ BY: ____________________________
18
EXHIBIT 10.24
AMENDMENT TO LEASE AGREEMENT
THIS AMENDMENT TO LEASE AGREEMENT (this "Agreement") is made and entered
into on this 13th day of March, 1997, by and between COOK PROPERTIES, INC.
("Cook Properties"), and TECH HEATING AND AIR CONDITIONING, INC. ("Lessee").
W I T N E S S E T H:
WHEREAS, Cook Properties and Lessee intended to enter into that certain
Lease dated April 2, 1995 (the "Lease"), covering approximately 10,850 square
feet of space (the "Leased Premises") located at 30300 Bruce Industrial Parkway,
Solon, Ohio.
WHEREAS, Cook Properties and Lessee desire to correct, amend and modify
the Lease as more particularly provided herein;
NOW, THEREFORE, in consideration of the premises, the mutual promises
herein contained and other good and valuable consideration, the receipt and
sufficiency of all of which is hereby acknowledged and confessed, Cook
Properties and Lessee hereby agree as follows:
1. Cook Properties and Lessee acknowledge and agree that the Lease
contains an error in the first paragraph of the Lease where reference is made to
Tech Heating and Air Conditioning, Inc., at 30300 Bruce Industrial Parkway, in
Solon, Ohio, as the "Lessor" under the Lease.
2. WHEREAS, Cook Properties and Lessee acknowledge and agree that it was
the intent of both Cook Properties and Lessee at the time the Lease was executed
that the "Lessor" under the Lease was to be Cook Properties.
3. Cook Properties and Lessee acknowledge and agree that for all
purposes under the Lease all references to Lessor shall mean Cook Properties,
and the purpose of this Amendment is to correct the incorrect, inadvertent
reference that appears in the Lease where reference is made to Tech Heating and
Air Conditioning, Inc. as "Lessor" and correct all references to "Lessor" to
refer to Cook Properties.
4. Cook Properties and Lessee agree that the corrections made pursuant
to this Amendment shall relate back to the date the Lease was executed and any
rights and/or obligations of "Lessor" under the Lease shall be interpreted to
refer to the rights and obligations of Cook Properties commencing on the date
the Lease was originally executed.
In the event of any conflict in the terms, provisions, or conditions of
the Lease and this Amendment, the provisions of this Amendment shall prevail.
<PAGE>
IN WITNESS WHEREOF, this Amendment has been executed as of the date
first set forth above.
LESSOR:
COOK PROPERTIES, INC.
/s/ BOB COOK
Bob Cook
Title: President
LESSEE:
TECH HEATING AND AIR CONDITIONING,
INC.
/s/ BOB COOK
Bob Cook
Title: President
-2-
<PAGE>
THE STATE OF OHIO SS.
SS.
COUNTY OF CUYAHOGA SS.
The foregoing instrument was acknowledged before me, a Notary Public, on
this 13TH day of MARCH, 1997 by Bob Cook, as PRESIDENT of COOK PROPERTIES, INC.
(SEAL)
/s/ MARIA A. SZENTE
Notary Public in and for
The State of Ohio
Print Name: MARIA A. SZENTE
Commission Expires: 9/27/2000
THE STATE OF OHIO SS.
SS.
COUNTY OF CUYAHOGA SS.
The foregoing instrument was acknowledged before me, a Notary Public, on
this 13TH day of MARCH , 1997 by Bob Cook, as PRESIDENT of TECH HEATING AND AIR
CONDITIONING, INC.
(SEAL)
/s/ MARIA SZENTE
Notary Public in and for
The State of Ohio
Print Name: MARIA A. SZENTE
Commission Expires: 9/27/2000
-3-
<PAGE>
TABLE OF CONTENTS
PAGE
1. TERM-POSSESSION........................................................1
2. RENT...................................................................1
3. ESCALATION RENTS.......................................................2
4. LESSOR'S WORK OBLIGATIONS..............................................2
5. USE....................................................................2
6. UTILITIES..............................................................3
7. INTERRUPTION OF UTILITIES AND SERVICES.................................3
8. OPERATING EXPENSES.....................................................3
9. REPAIR AND MAINTENANCE OF PREMISES BY LESSEE...........................4
10. MECHANIC'S LIEN........................................................4
11. RIGHTS RESERVED BY LESSOR..............................................4
12. LOSS OR DAMAGE TO PROPERTY.............................................5
13. INDEMNIFICATION AND INSURANCE..........................................5
14. DAMAGE AND DESTRUCTION.................................................6
15. SUBORDINATION..........................................................7
16. ASSIGNMENT AND SUBLETTING..............................................7
17. HOLDING OVER...........................................................7
18. SURRENDER AT END OF TERM...............................................8
<PAGE>
19. LESSOR'S REMEDIES UPON DEFAULT.........................................8
20. NOTICES...............................................................10
21. NO WAIVER.............................................................10
22. BROKER................................................................11
23. TRANSFER OF LESSOR'S INTERESTS; LIABILITY OF LESSOR...................11
24. SECURITY DEPOSIT......................................................11
25. OWNERSHIP OR ALTERATION...............................................12
26. MISCELLANEOUS.........................................................12
27. RULES AND REGULATIONS.................................................12
28. AUTHORITY TO EXECUTE LEASE............................................13
----------------
TECH HEATING AND AIR CONDITIONING, INC.
MAIN BUILDING
I. 5,750 sq. ft. of finished conditioned office space at $10.14 per sq.
ft.
II. 5,140 sq. ft. of heated warehouse space at $500 per sq. ft.
-2-
<PAGE>
LEASE AGREEMENT
THIS LEASE, made this APRIL 2, 1995, between Tech Heating and Air
Conditioning, Inc., at 30300 Bruce Industrial Parkway, in Solon, Ohio,
hereinafter called "Lessor," Tech Heating and Air Conditioning, Inc. hereinafter
collectively called "Lessee."
WITNESSETH
Lessor leases to Lessee and Lessee rents from Lessor approximately 10,850 square
feet of space (the "Premises"), in the warehouse building located at 30300 Bruce
Industrial Parkway, in Solon, Ohio (the "Building") together with the
non-exclusive right to use a pro-rata share of the parking spaces, upon the
terms and provisions set forth in this lease.
1. TERM-POSSESSION
(a) The term of this lease shall be 60 months, commencing on APRIL 2,
1995 (the "Commencement Date ") and ending on APRIL 2, 2000.
2. RENT
(a) Lessee covenants and agrees to pay to Lessor the Base Rent,
Escalation Payments and additional rents and charges set forth in
this Lease sometimes collectively hereinafter referred to as
("Rent") without demand, deduction or set-off at the address of
Lessor set forth above or such other place as Lessor may designate
in writing.
(b) As Base Rent for the Premises, Lessee shall pay Lessor the sum of
EIGHTY FOUR THOUSAND DOLLARS ($84, 000.00), annually during the
initial term of this lease, payable in equal monthly installments of
SEVEN THOUSAND DOLLARS ($ 7,000.00) each in advance on the day of
each and every calendar month. Rent payable for any period less than
a calendar month shall be pro-rated on a daily basis.
(c) In addition to Base Rent, Lessee shall pay to Lessor as additional
rent the Escalation Payments in accordance with the provisions of
Section 3 hereof.
(d) All overdue installments of rent, 15 day past the 1st of the month
shall bear interest from the date such installments is due at the
rate of one and one-half percent (1 1/2%) per month until paid.
Annual percentage rate is eighteen percent (18%).
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3. ESCALATION RENTS
(a) Lessee shall pay Lessor, as additional rent, for each lease year
commencing with the sixth (6th) lease year an amount equal to four
percent (4%) in excess of the total rent payable during the prior
average lease year.
(b) "Lease Year" shall mean each period of twelve (12) consecutive
months beginning on the first (lst) day of June of each year, during
the term of this lease.
(c) Such additional rent for every lease year which follows the second
lease year shall be billed and paid as follows:
1. Prior to the beginning of any such lease year, Lessor shall
deliver to Lessee a statement showing the aggregate amount of
such additional rent that will be payable to the then current
lease year. Lessee shall pay Lessor such sum in equal monthly
installments on the first day of each and every month during
such lease year.
2. If a statement mentioned in Section (c) (1) shall not have
been delivered until the lapse of one or more months of this
lease year, for which such payments are to be made, Lessee
shall make equal monthly payments of any such increase over
the balance of the then current lease year.
(d) The escalation rent shall be four percent (4%) of the gross rental
(base rent and escalation rent) payable during the previous lease
year and shall be cumulative.
4. LESSOR'S WORK OBLIGATIONS
(a) No representation respecting the condition of the Premises or the
Building has been made by Lessor to Lessee unless expressly
contained herein and none shall be implied in law.
5. USE
(a) Tech Heating and Air Conditioning, Inc. shall use and occupy the
Premises for office and warehouse space.
(b) Lessee shall not use or permit the Premises to be used for any
unlawful business or purpose. Lessee at its sole cost and expense
shall comply with all laws, orders and regulations of Federal,
State, county and municipal authorities and with any
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directions of any public officer which shall impose any liability,
order or duty upon Lessor or Lessee with respect to Lessee's use or
occupancy of the Premises.
6. UTILITIES
(a) Lessee shall pay for all utilities serving or used in connection
with Lessee's occupancy of the Premises, including, without
limitation, electricity, gas, water and telephone. Lessee's use of
any such services shall never exceed the capacity of the mains,
feeders, ducts, and conduits bringing such service to the Premises
or of the outlets, risers, wiring, piping, ductwork and other means
of distribution of such service within the premises.
Lessee shall pay to Lessor as additional rent fifteen percent (15%)
of all common utilities for the Premises, including, without
limitation, electricity, gas and water. Monthly, Lessor shall bill
Lessee for its percentage share, based on Lessor's single bill for
each utility.
(b) Lessee shall not use any electrical equipment which will overload or
interfere with the electrical installations of the Building. Light
bulbs, tubes, starters, ballasts and their equivalents used or
consumed on Lessee's Premises shall be paid or by Lessee in addition
to rental and other charges provided herein.
7. INTERRUPTION OF UTILITIES AND SERVICES
(a) Lessor does not warrant that any of the services stipulated in
Paragraphs 5 and 6 above shall be free from interruption,
fluctuation or suspension. Any interruption or suspension of, or
fluctuation in, any service to the Building or Premises shall not be
deemed an eviction or disturbance of Lessee's use and possession of
the Premises, or any part thereof, nor render possession of the
Premises, or any part thereof, nor render Lessor liable to Lessee
for damages, nor relieve Lessee from performance of Lessee's
covenants and agreements hereunder.
8. OPERATING EXPENSES
(a) Lessee shall pay to Lessor as additional rent FIFTY PERCENT (50% of
all costs and expenses (except real estate taxes) paid or incurred
by or on behalf of lessor in connection with the operation,
servicing, and maintenance of the Premises, (i. e. snowplowing and
lawn maintenance). In addition, Lessee shall pay to Lessor FIFTY
PERCENT (50%) of the increase in real estate taxes payable for the
year 1989 over the tax bills for the year 1988 after building
completions.
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9. REPAIR AND MAINTENANCE OF PREMISES BY LESSEE
(a) Lessee shall make at Lessee's expense all repairs and replacements
required to keep the Premises and the fixtures and improvements
therein in good working condition and repair except structural
repairs, which shall be made by Lessor. All repairs or replacements
of the Premises and Building required as a result of Lessee's or its
agents, employees or contractor's misuse, neglect, act of negligence
or by reason of Lessee's tenancy therein shall be made by Lessee at
Lessee's expense. All replacements made by Lessee shall maintain
sufficient heat within the Premises to prevent the freezing of pipes
and other damage. Any such damage from insufficient heat shall be
the responsibility of the Lessee.
Lessee shall not make any alterations, additions, improvements or
other changes in or to said Premises, or installation without
Lessor's prior written consent in each and every instance.
10. MECHANIC'S LIEN
(a) If, because of any alleged act of Lessee or anyone claiming under
Lessee, any mechanic's or other lien shall be filed against Lessor's
estate in the Premises (whether or not such lien is valid or
enforceable), Lessee shall, at Lessee's own cost and expense, cause
the same to be discharged of record by payment of bonding within
thirty (30) days after the date of filing thereof and Lessee shall
also indemnify and save harmless Lessor from and against any and all
costs, expenses, claims, losses or damages, including reasonable
counsel fees, resulting from the filing of any such mechanic's or
other lien. Nothing in this Lease shall be construed as a consent on
Lessor's estate in the Building to any lien or liability under any
law relating to liens.
11. RIGHTS RESERVED BY LESSOR
Lessor reserves the following rights:
(a) Lessor will provide door glass lettering and tenant sign in front of
building.
(b) To enter the Premises at all reasonable notice upon reasonable
notice
(i) for making of such inspections, repairs alterations or
additions of or to the Premises or the Building as Lessor may
deem necessary or desirable.
(ii) to exhibit the Premises to others in the last six (6) months
of lease term.
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(iii) for any purpose whatsoever related to the safety, protection
or preservation of the Premises or the Building.
12. LOSS OR DAMAGE TO PROPERTY
(a) All property belonging to Lessee or others located in or outside of
the Premises or Building, shall be there at the sole risk of Lessee
or such others, and unless caused by Lessor's negligence, Lessor and
Lessor's agents and employees shall not be liable for the theft,
loss or misappropriation thereof, nor for any damage or injury
thereto, nor for death or injury of Lessee or any of its officers,
agents, employees, customers, invitees or contractors or any other
person, or for damage to property caused by fire, casualty, water,
rain, sprinklers, snow, frost, ice steam, heat, cold dampness,
failing plaster, water coming through the roof, walls or
foundations, explosion, sewers or sewage, gas, odors, noise, the
bursting or leaking of pipes, plumbing, electrical wiring and
equipment and fixtures of all kinds, or by any act or neglect of
other tenants or occupants of the Building, or any other person, or
caused in any manner whatsoever, nor shall Lessor be liable for any
latent defect in the Premises.
13. INDEMNIFICATION AND INSURANCE
(a) Unless caused by Lessor or Lessor's agents and employees, Lessee
shall indemnify Lessor and save Lessor harmless from and against any
and all claims, actions damages, liability and expense in connection
with loss, damage or injury to persons or property occurring in, on
above or arising out of the Premises the use or occupancy thereof,
or the conduct or operation of Lessee's business, or occasioned
wholly or in part by any act or omission of Lessee's business, or
part by any act or omission of Lessee's business, or occasioned
wholly or in part by any act or omission of Lessee, its agents,
contractors, employees or invitees.
(b) Lessee shall maintain in full force and effect comprehensive general
liability insurance policies naming Lessor as an additional insured
in companies licensed to do business in Ohio with minimum single
limits of $1,000,000 on account of bodily injuries to or death of
one or more than one person as a result of an accident or occurrence
and $250,000 on account of damage to property. Lessee shall deposit
certificates of such insurance with Lessor prior to take occupancy
of the Premises and within ten (10) days prior to the expiration of
any such policies.
(c) Lessee shall maintain fire, extended coverage and other hazard
insurance policies covering Lessee's personal property and contents
in such amounts as Lessee shall desire.
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(d) Lessee shall pay to Lessor any increase in Lessor's insurance
policies resulting from Lessee's use or occupancy of the Premises.
(e) Lessor and Lessee agree that in the event the Premises or any part
of the building, or the equipment, contents or other personal
property therein, are damaged or destroyed by fire or other casualty
that is coverable under a standard fire and extended coverage policy
or is covered by the insurance of the Lessor or Lessee, regardless
of cause or origin, including negligence, the rights, if any, of any
party against the other, or against the employees or agents of any
party, with respect to such damage or destruction and with respect
to any loss of the parties, are hereby waived; provided, however,
that if such damage is insured and if there shall not prohibit a
claim against a party for the amount of the deductible.
14. DAMAGE AND DESTRUCTION
(a) If the Premises or Building, respectively, be damaged by fire or
other casualty to such extent that the cost of restoration, as
estimated by Lessor, will equal or exceed thirty percent (30%) of
the replacement value of the Premises or Building (exclusive of
foundation), as the case may be, just prior to the occurrence of the
damage, or if any damage shall occur as a result of afire or other
casualty in the last one and one- half (1 1/2) years of the term of
this Lease, Lessor may, not later than the ninetieth (90th) day
following the damage, terminate this lease by giving Lessee written
notice of such election and this Lease shall be deemed to terminate
on the third (3rd) day after the giving of said notice. Lessee shall
surrender possession of the Premises within ten (1) days thereafter,
and the Rent shall be apportioned as of the date of the damage or
destruction.
(b) If this Lease shall not be terminated in accordance with the rights
granted herein, Lessor shall, following receipt of their insurance
proceeds, restore the Premises to its condition immediately
preceding said damage to he extent possible, within one hundred
twenty (120) days from the date of such damage or destruction,
subject to delays beyond Lessor's reasonable control; and Lessee
shall have no right to terminate this Lease; provided, however, that
if Lessor shall not substantially complete the repair or restoration
of the Premises within one hundred twenty (120) days following the
date of such damage or destruction, so that the Premises are ready
for occupancy, then, Lessee as its sole remedy, shall have the right
to terminate this Lease by delivering written notice to Lessor
within one hundred thirty (130) days following the date of such
damage or destruction.
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<PAGE>
Lessee, not Lessor, shall restore fixtures, equipment, furniture and
other personal property owned by Lessee. In the event that Lessee
shall be unable to use any space in the Premises as a result of a
fire or other casualty, until demised premises are a fully repaired
and ready for occupancy, the Base Rent shall be abated on a per diem
basis, pro-rata for the portion of the Premises which Lessee is
unable to use because of such fire or other casualty.
15. SUBORDINATION
(a) Lessor reserves the right to subject and subordinate this Lease to
all mortgages which may now or hereafter affect the Premises, and to
any and all advances made thereunder and all renewals,
modifications, consolidations, replacements and extensions thereof.
Lessee covenants and agrees to executed within fifteen (15) days
after receipt of request therefor and instrument Lessor or its
lenders may request in confirmation of such subordination provided,
however that Lessor shall obtain an agreement of such mortgage
providing in substance that so long as Lessee shall be in default
under this Lease, Lessee's tenancy will not be distributed by any
default under such mortgage. Any alleged uncomplicated or defective
construction or maintenance work by Lessor shall not be an excuse
for failure to execute the subordination agreement. Lessee agrees to
attorn to any mortgagee or purchaser in a foreclosure sale as Lessor
under this Lease.
16. ASSIGNMENT AND SUBLETTING
Lessee shall not without first obtaining Lessor's written consent:
(a) Assign, mortgage, hypothecate or convey this Lease or any interest
therein voluntarily or by operation of law;
(b) Sublet the Premises or any part thereof, or
(c) Permit the use or occupancy of the Premises or any part thereof by
anyone other than Lessee.
17. HOLDING OVER
(a) Should Lessee remain in possession of the Premises after the
expiration of the term of this Lease without the written consent of
Lessor, then without diminishing in any respect Lessor's other
remedies with respect to Lessee's failure to vacate the Premises at
the end of the term, Lessee shall be a tenant at sufferance and such
tenancy shall
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otherwise be subject to all of the covenants and agreements of this
lease, at a monthly rental equal to one hundred fifty percent (150%)
of the monthly installment of Rent then otherwise payable hereunder;
provided, however, that either Lessor or Lessee has the right to
terminate the Lease at any time thereafter upon thirty (30) days
prior written notice to the other.
18. SURRENDER AT END OF TERM
(a) Upon the expiration or earlier termination of the term hereof Lessee
shall surrender the Premises together with all installations,
improvements and permanent alterations therein (other that Lessee's
furniture, trade fixtures, furnishings, business office machines and
equipment which shall remain Lessee's property and shall be removed
by Lessee) in as good condition and repair on the date Rent is first
payable, reasonable use and wear and loss or damage by fire or other
casualty excepted.
(b) Lessee shall repair at Lessee's expense any damage to the Premises
or Building caused by the removal of any property or items from the
Premises and Building and any of the same not so removed or removed
and not properly repaired, may be removed and/or repaired by Lessor,
and Lessee agrees to pay the cost thereof and to indemnify Lessor
and hold Lessor harmless therefrom. If Lessee shall not remove any
of its personal property at the end of the term, Lessor may treat
such property as abandoned by Lessee and such property shall belong
absolutely to Lessor.
Notwithstanding anything in this Lease to the contrary, all portions
of the heating, air conditioning, plumbing, electrical and
mechanical systems and equipment, all wall and floor covering and
all light fixtures shall not be removed by lessee and shall remain
in the Premises and belong to Lessor.
19. LESSOR'S REMEDIES UPON DEFAULT
(a) Lessee covenants and agrees that if:
(i) Lessee shall fail, neglect or refuse to pay in full any
installment of Rent or other moneys agreed by it to be paid
under the term of this Lease, and if any such default shall
continue for a period of fifteen (15) days from the date such
installment or payment was due; or
(ii) Any voluntary or involuntary petition or similar pleading
under the United States Bankruptcy Code as now hereafter
amended shall be filed by or against Lessee, or any voluntary
or involuntary proceeding in any court shall be
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instituted to declare Lessee insolvent or unable to pay
Lessee's debts, and any involuntary filing shall not be
Lessee's debts, and any involuntary filing shall not be
dismissed or discharged within sixty (60) days thereafter; or
(iii) Lessee makes an assignment of its property for the benefit of
creditors or if the Premises be taken under a levy of
execution or attachment in any action against Lessee and such
levy, attachment or assignment Is not dismissed or discharged
within thirty (30) days; or
(iv) Lessee shall fail to perform any covenant or provisions of
this Lease for a period of fifteen (15) days after the giving
of notice thereof in writing by Lessor (but Lessee shall not
be deemed in default of any provisions for the making of
repairs within said fifteen (15) day period and proceeds
therewith with due diligence). Provided however, that Lessee
shall not be in default if it continues to pay rent,
notwithstanding the fact that Lessee has abandoned the
Premises, as long as Lessee gives Lessor thirty (30) days
written notice to all other remedies given to Lessor in law or
in equity, may be written notice terminate this Lease, or
without terminating this Lease or without notice, re-enter the
Premises immediately, and by force if necessary, and to remove
all persons and their property therefrom, using such force in
effecting such removal as may be necessary and advisable to
recover possession of the Premises whether possession be in
Lessee or a third (3rd) person, without being deemed guilty of
any manner or trespass.
(b) In the event of re-entry by Lessor and/or termination of this Lease,
Lessor may, without being obligated to do so, relet the whole or any
portion thereof with additional space, for any period equal to,
greater or less than the remainder of the term of this Lease, for
any sum (including any rental concessions and rent-free occupancy)
which it may deem suitable and satisfactory, and for any use and
purpose which it may deem appropriate.
(c) As part of Lessor's damage for Lessee's default, Lessor shall be
entitled to receive all of Lessor's expenses, including without
limitation, commissions and the cost of repairs, as well as Rent or
damages equal to the Rent and all other sums due from Lessee at such
time and for the remainder of the term of this lease.
Any amounts Lessor receives from any new occupant shall be applied
to the foregoing damage, Lessee remaining liable for any deficiency.
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(d) No termination of this Lease nor any taking or recovering of
possession of the Premises shall deprive Lessor of any of its
remedies or actions against Lessee or shall relieve Lessee from its
liability for Rent and damages hereunder. The failure of Lessor to
relet, or if relet, to collect the Rent under such reletting shall
not release or affect Lessee's liability for damages hereunder. All
remedies available to Lessor are declared to be cumulative and
concurrent.
20. NOTICES
(a) Any notices required to be served upon Lessee shall be deemed
sufficiently given if in writing, mailed by registered or certified,
postage prepaid and addressed to Lessee at the address indicated on
the first page of this Lease, or at the Premises, and the time of
giving or making such notice or demand shall be deemed to be the
time when the same is mailed as herein provided. Any notice by
Lessee to Lessor may be in writing sent by registered or certified
mail, postage prepaid, addressed to Lessor at 30300 Bruce Industrial
Parkway, Solon, Ohio 44139. Lessee and/or Lessor may change their
address by giving notice to the other party as provided herein.
(b) No delay on the part of Lessor in exercising any right, power or
privilege hereunder shall operate as a waiver thereof, nor shall any
single or partial exercise of any right, power or privilege preclude
an other, or further exercise thereof or the exercise of any other
right, power or privilege.
(c) Any acceptance or surrender, waiver or release by Lessor and any
cancellation, termination or modification of this lease must be in
writing signed by Lessor's satisfaction, and Lessor may accept the
same without prejudice to Lessor's right to recover any balance due
to pursue any other remedy in this Lease provided.
21. NO WAIVER
(a) No receipt of money by Lessor from Lessee with knowledge of the
breach of any covenants of this Lease, or after the termination
hereof, of after the commencement of any suit, or after judgment for
possession of the premises shall be deemed a waiver of such breach,
nor shall its reinstate, continue or extend the term of this Lease
or affect any such notice, demand, suit or judgment.
(b) No delay on the part of Lessor in exercising any right, power or
privilege hereunder shall operate as a waiver thereof, nor shall any
single or partial exercise of any right, power or privilege preclude
any other, or further exercise thereof or the exercise of any other
right, power or privilege.
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(c) Any acceptance or surrender, waiver or release by Lessor and any
cancellation, termination or modification of this Lease must be in
writing signed by Lessor's satisfaction, and Lessor may accept the
same without prejudice to Lessor's right to recover any balance due
to pursue any other remedy in this Lease provided.
22. BROKER
(a) Lessee represents and warrants to Lessor that no real estate broker,
agent or finder was involved in making, negotiating or consummating
this Lease.
23. TRANSFER OF LESSOR'S INTERESTS; LIABILITY OF LESSOR
(a) If Lessor should sell or otherwise transfer Lessor's interest in the
Building, Lessor shall thereafter have no liability to Lessee under
this Lease or any modification or amendment thereof or extensions or
renewals thereof, except for such liabilities which might have
accrued prior to the date of such sale or transfer of Lessor's
interest.
(b) If Lessor shall fail to perform any covenant, term or condition of
this Lease upon Lessor's part to be performed or if Lessee shall
have any claim against Lessor arising out of arty provision of this
Lease, statute or common law, and as a consequence of such default
or claim Lessee shall recover a money judgment against Lessor, such
judgment shall be satisfied only out of the proceeds received at a
judicial sale upon the execution and levy against the right, title
and interest of Lessor in the Building, and in the rents or other
income from such property receivable by Lessor. Lessor shall have no
personal or individual liability under this Lease.
24. SECURITY DEPOSIT
(a) Lessee has or will deposit with Lessor the sum of $0.00 as security
for the faithful performance and observance by Lessee, of the terms,
provisions and conditions of this lease; it is agreed that in the
event Lessee defaults in respect of any of the terms provisions, and
conditions of this lease, including, but not limited to, the payment
of rent and additional rent, Lessor may use, apply or retain the
whole or any part of the security so deposited to the extent
required for the payment of any rent and additional rent, or any
other sum as to which Lessee is in default or for any sum which
Lessor may extend or may be required to extend the reason of
Lessee's default in respect to any of the terms, covenants and
conditions of this lease, including but not limited to, any damages
or deficiencies in the reletting of this Premises whether such
damages of deficiencies accrue before or after summary proceedings
or other re-entry by
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Lessor. In the event that Lessee shall fully and faithfully comply
with all of the terms, provisions, covenants and conditions of this
Lease, the security shall be returned to Lessee after the date fixed
as the end of the Lease and after delivery of entire possessions of
demised Premises to Lessor. Lessee further covenants that it will
not assign or encumber or attempt to assign or encumber the moneys
deposited herein as security, and neither Lessor nor its successor
assigned shall be bound by any such assignment, encumbrance,
attempted assignment or attempted encumbrance.
25. OWNERSHIP OR ALTERATION
(a) All installations, alternations, improvements or addition to the
Premises (other than Lessee's personal property) made by Lessor or
Lessee shall become the Lessor's property upon installation and
shall remain in or upon the Premises upon termination.
26. MISCELLANEOUS
(a) The holding of any court that any provision of this Lease is invalid
or unenforceable shall not affect the remaining provisions of the
Lease which shall remain in full force and effect. This Lease
contains the entire agreement of the parties and shall not be
modified in any manner except by an instrument in wiring signed by
the parties or their respective successors in interest. Time is
expressly declared to be of the essence for all provisions of this
Lease. The paragraph headings of this Lease are for convenience only
and shall not be used in the interpretation of any of its
provisions. This Lease shall not be recorded, but either party shall
execute at the request of the other an instrument in recordable form
setting forth the names of the parties and the terms of this Lease.
If more than one person shall execute this Lease as Lessee, then
each person executing this Lease shall jointly and severally be
liable hereunder.
27. RULES AND REGULATIONS
(a) Lessee and Lessee's servants, employees, agents, visitors and
licensees shall observe faithfully, and comply strictly with any
Rules and Regulations as Lessor or Lessor's agents may from time to
time adopt. Notice of any additional Rules or Regulations shall be
given in such manner as Lessor may elect.
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28. AUTHORITY TO EXECUTE LEASE
(a) If Lessee is a corporation, each person(s) signing this Lease as an
officer represents to the Lessor that such person(s) is authorized
to execute this Lease without the necessity of obtaining any other
signatures from any other officers, that the execution of this Lease
has been authorized by the Board of Directors of the corporation,
and that this lease is fully binding upon the Lessee.
IN WITNESS WHEREOF, the parties hereto have set their hands to
counterparts, each of which shall have the same force and effect as if it
were an original, this APRIL 2, 1995, as to Lessor, and this APRIL 2,
1995, as to Lessee.
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ACKNOWLEDGMENT
Signed in the presence of: "Lessor"
/S/ LINDA KONTUR By: _____________________________
Tech Heating and Air Conditioning, Inc.
"Lessee"
By: /S/ BOB COOK
Bob Cook
STATE OF OHIO ss.
COUNTY OF CUYAHOGA ss. SS:
The foregoing instrument was acknowledged before me, a Notary Public on
this 2nd day of April, 1995 by Bob Cook.
/S/ MARIA SZENTE
(SEAL) Notary Public
Maria A. Szente
STATE OF OHIO ss.
COUNTY OF CUYAHOGA ss. SS:
The foregoing instrument was acknowledged before me, a Notary Public on
this 2nd day of April, 1995 by Bob Cook, President of Tech, Inc., an Ohio
corporation, on behalf of said corporation and by Bob Cook, individually.
/S/ MARIA SZENTE
(SEAL) Notary Public
Maria A. Szente
THIS INSTRUMENT PREPARED BY:
Howard S. Chapman
Attorney at Law
25250 Rockside Road
Bedford Heights, Ohio 44146
(216) 439-3400
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EXHIBIT 10.25
CREDIT AGREEMENT
$75,000,000.00 REVOLVING CREDIT LOAN
AMONG
COMFORT SYSTEMS USA, INC.
AS THE COMPANY,
THE SUBSIDIARIES OF THE COMPANY
LISTED AS GUARANTORS HEREIN
AND
BANK ONE, TEXAS, N.A.,
AS THE AGENT
AND
THE BANKS NAMED HEREIN
DATED AS OF JULY 2, 1997
<PAGE>
TABLE OF CONTENTS
PAGE
ARTICLE I DEFINITIONS; ACCOUNTING TERMS; INTERPRETATION.............1
SECTION 1.01. DEFINITIONS..............................................1
SECTION 1.02. TYPES OF ADVANCES.......................................13
SECTION 1.03. ACCOUNTING TERMS........................................13
SECTION 1.04. SCHEDULES...............................................14
ARTICLE II THE LOANS.................................................14
SECTION 2.01. THE LOANS...............................................14
SECTION 2.02. THE NOTES...............................................14
SECTION 2.03. NOTICE OF ADVANCE.......................................14
SECTION 2.04. DISBURSEMENT OF FUNDS FOR LOANS.........................15
SECTION 2.05. CONVERSIONS AND CONTINUANCES............................15
SECTION 2.06. VOLUNTARY PREPAYMENTS...................................16
SECTION 2.07. MANDATORY REPAYMENTS....................................16
SECTION 2.08. METHOD AND PLACE OF PAYMENT.............................16
SECTION 2.09. PRO RATA ADVANCES.......................................16
SECTION 2.10. INTEREST................................................16
SECTION 2.11. INTEREST PERIODS........................................18
SECTION 2.12. INTEREST RATE NOT ASCERTAINABLE.........................18
SECTION 2.13. CHANGE IN LEGALITY......................................19
SECTION 2.14. INCREASED COSTS, TAXES OR CAPITAL ADEQUACY REQUIREMENTS.19
SECTION 2.15. EURODOLLAR ADVANCE PREPAYMENT AND DEFAULT PENALTIES.....21
SECTION 2.16. VOLUNTARY REDUCTION OF COMMITMENT.......................21
SECTION 2.17. TAX FORMS...............................................21
ARTICLE III LETTERS OF CREDIT.........................................22
SECTION 3.01. LETTERS OF CREDIT.........................................22
SECTION 3.02. LETTER OF CREDIT REQUESTS.................................22
SECTION 3.03. LETTER OF CREDIT PARTICIPATIONS...........................23
SECTION 3.04. INCREASED COSTS...........................................24
SECTION 3.05. CONFLICT BETWEEN APPLICATIONS AND AGREEMENT...............25
ARTICLE IV FEES......................................................25
SECTION 4.01. FEES....................................................25
ARTICLE V CONDITIONS PRECEDENT......................................26
SECTION 5.01. CONDITIONS PRECEDENT TO THE INITIAL ADVANCE.............26
SECTION 5.02. CONDITIONS PRECEDENT TO ALL CREDIT EVENTS...............27
SECTION 5.03. DELIVERY OF DOCUMENTS...................................28
<PAGE>
ARTICLE VI REPRESENTATIONS AND WARRANTIES............................28
SECTION 6.01. ORGANIZATION AND QUALIFICATION..........................28
SECTION 6.02. AUTHORIZATION AND VALIDITY..............................29
SECTION 6.03. GOVERNMENTAL CONSENTS...................................29
SECTION 6.04. CONFLICTING OR ADVERSE AGREEMENTS OR RESTRICTIONS.......29
SECTION 6.05. TITLE TO ASSETS.........................................29
SECTION 6.06. LITIGATION..............................................30
SECTION 6.07. FINANCIAL STATEMENTS....................................30
SECTION 6.08. DEFAULT.................................................30
SECTION 6.09. INVESTMENT COMPANY ACT..................................30
SECTION 6.10. PUBLIC UTILITY HOLDING COMPANY ACT......................30
SECTION 6.11. ERISA...................................................30
SECTION 6.12. TAX RETURNS AND PAYMENTS................................30
SECTION 6.13. ENVIRONMENTAL MATTERS...................................31
SECTION 6.14. PURPOSE OF LOANS........................................31
SECTION 6.15. FRANCHISES AND OTHER RIGHTS.............................32
SECTION 6.16. SUBSIDIARIES AND ASSETS.................................32
SECTION 6.17. SOLVENCY................................................32
ARTICLE VII AFFIRMATIVE COVENANTS.....................................32
SECTION 7.01. INFORMATION COVENANTS...................................32
SECTION 7.02. BOOKS, RECORDS AND INSPECTIONS..........................34
SECTION 7.03. INSURANCE AND MAINTENANCE OF PROPERTIES.................34
SECTION 7.04. PAYMENT OF TAXES........................................35
SECTION 7.05. CORPORATE EXISTENCE.....................................35
SECTION 7.06. COMPLIANCE WITH STATUTES................................35
SECTION 7.07. ERISA...................................................35
SECTION 7.08. ADDITIONAL SUBSIDIARIES.................................35
SECTION 7.09. PAYMENT OF CERTAIN INDEBTEDNESS.........................35
ARTICLE VIII NEGATIVE COVENANTS........................................36
SECTION 8.01. CHANGE IN BUSINESS......................................36
SECTION 8.02. CONSOLIDATION, MERGER OR SALE OF ASSETS.................36
SECTION 8.03. INDEBTEDNESS............................................36
SECTION 8.04. LIENS...................................................37
SECTION 8.05. INVESTMENTS.............................................38
SECTION 8.06. RESTRICTED PAYMENTS.....................................38
SECTION 8.07. CHANGE IN ACCOUNTING....................................38
SECTION 8.08. CHANGE OF CERTAIN INDEBTEDNESS..........................39
SECTION 8.09. TRANSACTIONS WITH AFFILIATES............................39
SECTION 8.10. CURRENT RATIO...........................................39
SECTION 8.11. FUNDED DEBT TO EBITDA RATIO.............................39
SECTION 8.12. FUNDED DEBT TO CONSOLIDATED TANGIBLE NET WORTH RATIO....39
SECTION 8.13. CAPITAL EXPENDITURES....................................39
<PAGE>
SECTION 8.14. INTEREST COVERAGE RATIO.................................39
ARTICLE IX GUARANTY..................................................40
SECTION 9.01. GUARANTY................................................40
SECTION 9.02. CONTINUING GUARANTY.....................................40
SECTION 9.03. EFFECT OF DEBTOR RELIEF LAWS............................41
SECTION 9.04. WAIVER OF SUBROGATION...................................42
SECTION 9.05. SUBORDINATION...........................................42
SECTION 9.06. WAIVER..................................................43
SECTION 9.07. FULL FORCE AND EFFECT...................................43
ARTICLE X EVENTS OF DEFAULT AND REMEDIES............................43
SECTION 10.01. EVENTS OF DEFAULT.......................................43
SECTION 10.02. PRIMARY REMEDIES........................................45
SECTION 10.03. OTHER REMEDIES..........................................45
ARTICLE XI THE AGENT................................................46
SECTION 11.01. AUTHORIZATION AND ACTION................................46
SECTION 11.02. AGENT'S RELIANCE........................................46
SECTION 11.03. AGENT AND AFFILIATES; BOT AND AFFILIATES................47
SECTION 11.04. BANK CREDIT DECISION....................................47
SECTION 11.05. AGENT'S INDEMNITY.......................................48
SECTION 11.06. SUCCESSOR AGENT.........................................48
SECTION 11.07. NOTICE OF DEFAULT.......................................49
ARTICLE XII MISCELLANEOUS.............................................49
SECTION 12.01. AMENDMENTS..............................................49
SECTION 12.02. NOTICES.................................................49
SECTION 12.03. NO WAIVER; REMEDIES.....................................50
SECTION 12.04. COSTS, EXPENSES AND TAXES...............................51
SECTION 12.05. INDEMNITY...............................................51
SECTION 12.06. RIGHT OF SETOFF.........................................52
SECTION 12.07. GOVERNING LAW...........................................52
SECTION 12.08. INTEREST................................................52
SECTION 12.09. SURVIVAL OF REPRESENTATIONS AND WARRANTIES..............53
SECTION 12.10. SUCCESSORS AND ASSIGNS; PARTICIPATIONS..................53
SECTION 12.11. CONFIDENTIALITY.........................................54
SECTION 12.12. PRO RATA TREATMENT......................................55
SECTION 12.13. SEPARABILITY............................................55
SECTION 12.14. EXECUTION IN COUNTERPARTS...............................55
SECTION 12.15. INTERPRETATION..........................................56
SECTION 12.16. SUBMISSION TO JURISDICTION..............................57
SECTION 12.17. WAIVER OF JURY TRIAL....................................57
<PAGE>
SECTION 12.18. FINAL AGREEMENT OF THE PARTIES..........................58
Exhibits and Schedules:
Exhibit 1.01A Administrative Questionnaire
Exhibit 1.01B Subordination Terms
Exhibit 2.02(a) Form of Note
Exhibit 2.03 Form of Notice of Advance
Exhibit 2.05 Form of Notice of Conversion
Exhibit 3.02 Form of Letter of Credit Request
Exhibit 7.01(d) Form of Compliance Certificate
Exhibit 12.10(c) Form of Assignment and Acceptance
Schedule 6.04 Agreements
Schedule 6.06 Litigation
Schedule 6.13 Exceptions to Environmental Matters
Schedule 6.16 Subsidiaries
Schedule 8.03(b)(i) Existing Indebtedness
Schedule 8.03(b)(ii) Existing Indebtedness to be Retired
Schedule 8.04(a) Existing Liens
Schedule 8.05(b) Investments
<PAGE>
CREDIT AGREEMENT
This CREDIT AGREEMENT dated as of July 2, 1997 (this "AGREEMENT") is
among COMFORT SYSTEMS USA, INC., a Delaware corporation (the "COMPANY"), the
Subsidiaries of the Company listed on the signature pages hereto as Guarantors
(together with each other person who subsequently becomes a Guarantor,
collectively the "GUARANTORS"), the banks and other financial institutions
listed on the signature pages hereto under the caption "Banks" (together with
each other person who becomes a Bank, collectively the "BANKS") and BANK ONE,
TEXAS, N.A., individually as a Bank ("BOT") and as agent for the other Banks (in
such capacity together with any other Person who becomes the agent, the
"AGENT").
The Company has requested that the Banks provide the Company with a
revolving credit facility, pursuant to which the Banks will commit to make loans
of up to $75,000,000.00 including a letter of credit facility not to exceed
$5,000,000.00 to the Company for general corporate purposes, including working
capital, financing permitted acquisitions and the issuance of letters of credit.
NOW, THEREFORE, in consideration of the foregoing and the mutual
covenants set forth herein, the Company, the Agent, the Guarantors, and the
Banks agree as follows:
ARTICLE I
DEFINITIONS; ACCOUNTING TERMS; INTERPRETATION
SECTION 1.01. DEFINITIONS. As used in this Agreement, the following
terms shall have the following meanings:
"ADMINISTRATIVE QUESTIONNAIRE" means the questionnaire attached
hereto as EXHIBIT 1.01(A) to be completed by each Bank and returned to the
Agent.
"ADVANCE" means an advance, pursuant to a Notice of Advance,
comprised of a single Type of Loans from all the Banks (or resulting from
a conversion or conversions on the same date having, in the case of
Eurodollar Rate Advances, the same Interest Period (except as otherwise
provided in this Agreement)), made by all of the Banks concurrently to the
Company.
"ADVANCE DATE" means, with respect to each Advance, the Business Day
upon which the proceeds of such Advance are to be made available to the
Company.
<PAGE>
"AFFILIATE" means any other Person directly or indirectly
controlling (including all directors and officers of such Person),
controlled by, or under direct or indirect common control with such
Person.
"AGENT" has the meaning specified in the introduction to this
Agreement.
"AGREEMENT" has the meaning specified in the introduction to this
Agreement.
"ALTERNATE BASE RATE" means, for any date, a rate per annum (rounded
upwards, if necessary, to the next 1/16 of 1%) equal to the greater of (a)
the Federal Funds Effective Rate in effect on such day plus 1/2 of 1% and
(b) the Prime Rate in effect on such day. For purposes hereof, the term
"PRIME RATE" means, as of a particular date, the prime rate of BOT most
recently announced by BOT and in effect on such date, automatically
fluctuating upward or downward, as the case may be, with and at the time
of each change therein without notice to the Company or any other Person,
which prime rate may not necessarily represent the lowest or best rate
actually charged to a customer. "FEDERAL FUNDS EFFECTIVE RATE" means, for
any day, the weighted average of the rates on overnight federal funds
transactions with members of the Federal Reserve System arranged by
federal funds brokers, as published for such day (or, if such day is not a
Business Day, for the next preceding Business Day) by the Federal Reserve
Bank of New York, or, if such rate is not so published for any day which
is a Business Day, the average of the quotations for such day on such
transactions received by the Agent from three federal funds brokers of
recognized standing selected by it. If, for any reason, the Agent shall
have determined (which determination shall be conclusive absent manifest
error) that it is unable to ascertain the Federal Funds Effective Rate,
including the inability or failure of the Agent to obtain sufficient
quotations in accordance with the terms hereof, the Alternate Base Rate
shall be determined without regard to clause (a) of the first sentence of
this definition until the circumstances giving rise to such inability no
longer exist. Any change in the Alternate Base Rate due to a change in the
Prime Rate or the Federal Funds Effective Rate shall be effective on the
effective date of such change in the Prime Rate or the Federal Funds
Effective Rate, respectively.
"ALTERNATE BASE RATE ADVANCE" means any Advance bearing interest at
a rate determined by reference to the Alternate Base Rate in accordance
with the provisions of ARTICLE II.
"APPLICABLE LENDING OFFICE" means, with respect to each Bank, such
Bank's Domestic Lending Office in the case of an Alternate Base Rate
Advance and such Bank's Eurodollar Lending Office in the case of a
Eurodollar Rate Advance.
"APPLICATION FOR LETTER OF CREDIT" means a letter of credit
application in a form satisfactory to the Issuing Bank.
<PAGE>
"ASSETS" (whether or not capitalized) means any interest in any kind
of property or asset, whether real, personal or mixed, or tangible or
intangible.
"ASSIGNMENT AND ACCEPTANCE" has the meaning specified in SECTION
12.10 (C).
"BANK" has the meaning provided in the introduction to this
Agreement.
"BANKRUPTCY CODE" has the meaning specified in SECTION 10.01(E).
"BOARD" means the Board of Governors of the Federal Reserve System
of the United States (or any successor).
"BOT" means Bank One, Texas, N.A., 910 Travis, 7th Floor, Houston,
Texas 77002.
"BUSINESS DAY" means any day (other than a day which is a Saturday,
Sunday or legal holiday in the State of Texas) on which most banks are
open for business in Houston, Texas.
"CAPITALIZED LEASE OBLIGATIONS" means all lease or rental
obligations which, pursuant to GAAP, are capitalized for balance sheet
purposes.
"CERCLA" means the comprehensive Environmental Response,
Compensation, and Liability Act of 1980, as amended, state and local
analogs, and all rules and regulations and requirements thereunder in each
case as now or hereafter in effect.
"CHANGE OF CONTROL" means any of (i) the acquisition by any Person
(other than the shareholders on the Effective Date), or two or more
Persons acting in concert, after the Effective Date of beneficial
ownership of 50% or more of the outstanding shares of voting stock of the
Company, (ii) during any period of 24 consecutive months, beginning on the
Effective Date, the ceasing of those individuals (the "CONTINUING
DIRECTORS") who (a) were directors of the Company on the first day of each
such period or (b) subsequently became directors of the Company and whose
initial nomination for election subsequent to that date was approved by a
majority of the Continuing Directors then on the board of directors of the
Company, to constitute a majority of the board of directors of the Company
at any time during such period, (iii) all or substantially all of the
assets of the Company and its Subsidiaries are sold in a single
transaction or series of related transactions to any Persons or (iv) the
Company merges or consolidates with or into any other Person except as
permitted hereunder.
"CODE" means the Internal Revenue Code of 1986 and the regulations
promulgated thereunder.
<PAGE>
"COMMITMENT" and "COMMITMENTS" means the obligation of each of the
Banks to enter into and perform this Agreement, to make available the
Loans and to issue or participate in the Letters of Credit to the Company
in the amounts shown on the signature page of each Bank hereto and all
other duties and obligations of the Banks hereunder.
"COMMITMENT FEE" has the meaning specified in SECTION 4.01(A).
"COMPANY" has the meaning specified in the introduction to this
Agreement.
"CONSOLIDATED TANGIBLE NET WORTH" means, at any date, an amount
equal to the consolidated stockholders' equity of the Company and its
subsidiaries LESS intangibles of such Persons determined in accordance
with GAAP as of such date.
"CONVERSION" or "CONVERT" (in each case whether or not capitalized)
means the changing of a Eurodollar Rate Advance to an Alternate Base Rate
Advance or vice versa in accordance with the provisions hereof.
"CREDIT EVENT" means the making of any Advance or the issuance or
extension of any Letter of Credit.
"CURRENT ASSETS" and "CURRENT LIABILITIES" means, as to the Company
and its Subsidiaries determined on a consolidated basis, at any time the
aggregate current assets or current liabilities (other than the repayment
of the Loans) of the Company, each as determined in accordance with GAAP.
"DEFAULT" means the occurrence of any event which with or without
the giving of notice or the passage of time or both could become an Event
of Default.
"DEFAULT RATE" means the lesser of (i) the Highest Lawful Rate and
(ii) with respect to (a) Alternate Base Rate Advances, the rate per annum
which would otherwise be applicable plus two percent (2%), and (b)
Eurodollar Rate Advances, the rate per annum which would otherwise be
applicable plus three percent (3%).
"DESIGNATED PAYMENT DATE" means March 31, June 30, September 30 and
December 31 of each year; PROVIDED, HOWEVER, if a Designated Payment Date
shall be a day which is not a Business Day, such Designated Payment Date
shall be the next succeeding Business Day, and such extension of time
shall be included in determining the amount to be paid on such date.
"DOMESTIC LENDING OFFICE" means, with respect to any Bank, the
office of such Bank designated from time to time as its "Domestic Lending
Office" hereunder.
<PAGE>
"EBITDA" means, for any period, the consolidated pre-tax income for
such period, plus the aggregate amount which was deducted for such period
in determining such consolidated, pre-tax income in respect of interest
expense (including amortization of debt discount, imputed interest and
capitalized interest), plus depreciation and amortization, provided, the
calculations of EBITDA after the acquisition of assets or entities
permitted under Section 7.05(d) shall include pro forma adjustments
consistent with the regulations and practices of the United States
Securities and Exchange Commission (whether or not applicable) to account
for such acquired entity's historical EBITDA for the relevant period or
similar adjustments in the case of an asset acquisition.
"EFFECTIVE DATE" means the date on which all conditions to make an
Advance set forth in SECTION 5.01 are first met or waived in accordance
with SECTION 12.01 hereof.
"ELIGIBLE ASSIGNEE" means (a) any Bank; (b) a commercial bank
organized under the laws of the United States, or any state thereof, and
having total assets in excess of $250,000,000.00; (c) a commercial bank
organized under the laws of any other country which is a member of the
Organization for Economic Cooperation and Development or any successor
organization, or a political subdivision of any such country, and having
total assets in excess of $1,000,000,000.00; PROVIDED that such bank is
acting through a branch or agency located in the country in which it is
organized or another country which is also a member of the Organization
for Economic Cooperation and Development or any successor organization;
(d) the central bank of any country which is a member of the Organization
for Economic Cooperation and Development or any successor organization;
and (e) any other bank or similar financial institution approved by the
Agent, the Majority Banks and the Company, which consent of the Company
shall not be unreasonably withheld.
"ENVIRONMENTAL LAWS" means federal, state or local laws, rules or
regulations, and any judicial or administrative interpretations thereof,
including any judicial or administrative order, judgment, permit,
approval, decision or determination pertaining to conservation or
protection of the environment in effect at the time in question, including
the Clean Air Act, CERCLA, the Federal Water Pollution Control Act, the
Occupational Safety and Health Act, the Resource Conservation and Recovery
Act, the Safe Drinking Water Act, the Toxic Substances Control Act, the
Superfund Amendment and Reauthorization Act of 1986, the Hazardous
Materials Transportation Act, and comparable state and local laws, and
other environmental conservation and protection laws.
"ERISA" means the Employee Retirement Income Security Act of 1974
and the regulations promulgated thereunder.
"ERISA AFFILIATE" means any trade or business (whether or not
incorporated) which is either a member of the same "controlled group" or
under "common control," within the meaning of Section 414 of the Code and
the regulations thereunder, with the Company and (b) any Subsidiary of the
Company.
<PAGE>
"EUROCURRENCY LIABILITIES" has the meaning specified in Regulation D
as in effect from time to time.
"EURODOLLAR LENDING OFFICE" means, with respect to each Bank, the
branches or affiliates of such Bank designated as its "Eurodollar Lending
Office" from time to time hereunder.
"EURODOLLAR RATE" means, with respect to any Eurodollar Rate
Advance, the rate (rounded to 1/16 of 1%) at which dollar deposits
approximately equal in principal amount to the entire portion of such
Advance and for a maturity equal to the applicable Interest Period are
offered in immediately available funds to the Agent by prime banks in
whatever Eurodollar interbank market may be selected by the Agent in its
sole and absolute discretion at the time of determination and in
accordance with the then usual practice in such market at approximately
10:00 a.m. (Houston, Texas time) two Business Days prior to the
commencement of such Interest Period.
"EURODOLLAR RATE ADVANCE" means any Advance bearing interest at a
rate determined by reference to the Eurodollar Rate in accordance with the
provisions of ARTICLE II.
"EVENTS OF DEFAULT" has the meaning specified in SECTION 10.01.
"EXECUTION DATE" means the date upon which this Agreement shall have
been executed by the Company, the Guarantors, the Banks, and the Agent.
"FEDERAL FUNDS EFFECTIVE RATE" has the meaning specified in the
definition of the term "ALTERNATE BASE RATE."
"FEES" has the meaning specified in SECTION 4.01.
"FINANCIALS" has the meaning specified in SECTION 6.07.
"FUNDED DEBT" means all indebtedness for borrowed money evidenced by
a written document and subject to periodic, required payments of interest
and/or principal exclusive of Subordinated Debt.
"GAAP" means generally accepted accounting principles as in effect
from time to time as set forth in the opinions, statements and
pronouncements of the Accounting Principles Board of the American
Institute of Certified Public Accountants, the Financial Accounting
Standards Board and such other Persons who shall be approved by a
significant segment of the accounting profession and concurred in by the
independent certified public accountants certifying any audited financial
statements of the Company.
"GUARANTEED OBLIGATIONS" has the meaning specified in SECTION 9.01.
<PAGE>
"GUARANTORS" has the meaning provided in the introduction to this
Agreement.
"GUARANTY" means the obligations contained in ARTICLE IX hereof and
in any document containing similar obligations executed by subsequent
Guarantors.
"HAZARDOUS MATERIALS" means (a) hazardous waste as defined in the
Resource Conservation and Recovery Act of 1976, or in any applicable
federal, state or local law or regulation, (b) hazardous substances, as
defined in CERCLA, or in any applicable state or local law or regulation,
(c) gasoline, or any other petroleum product or by-product, (d) toxic
substances, as defined in the Toxic Substances Control Act of 1976, or in
any applicable federal, state or local law or regulation or (e)
insecticides, fungicides, or rodenticides, as defined in the Federal
Insecticide, Fungicide, and Rodenticide Act of 1975, or in any applicable
federal, state or local law or regulation, as each such act, statute or
regulation may be amended from time to time.
"HIGHEST LAWFUL RATE" means, as to any Bank, the maximum nonusurious
rate of interest that, under applicable law, may be contracted for, taken,
reserved, charged or received by such Bank on the Loans or under the Loan
Documents at any time or from time to time. If the maximum rate of
interest which, under applicable law, any of the Banks are permitted to
charge the Company on the Loans shall change after the date hereof, to the
extent permitted by applicable law, the Highest Lawful Rate shall be
automatically increased or decreased, as the case may be, as of the
effective time of such change without notice to the Company or any other
Person.
"INDEBTEDNESS" means, without duplication, (a) all indebtedness for
borrowed money (whether by loan or the issuance and sale of debt
securities) or for the deferred purchase price of property or services,
(b) all indebtedness created or arising under any conditional sale or
other title retention agreement with respect to property, (c) all
Capitalized Lease Obligations, (d) hedge or swap agreements; and (e)
obligations under direct or indirect guaranties in respect of, and
obligations (contingent or otherwise) to purchase or otherwise acquire, or
otherwise to assure a creditor against loss in respect of, indebtedness or
obligations of another Person of the kinds referred to in clauses (a)
through (d) above.
"INTEREST EXPENSE" means, with respect to the Company and its
Subsidiaries determined on a consolidated basis, for any period the total
interest expense for such period determined in conformity with GAAP
including any interest expense attributable to Capitalized Lease
Obligations.
"INTEREST PERIOD" has the meaning specified in SECTION 2.11.
"INVESTMENT" means, as applied to any Person, any direct or indirect
purchase or other acquisition by such Person of the assets, stock or other
securities of any other Person, or any direct or indirect loan, advance or
capital contribution by such Person to any other
<PAGE>
Person, and any other item which would be classified as an "investment" on
a balance sheet of such Person in accordance with GAAP, including any
direct or indirect contribution by such Person of property or assets to a
joint venture, partnership or other business entity in which such Person
retains an interest.
"ISSUING BANK" means, for each Letter of Credit, BOT.
"LETTER OF CREDIT" has the meaning specified in SECTION 3.01(A).
"LETTER OF CREDIT FEE" means the following computed on the undrawn
face amount of each Letter of Credit (i) a 1/8% per annum fronting fee
payable to the Issuing Bank and (ii) a fee payable to the Issuing Bank for
the ratable benefit of the Banks equal to the greater of (a) $500.00 or
(b) a rate per annum determined in accordance with the grid set forth
below as a function of the Funded Debt to EBITDA ratio:
FUNDED DEBT/EBITDA RATIO LETTER OF CREDIT FEE
------------------------ --------------------
(less than) 1.00 .875%
(greater than or equal to) 1 but (less than) 1.50 1.125%
(greater than or equal to) 1.50 but (less than) 2.00 1.375%
(greater than or equal to) 2.00 but (less than) 2.50 1.875%
Any Letter of Credit Fees expressed as a rate per annum shall be
calculated on the basis of a 365 day year.
"LETTER OF CREDIT OBLIGATIONS" means at any time the sum of (a) the
aggregate then undrawn and unexpired amount of outstanding Letters of
Credit and (b) the aggregate amount of drawings under Letters of Credit
not reimbursed pursuant to SECTION 3.03(C).
"LETTER OF CREDIT REQUEST" has the meaning specified in SECTION
3.02(A).
"LIEN" means, when used with respect to any Person, any mortgage,
lien, charge, pledge, security interest or encumbrance of any kind
(whether voluntary or involuntary and whether imposed or created by
operation of law or otherwise) upon, or pledge of, any of its property or
assets, whether now owned or hereafter acquired, or any lease intended as
security, any capital lease in the nature of the foregoing, any
conditional sale agreement or other title retention agreement, in each
case, for the purpose, or having the effect, of protecting a creditor
against loss or securing the payment or performance of an obligation.
"LOAN" and "LOANS" has the meaning assigned thereto in SECTION 2.01.
<PAGE>
"LOAN DOCUMENTS" means this Agreement and the other documents
described in ARTICLE V hereof, the Notes, the Notice of Advance, and the
corporate resolutions authorizing the Loan Documents.
"MAJORITY BANKS" means Banks holding at least 51% of the Advances
outstanding under the Loans, or, if no Advances are outstanding, Banks
holding such percentage of the Total Commitment (notwithstanding any
reduction or termination of the Total Commitment) or if there are no
Advances or Commitments outstanding, Banks holding such percentage of
outstanding Letters of Credit.
"MARGIN" means with respect to any Advance, the percentage
determined in accordance with the following table as a function of the
Funded Debt to EBITDA ratio:
FUNDED DEBT/ EURODOLLAR RATE ALTERNATE BASE
EBITDA RATIO ADVANCE RATE ADVANCE
------------ ------- ------------
(less than) 1.00 1.00% 0.00%
(greater than or equal to) 1 but (less than) 1.50 1.25% 0.00%
(greater than or equal to) 1.50 but (less than) 2.00 1.50% 0.00%
(greater than or equal to) 2.00 but (less than) 2.50 2.00% 0.25%
If sufficient information does not exist to calculate the Margin,
Eurodollar Rate Advances shall not be available to the Company and the
Margin for Alternate Base Rate Advances shall be deemed to be 0%.
"MARGIN PERIOD" means (a) the period from the Effective Date through
the date that the first quarterly financial statements are delivered
pursuant to Section 7.01(a) and (b) thereafter, a period commencing on the
date on which the quarterly or annual financial statements of the Company
are required to be delivered pursuant to SECTION 7.01(A) or SECTION
7.01(B), as the case may be, and ending on the next date a financial
statement is required to be so delivered.
"MATERIAL ADVERSE EFFECT" means, relative to any occurrence of
whatever nature (including any adverse determination in any litigation,
arbitration or governmental investigation or proceeding), (a) a material
adverse effect on the financial condition, business or operations of the
Company individually or the Company and its Subsidiaries taken as a whole
or (b) a material impairment of the collective ability of the Company and
its Subsidiaries to make payment hereunder or under any Note or the right
of any Bank to enforce any of its remedies to collect any amounts owing
under the Loan Documents.
<PAGE>
"MATURITY DATE" means a date which is three years after the
Execution Date.
"MAXIMUM GUARANTEED AMOUNT" means for each Guarantor the maximum
amount which any Guarantor could pay under the Guaranty without having
such payment set aside as a fraudulent transfer or conveyance or similar
action under the Bankruptcy Code or any applicable state or foreign law.
"MULTIEMPLOYER PLAN" means any plan which is a "multiemployer plan"
(as such term is defined in Section 4001(a)(3) of ERISA).
"NOTE" has the meaning specified in SECTION 2.02.
"NOTE" and "NOTES" have the meaning specified in SECTION 2.02.
"NOTICE OF ADVANCE" has the meaning provided in SECTION 2.03(A).
"NOTICE OF CONVERSION" has the meaning provided in SECTION 2.05.
"NOTICE OF DEFAULT" has the meaning specified in SECTION 10.02.
"OBLIGATIONS" means all the obligations of the Company now or
hereafter existing under the Loan Documents, whether for principal,
interest, Fees, expenses, indemnification or otherwise.
"OTHER ACTIVITIES" has the meaning specified in SECTION 11.03.
"OTHER FINANCINGS" has the meaning specified in SECTION 11.03.
"PAYMENT OFFICE" means the office of the Agent located at 1111
Fannin Street, Houston, Texas 77002, or such other office as the Agent may
hereafter designate in writing as such to the other parties hereto.
"PBGC" means the Pension Benefit Guaranty Corporation or any entity
succeeding to all or any of its functions under ERISA.
"PERMITTED INVESTMENTS" means, as to any Person:
(a) securities issued or directly and fully guaranteed or
insured by the United States or any agency or instrumentality
thereof (PROVIDED that the full faith and credit of the United
States is pledged in support thereof) having maturities of not more
than twelve months from the date of acquisition thereof,
<PAGE>
(b) time deposits and certificates of deposit with maturities
of not more than twelve months from the date of acquisition by such
Person which deposits or certificates are either: (a) fully insured
by the Federal Deposit Insurance Corporation or (b) in any Bank or
other commercial bank incorporated in the United States or any U.S.
branch of any other commercial bank, in each case having capital,
surplus and undivided profits aggregating $100,000,000.00 or more
with a long-term unsecured debt rating of at least A- from Standard
& Poor's Ratings Group or A3 from Moody's Investors Service,
(c) commercial paper issued by any Person incorporated in the
United States rated at least A2 or the equivalent thereof by
Standard & Poor's Ratings Group or at least P2 or the equivalent
thereof by Moody's Investors Service and, in each case, maturing not
more than 270 days after the date of issuance,
(d) investments in money market mutual funds having assets in
excess of $2,000,000,000.00 substantially all of whose assets are
comprised of securities of the types described in clauses (a)
through (c) above, and
(e) repurchase or reverse purchase agreements respecting
obligations with a term of not more than seven days for underlying
securities of the types described in clause (a) above entered into
with any bank listed in or meeting the qualifications specified in
clause (b) above.
"PERMITTED LIENS" shall mean: (a) Liens for taxes, assessments,
levies or other governmental charges not yet due or which are being
contested in good faith by appropriate proceedings and for which adequate
reserves are maintained in accordance with GAAP; (b) Liens in connection
with worker's compensation, unemployment insurance or other social
security, old age pension or public liability obligations not yet due or
which are being contested in good faith by appropriate proceedings and for
which adequate reserves are maintained in accordance with GAAP; (c)
operator's, vendors', carriers', warehousemen's, repairmen's, mechanics',
workers', materialmen's or other like Liens arising by operation of law in
the ordinary course of business (or deposits to obtain the release of any
such Lien) and securing amounts not yet due or which are being contested
in good faith by appropriate proceedings and for which adequate reserves
are maintained in accordance with GAAP; (d) deposits to secure insurance
in the ordinary course of business; (e) deposits to secure the performance
of bids, tenders, contracts (other than contracts for the payment of money
or the deferred purchase price of goods or services), leases, licenses,
franchises, trade contracts, statutory obligations, surety and appeal
bonds and performance bonds and other obligations of a like nature
incurred in the ordinary course of business; (f) easements, rights of way,
covenants, restrictions, reservations, exceptions, encroachments, zoning
and similar restrictions and other similar encumbrances (other than to
secure the payment of borrowed money or the deferred purchase price of
goods or services) or title defects, in each case incurred in the ordinary
course of business which, in the aggregate, are not substantial in
<PAGE>
amount, and which do not in any case singly or in the aggregate materially
detract from the value or usefulness of the Property subject thereto for
the business conducted by the Company and its Subsidiaries or materially
interfere with the ordinary conduct of the business of the Company and its
Subsidiaries; (g) bankers' liens arising by operation of law; (h) inchoate
Liens arising under ERISA to secure contingent liabilities of the Company
and its Subsidiaries; and (i) Liens on assets of Subsidiaries to secure
indebtedness to the Company provided same are collaterally assigned to the
Agent, provided further, such Liens may be incurred only to the extent the
underlying Indebtedness is otherwise permitted under the terms of this
Agreement.
"PERSON" means an individual, partnership, corporation (including a
business trust), limited liability company, joint stock company, trust,
unincorporated association, joint venture or other entity, or a foreign or
domestic state or political subdivision thereof or any agency of such
state or subdivision.
"PLAN" means any employee pension benefit plan (as defined in
Section 3(2) of ERISA), subject to Title IV of ERISA or Section 412 of the
Code, other than a Multiemployer Plan, with respect to which the Company
or an ERISA Affiliate contributes or has an obligation or liability to
contribute, including any such plan that may have been terminated.
"PRESCRIBED FORMS" shall mean such duly executed form(s) or
statement(s), and in such number of copies, which may, from time to time,
be prescribed by law and which, pursuant to applicable provisions of the
Code or an income tax treaty between the United States and the country of
residence of the Bank providing the form(s) or statement(s), permit each
of the Company and the Agent to make payments hereunder for the account of
such Bank free of deduction or withholding of income and other taxes.
"PRIME RATE" has the meaning set forth in the definition of
Alternate Base Rate.
"PROPERTY" (whether or not capitalized) means any interest in any
kind of property or asset, whether real, personal or mixed, or tangible or
intangible.
"REGULATIONS A, D, G, T, U AND X" means Regulations A, D, G, T, U
and X of the Board as the same are from time to time in effect, and all
official rulings and interpretations thereunder or thereof.
"RELEASE" means any spilling, leaking, pumping, pouring, emitting,
emptying, discharging, injecting, escaping, leaching, dumping or disposing
into the environment (including the abandonment or discarding of barrels,
containers and other closed receptacles).
<PAGE>
"REPORTABLE EVENT" means an event described in Section 4043(b) of
ERISA with respect to a Plan as to which the 30-day notice requirement has
not been waived by the PBGC.
"REQUIREMENTS OF ENVIRONMENTAL LAWS" means, as to any Person, the
requirements of any applicable Environmental Law relating to or affecting
such Person or the condition or operation of such Person's business or its
properties, both real and personal.
"RESERVE PERCENTAGE" means, for any Interest Period and for any
Bank, the reserve percentage applicable during such Interest Period under
regulations issued from time to time by the Board (or if more than one
such percentage is so applicable, the daily average for such percentages
for those days in such Interest Period during which any such percentage
shall be so applicable) for determining the actual reserve requirement
(including any marginal, supplemental or emergency reserves) for such Bank
in respect of liabilities or assets consisting of or including
Eurocurrency Liabilities.
"RESPONSIBLE OFFICER" means, with respect to the Company, the
chairman of the board of directors, president, any vice president, chief
executive officer, chief operating officer, treasurer or chief financial
officer of the Company.
"SUBSIDIARY" means and includes, with respect to any Person, (a) any
corporation more than 50% of whose stock of any class or classes having by
the terms thereof ordinary voting power to elect a majority of the
directors of such corporation (irrespective of whether or not at the time
stock of any class or classes of such corporation shall have or might have
voting power by reason of the happening of any contingency) is at the time
owned by such Person, directly or indirectly and (b) any partnership,
association, joint venture or other entity in which such Person, directly
or indirectly, has greater than 50% of the equity interest. Unless
otherwise provided or the context otherwise requires, the term
"Subsidiary" or "Subsidiaries" shall mean a Subsidiary or Subsidiaries of
the Company.
"SUBORDINATED DEBT" means any Indebtedness of the Company or any
subsidiary of the Company which is expressly and validly subordinated to
the obligations of the Company hereunder and under the Notes and other
Loan Documents pursuant to terms and conditions substantially in the form
of the attached EXHIBIT 1.01(B);
"TOTAL COMMITMENT" means the sum of the Commitments for each Bank
totaling a maximum of $75,000,000.00 for all Banks.
"UNUTILIZED COMMITMENT" means the Total Commitment less Letter of
Credit Obligations less the outstanding Advances under the Loan, as same
may be reduced pursuant to SECTION 2.16.
<PAGE>
SECTION 1.02. TYPES OF ADVANCES. Advances hereunder are
distinguished by "Type". The Type of an Advance refers to the determination
whether such Advance is a Eurodollar Rate Advance or an Alternate Base Rate
Advance.
SECTION 1.03. ACCOUNTING TERMS. All accounting terms not defined
herein shall be construed in accordance with GAAP, as applicable, and all
calculations required to be made hereunder and all financial information
required to be provided hereunder shall be done or prepared in accordance with
GAAP.
SECTION 1.04. SCHEDULES. Schedules hereto may be updated by the
Company from time to time to reflect transactions and other matters not
prohibited by the Loan Documents.
ARTICLE II
THE LOANS
SECTION 2.01. THE LOANS. Subject to the terms and conditions hereof,
each Bank severally agrees at any time and from time to time on and after the
Execution Date and prior to the Maturity Date, to make and maintain a loan or
loans (together with any Advances under a Letter of Credit described in Article
III, a "LOAN" and collectively, the "LOANS") to the Company not to exceed at any
time outstanding the maximum amount of its Commitment, which Loans (i) shall, at
the option of the Company, be made and maintained pursuant to one or more
Advances comprised of Alternate Base Rate Advances or Eurodollar Rate Advances;
PROVIDED that, except as otherwise specifically provided herein, all Advances
made simultaneously under the Loan shall be of the same Type, (ii) in the case
of Eurodollar Rate Advances, shall be made in the minimum amount of
$1,000,000.00 and integral multiples of $100,000.00 and, in the case of
Alternate Base Rate Advances, in the minimum amount of $100,000.00 and integral
multiples thereof, or, in either case, in the remaining balance of the Total
Commitment, (iii) may be repaid and, so long as no Default or Event of Default
exists hereunder, reborrowed, at the option of the Company in accordance with
the provisions hereof, and (iv) shall, in the aggregate at any time outstanding
and together with all Letter of Credit Obligations, not exceed the Total
Commitment. There shall be no further Advances after the Maturity Date.
SECTION 2.02. THE NOTES. The Loans shall be evidenced by a Note in
favor of each Bank (individually a "NOTE" and collectively, the "NOTES"),
substantially in the form of EXHIBIT 2.02(A).
SECTION 2.03. NOTICE OF ADVANCE. (a) Whenever the Company desires an
Advance, it shall give written notice thereof (a "NOTICE OF ADVANCE") (or
telephonic notice promptly confirmed in writing) to the Agent (i) in the case of
an Alternate Base Rate Advance, not later than 10:00 a.m. (Houston, Texas time)
on the date of such Advance and (ii) in the case of a Eurodollar Rate Advance,
not later than noon (Houston, Texas time) three Business Days prior to the date
of such Advance. Each Notice of Advance shall be irrevocable and shall be in the
form of EXHIBIT 2.03
<PAGE>
hereto, specifying (i) the aggregate principal amount of the Advance to be made,
(ii) the date of such Advance (which shall be a Business Day), (iii) whether it
is to be an Alternate Base Rate Advance or a Eurodollar Rate Advance and (iv) if
the proposed Advance is to be a Eurodollar Rate Advance, the initial Interest
Period to be applicable thereto.
(b) The Agent shall promptly give the Banks written notice or
telephonic notice (promptly confirmed in writing) of each proposed Advance, of
each Bank's proportionate share thereof and of the other matters covered by each
Notice of Advance.
SECTION 2.04. DISBURSEMENT OF FUNDS FOR LOANS. (a) No later than
1:00 p.m. (Houston, Texas time) on any Advance Date for Loans, each Bank shall
make available its pro rata portion of the amount of such Advance in U.S.
dollars and in immediately available funds at the Payment Office. At such time,
the Agent shall credit the amounts so received to the general deposit account of
the Company maintained with the Agent in immediately available funds or as
otherwise directed by the Company.
(b) Unless the Agent shall have been notified by any Bank prior to
disbursement of the Advance by the Agent that such Bank does not intend to make
available to the Agent such Bank's portion of the Advance to be made on such
date, the Agent may assume that such Bank has made such amount available to the
Agent on such Advance Date and the Agent may, in reliance upon such assumption,
make available to the Company a corresponding amount. If such corresponding
amount is not in fact made available to the Agent by such Bank and the Agent has
made available same to the Company, the Agent shall be entitled to recover such
corresponding amount on demand from such Bank. If such Bank does not pay such
corresponding amount forthwith upon the Agent's demand therefor, the Agent shall
promptly notify the Company, and the Company shall pay such corresponding amount
to the Agent within two (2) Business Days after demand therefor. The Agent shall
also be entitled to recover from such Bank or the Company, as the case may be,
interest on such corresponding amount from the date such corresponding amount
was made available by the Agent to the Company to the date such corresponding
amount is recovered by the Agent, at a rate per annum equal to the Alternate
Base Rate or the Eurodollar Rate PLUS the applicable Margin, as appropriate.
Nothing herein shall be deemed to relieve any Bank from its obligation to
fulfill its Commitments hereunder or to prejudice any rights which the Company
may have against any Bank as a result of any default by such Bank hereunder.
SECTION 2.05. CONVERSIONS AND CONTINUANCES. The Company shall have
the option to convert or continue on any Business Day all or a portion of the
outstanding principal amount of one Type of Advance for any Loan into another
Type of Advance, PROVIDED, no Advances may be converted into or continued as
Eurodollar Rate Advances if a Default or Event of Default is in existence on the
date of the conversion. Any continuation of an Advance as the same Type of
Advance in the same amount shall be effected by the Company giving notice to the
Agent, in writing, or by telephone promptly confirmed in writing, of its
intention to continue such Advance as an Advance of the same Type. Each such
conversion shall be effected by the Company giving the Agent written notice
(each a "NOTICE OF CONVERSION"), substantially in the form of EXHIBIT 2.05
<PAGE>
hereto, prior to noon (Houston, Texas time) at least (a) three (3) Business Days
prior to the date of such conversion in the case of conversion into or
continuance as Eurodollar Rate Advances and (b) prior to 10:00 a.m. (Houston,
Texas time) one Business Day prior to the date of conversion in the case of a
conversion into Alternate Base Rate Advances, specifying each Advance (or
portions thereof) to be so converted and, if to be converted into or continued
as Eurodollar Rate Advances, the Interest Period to be initially applicable
thereto. The Agent shall thereafter promptly notify each Bank of such Notice of
Conversion.
SECTION 2.06. VOLUNTARY PREPAYMENTS. The Company shall have the
right to voluntarily prepay any Loan in whole or in part at any time on the
following terms and conditions: (a) no Eurodollar Rate Advance may be prepaid
prior to the last day of its Interest Period unless, simultaneously therewith,
the Company pays to the Agent for the benefit of the Banks, all sums necessary
to compensate the Banks for all costs and expenses resulting from such
prepayment, as reasonably determined by the Banks, including but not limited to
those costs described in SECTIONS 2.10(F), 2.14, and SECTION 2.15 hereof; and
(b) each prepayment pursuant to this section shall be applied first, to the
payment of accrued and unpaid interest, and then, to the outstanding principal
of such Advances.
SECTION 2.07. MANDATORY REPAYMENTS.
The Company shall repay Loans on any day on which the aggregate
outstanding principal amount of the Loans together with the outstanding Letter
of Credit Obligations exceeds the Total Commitment, in the amount of such
excess. The aggregate amount under the Notes (and all accrued, unpaid interest)
shall be due and payable, and the Commitments shall terminate, on the Maturity
Date.
SECTION 2.08. METHOD AND PLACE OF PAYMENT. Except as otherwise
specifically provided herein, all payments under this Agreement due from the
Company shall be made to the Agent for the benefit of the Banks not later than
11:00 a.m. (Houston, Texas time) on the date when due and shall be made in
lawful money of the United States in immediately available funds at the Payment
Office.
SECTION 2.09. PRO RATA ADVANCES. All Advances under this Agreement
shall be incurred from the Banks pro rata, on the basis of their respective
Commitments. It is understood that no Bank shall be responsible for any default
by any other Bank in its obligation to make Loans hereunder and that each Bank
shall be obligated to make the Loans provided to be made by it hereunder,
regardless of the failure of any other Bank to fulfill its commitments
hereunder.
SECTION 2.10. INTEREST. (a) Subject to SECTION 12.08, the Company
agrees to pay interest on the total outstanding principal balance of all
Alternate Base Rate Advances from the date of each respective Advance to
maturity (whether by acceleration or otherwise) at a rate per annum which shall
at all times be equal to the lesser of (i) the Highest Lawful Rate and (ii) the
Alternate Base Rate in effect from time to time plus the Margin for Alternate
Base Rate Advances, which
<PAGE>
Margin shall be adjusted on the first day of each Margin Period. If the
Alternate Base Rate is based on the Prime Rate, interest shall be computed on
the basis of the actual number of days elapsed over a year of 365 or 366 days,
as the case may be. If the Alternate Base Rate is based on the Federal Funds
Effective Rate, interest shall be computed on the basis of the actual number of
days elapsed over a year of 360 days.
(b) Subject to SECTION 12.08, the Company agrees to pay interest on
the total outstanding principal balance of all Eurodollar Rate Advances from the
date of each respective Advance to maturity (whether by acceleration or
otherwise) at a rate per annum (computed on the basis of the actual number of
days elapsed over a year of 360 days) which shall, during each Interest Period
applicable thereto, be equal to the lesser of (i) the Highest Lawful Rate and
(ii) the applicable Eurodollar Rate for such Interest Period plus the Margin for
Eurodollar Rate Advances. The applicable Eurodollar Rate shall be fixed for each
Interest Period and shall not change during said Interest Period, but the
applicable Margin, which is added to said Eurodollar Rate to determine the total
interest payable to the Banks, shall be adjusted, if applicable under the
definition of "Margin", effective on the first day of each Margin Period,
whether or not said adjustment occurs at a time other than the beginning of an
Interest Period.
(c) Subject to SECTION 12.08, overdue principal and, to the extent
permitted by law, overdue interest in respect of any Advance and all other
overdue amounts owing hereunder shall bear interest for each day that such
amounts are overdue at a rate per annum equal to the Default Rate.
(d) Interest on each Advance shall accrue from and including the
date of such Advance to but excluding the date of any repayment thereof and
shall be payable (i) in respect of Eurodollar Rate Advances (A) on the last day
of the Interest Period (as defined below) applicable thereto and on each
Designated Payment Date during any Interest Period in excess of three (3) months
and (B) on the date of any voluntary or mandatory repayment or any conversion or
continuance, (ii) in respect of Alternate Base Rate Advances (A) on each
Designated Payment Date, and (B) on the date of any voluntary or mandatory
repayment of such Advances on the principal amount repaid and (iii) in respect
of each Advance, at maturity (whether by acceleration or otherwise) and, after
maturity, on demand.
(e) The Agent, upon determining the Eurodollar Rate for any Interest
Period, shall notify the Company thereof. Each such determination shall, absent
manifest error, be final and conclusive and binding on all parties hereto. In
addition, prior to the due date for the payment of interest on any Advances set
forth in the immediately preceding paragraph, the Agent shall notify the Company
of the amount of interest due by the Company on all outstanding Advances on the
applicable due date, but any failure of the Agent to so notify the Company shall
not reduce the Company's liability for the amount owed.
(f) The Company shall pay to the Agent for the account of each Bank,
so long as such Bank shall be required under regulations of the Board to
maintain reserves with respect to
<PAGE>
liabilities or assets consisting of or including Eurocurrency Liabilities,
additional interest on the unpaid principal amount of such Bank's share of each
Eurodollar Rate Advance, from the date of such Advance until such principal
amount is paid in full, at an interest rate per annum equal at all times during
the Interest Period for such Advance to the lesser of (i) the Highest Lawful
Rate and (ii) the remainder obtained by subtracting (A) the Eurodollar Rate for
such Interest Period from (B) the rate obtained by dividing such Eurodollar Rate
referred to in clause (A) above by that percentage equal to 100% minus the
Reserve Percentage of such Bank for such Interest Period. Such additional
interest shall be determined by such Bank as incurred and shall be payable upon
demand therefor by the Bank to the Company. Each determination by such Bank of
additional interest due under this Section shall be conclusive and binding for
all purposes in the absence of manifest error.
SECTION 2.11. INTEREST PERIODS. (a) At the time the Company gives
any Notice of Advance or Notice of Conversion or provides notice of its intent
to continue a loan as the same Type in respect of the making of, or conversion
into, a Eurodollar Rate Advance, the Company shall have the right to elect, by
giving the Agent on the dates and at the times specified in SECTION 2.03 or
SECTION 2.05, as the case may be, notice of the interest period (each an
"INTEREST PERIOD") applicable to such Eurodollar Rate Advance, which Interest
Period shall be either a one, two, three or six month period; PROVIDED, that:
(i) the initial Interest Period for any Eurodollar Rate
Advance shall commence on the date of such Eurodollar Rate Advance
(including the date of any conversion thereto or continuance thereof
pursuant to SECTION 2.05); each Interest Period occurring thereafter in
respect of such Eurodollar Rate Advance shall commence on the expiration
date of the immediately preceding Interest Period;
(ii) if any Interest Period relating to a Eurodollar Rate
Advance begins on a day for which there is no numerically corresponding
day in the calendar month at the end of such Interest Period, such
Interest Period shall end on the last Business Day of such calendar month;
(iii) if any Interest Period would otherwise expire on a day
which is not a Business Day, such Interest Period shall expire on the next
succeeding Business Day, PROVIDED, that if there are no more Business Days
in that month, the Interest Period shall expire on the preceding Business
Day;
(iv) no Interest Period for Advances shall extend beyond the
applicable Maturity Date; and
(v) the Company shall be entitled to have a maximum of ten
(10) separate Eurodollar Rate Advances hereunder for all Loans outstanding
at any one time.
(b) If, upon the expiration of any Interest Period applicable to a
Eurodollar Rate Advance, the Company has failed to elect a new Interest Period
to be applicable to such Advance
<PAGE>
as provided above, the Company shall be deemed to have elected to convert such
Advance into an Alternate Base Rate Advance effective as of the expiration date
of such current Interest Period.
SECTION 2.12. INTEREST RATE NOT ASCERTAINABLE. In the event that the
Agent shall determine (which determination shall, absent manifest error, be
final, conclusive and binding upon all parties) that on any date for determining
the Eurodollar Rate for any Interest Period, by reason of any changes arising
after the date of this Agreement affecting the Eurodollar 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 Eurodollar Rate, then, and in any such event, the Agent shall
forthwith give notice to the Company and to the Banks of such determination.
Until the circumstances giving rise to the suspension described herein no longer
exist, the obligations of the Banks to make Eurodollar Rate Advances shall be
suspended.
SECTION 2.13. CHANGE IN LEGALITY. (a) Notwithstanding anything to
the contrary herein contained, if any change in any law or regulation or in the
interpretation thereof by any governmental authority charged with the
administration or interpretation thereof shall make it unlawful for any Bank or
its Eurodollar Lending Office to make or maintain any Eurodollar Rate Advance or
to give effect to its obligations as contemplated hereby, then, by prompt
written notice to the Company, such Bank may:
(i) declare that Eurodollar Rate Advances will not thereafter
be made by such Bank hereunder, whereupon the Company shall be prohibited
from requesting Eurodollar Rate Advances from such Bank hereunder unless
such declaration is subsequently withdrawn, PROVIDED, such request for a
Eurodollar Rate Advance shall, if the Company so indicates, be
automatically converted (as to such Bank) into a request for an Alternate
Base Rate Advance and the affected Bank or Banks shall respond thereto as
provided herein; and
(ii) require that all outstanding Eurodollar Rate Advances
made by such Bank be converted to Alternate Base Rate Advances, in which
event (A) all such Eurodollar Rate Advances shall be automatically
converted to Alternate Base Rate Advances as of the effective date of such
notice as provided in paragraph (b) below if required by applicable law or
regulation, or if not so required, at the end of the current Interest
Period and (B) all payments and prepayments of principal which would
otherwise have been applied to repay the converted Eurodollar Rate
Advances shall instead be applied to repay the Alternate Base Rate
Advances resulting from the conversion of such Eurodollar Rate Advances.
(b) For purposes of this Section, a notice to the Company by the
Agent pursuant to paragraph (a) above shall be effective on the date of receipt
thereof by the Company.
SECTION 2.14. INCREASED COSTS, TAXES OR CAPITAL ADEQUACY
REQUIREMENTS. (a) If any change in the application or effectiveness of any
applicable law or regulation or compliance by any Bank with any applicable
guideline or request issued after the date hereof from any central bank or
governmental authority having jurisdiction over such Bank (whether or not having
the force of
<PAGE>
law) (i) shall change the basis of taxation of payments to such Bank of the
principal of or interest on any Eurodollar Rate Advance made by such Bank or any
other fees or amounts payable hereunder with respect to Eurodollar Rate Advances
(other than taxes imposed on the overall net income of such Bank or its
Applicable Lending Office or franchise taxes imposed upon it by the jurisdiction
in which such Bank or its Applicable Lending Office has an office), (ii) shall
impose, modify or deem applicable any reserve, special deposit or similar
requirement with respect to Eurodollar Rate Advances against assets of, deposits
with or for the account of, or credit extended by, such Bank (without
duplication of any amounts paid pursuant to SECTION 2.10(F)) or (iii) shall
impose on such Bank any other condition affecting this Agreement with respect to
Eurodollar Rate Advances or any Eurodollar Rate Advance made by such Bank, and
the result of any of the foregoing shall be to increase the cost to such Bank of
maintaining its Commitment or of making or maintaining any Eurodollar Rate
Advance or to reduce the amount of any sum received or receivable by such Bank
hereunder (whether of principal, interest or otherwise) in respect thereof by an
amount deemed in good faith by such Bank to be material, then the Company shall
pay to such Bank such additional amount as will compensate it for such increase
or reduction within ten (10) days after notice thereof pursuant to SECTION
2.14(C).
(b) If any Bank shall have determined in good faith that any change
in any law, rule, regulation or guideline regarding capital adequacy, or any
change therein or any change in the interpretation or administration thereof or
compliance with any request or directive regarding capital adequacy (whether or
not having the force of law) of any such authority, central bank or comparable
agency has or would have the effect of reducing the rate of return on the
capital of such Bank as a consequence of, or with reference to, such Bank's
obligations hereunder to a level below that which it could have achieved but for
such adoption, change or compliance by an amount deemed by such Bank to be
material, then, from time to time, the Company shall pay to the Agent for the
benefit of such Bank such additional amount as will reasonably compensate it for
such reduction within ten (10) days after notice thereof pursuant to SECTION
2.14(C).
(c) Each Bank will notify the Company through the Agent of any event
occurring after the date of this Agreement which will entitle it to compensation
pursuant to this Section, as promptly as practicable after it becomes aware
thereof and determines to request compensation and in any case, within 120 days
after becoming aware thereof. A certificate setting forth in reasonable detail
the amount necessary to compensate the Bank in question as specified in
paragraph (a) or (b) above, as the case may be, and the calculation of such
amount shall be delivered to the Company and shall be conclusive absent manifest
error. The failure on the part of any Bank to demand increased compensation with
respect to any Interest Period shall not constitute a waiver of the right to
demand compensation thereafter within the 120 day time limit set forth above.
Each Bank agrees, to the extent it may lawfully do so without incurring
additional costs, to use its best efforts to minimize costs arising under this
section by designating another lending office for the Loans affected, PROVIDED
no Bank shall be required to do so.
(d) In the event any Bank gives a notice to the Company pursuant to
SECTION 2.13 or 2.14 that it cannot fund certain Loans or that such funding will
be at an increased cost, or is unable
<PAGE>
to deliver the Prescribed Forms as required by SECTION 2.17 below, the Company
may give notice in response, with copies to the Agent, that it wishes to seek
one or more banks to replace such Bank in accordance with the provisions set
forth in SECTION 12.10. Each Bank giving such a notice agrees that, at the
request of the Company, it will assign all of its interests hereunder and under
the Notes and the Commitment to a designated, Eligible Assignee for the full
amount then owing to it, all in accordance with SECTION 12.10. Thereafter, said
assignee shall have all of the rights hereunder and obligations of the Assigning
Bank (except as otherwise expressly set forth herein) and such Bank shall have
no further obligations to the Company hereunder.
(e) Any notice given pursuant to this SECTION 2.14 shall be deemed
to contain a representation by the Bank issuing such notice that the increased
costs and charges are common to substantially all of the loan customers of such
Bank and are not unique to the Company.
SECTION 2.15. EURODOLLAR ADVANCE PREPAYMENT AND DEFAULT PENALTIES.
Subject to SECTION 12.08, the Company shall indemnify each Bank against any loss
or expense (excluding loss of anticipated profits) which it may sustain or incur
as a consequence of (a) an Advance of, or a conversion from or into, Eurodollar
Rate Advances that does not occur on the date specified therefor in a Notice of
Advance or Notice of Conversion or (b) any payment, prepayment or conversion of
a Eurodollar Rate Advance required by any other provision of this Agreement or
otherwise made on a date other than the last day of the applicable Interest
Period. Such loss or expense shall include an amount equal to the excess
determined by each Bank of (i) its cost of obtaining the funds for the Advance
being paid, prepaid or converted or not borrowed (based on the Eurodollar Rate)
for the period from the date of such payment, prepayment or conversion or
failure to borrow to the last day of the Interest Period for such Advance (or,
in the case of a failure to borrow, the Interest Period for the Advance which
would have commenced on the date of such failure to borrow) OVER (ii) the amount
of interest (as determined by each Bank) that would be realized in reemploying
the funds so paid, prepaid or converted or not borrowed for such period or
Interest Period, as the case may be. The Agent, on behalf of the Banks, will
notify the Company of any loss or expense which will entitle the Banks to
compensation pursuant to this Section, as promptly as possible after it becomes
aware thereof, but failure to so notify shall not affect the Company's liability
therefor. A certificate of any Bank setting forth any amount which it is
entitled to receive pursuant to this Section shall be delivered to the Company
and shall be conclusive absent manifest error if such determination is made on a
reasonable basis. The Company shall pay to the Agent for the account of the
Banks the amount shown as due on any certificate within ten (10) days after its
receipt of the same. Without prejudice to the survival of any other obligations
of the Company hereunder, the obligations of the Company under this Section
shall survive the termination of this Agreement and, with respect to the
assigning Bank, the assignment of any of the Notes, in each case for one hundred
and twenty (120) days.
SECTION 2.16. VOLUNTARY REDUCTION OF COMMITMENT. Upon at least three
(3) Business Days' prior written notice, the Company shall have the right,
without premium or penalty, to reduce or terminate the Commitments, in whole or
in part, in the amount of $5,000,000.00 or integral multiples thereof.
<PAGE>
SECTION 2.17. TAX FORMS. With respect to any Bank which is organized
under the laws of a jurisdiction outside the United States, on the date of the
initial Advance hereunder or on the date it becomes a party hereto, and from
time to time thereafter if requested by the Company or the Agent, each such Bank
shall provide the Agent and the Company with the Prescribed Forms. Unless the
Company and the Agent have received such Prescribed Forms, the Agent and the
Company if required by applicable law or regulation, may withhold taxes from
payments under the Loan Documents at the applicable rate in the case of payments
to or for any Bank organized under the laws of a jurisdiction outside the United
States, PROVIDED the Company shall, unless otherwise directed in writing by the
Agent or unless otherwise required by law, make all payments in full to the
Agent without deducting any withholding or similar taxes.
ARTICLE III
LETTERS OF CREDIT
SECTION 3.01. LETTERS OF CREDIT. (a) Subject to and upon the terms
and conditions herein set forth, the Issuing Bank agrees that it will, at any
time and from time to time on or after the Effective Date and prior to the
Maturity Date, following its receipt of a Letter of Credit Request and
Application for Letter of Credit, issue for the account of the Company and in
support of the obligations of the Company or any of its Subsidiaries, one or
more letters of credit (the "LETTERS OF CREDIT"), up to a maximum amount
outstanding at any one time for all Letters of Credit of $5,000,000.00, PROVIDED
that the Issuing Bank shall not issue any Letter of Credit if at the time of
such issuance: (i) Letter of Credit Obligations shall be greater than an amount
which, when added to the sum of all Advances then outstanding plus Letter of
Credit Obligations, would exceed the Total Commitment or (ii) the expiry date
or, in the case of any Letter of Credit containing an expiry date that is
extendible at the option of the Issuing Bank, the initial expiry date, of such
Letter of Credit is a date that is later than the Maturity Date.
(b) The Issuing Bank shall neither renew or extend nor permit the
renewal or extension of any Letter of Credit (which renewal or extension will
not be for any period ending after the Revolving Credit Maturity Date) if any of
the conditions precedent to such renewal set forth in SECTION 5.02 are not
satisfied or waived or, after giving effect to such renewal, the expiry date of
such Letter of Credit would be a date that is later than the Maturity Date.
SECTION 3.02. LETTER OF CREDIT REQUESTS. (a) Whenever the Company
desires that a Letter of Credit be issued for its account or that the existing
expiry date shall be extended, it shall give the Issuing Bank (with copies to be
sent to the Agent and each Bank) (i) in the case of a Letter of Credit to be
issued, at least five (5) Business Days' prior written request therefor and (ii)
in the case of the extension of the existing expiry date of any Letter of
Credit, at least five (5) Business Days prior to the date on which the Issuing
Bank must notify the beneficiary thereof that the Issuing Bank does not intend
to extend such existing expiry date. Each such request shall be executed by the
Company and shall be in the form of EXHIBIT 3.02 attached hereto (each a "LETTER
OF CREDIT REQUEST") and shall be accompanied by an Application for Letter of
Credit therefor, completed to
<PAGE>
the reasonable satisfaction of the Issuing Bank, and such other certificates,
documents and other papers and information as the Issuing Bank or the Agent may
reasonably request. Each Letter of Credit shall be denominated in U.S. dollars,
shall expire no later than the date specified in SECTION 3.01, shall not be in
an amount greater than is permitted under clause (i) of SECTION 3.01(A) and
shall be in such form as may be reasonably approved from time to time by the
Issuing Bank and the Company.
(b) The making of each Letter of Credit Request shall be deemed to
be a representation and warranty by the Company that such Letter of Credit may
be issued in accordance with, and will not violate the requirements of this
Agreement. Unless the Issuing Bank has received notice from any Bank before it
issues the respective Letter of Credit or extends the existing expiry date of a
Letter of Credit that one or more of the conditions specified in ARTICLE V are
not then satisfied, or that the issuance of such Letter of Credit would violate
this Agreement, then the Issuing Bank shall issue the requested Letter of Credit
for the account of the Company in accordance with the Issuing Bank's usual and
customary practices. Upon its issuance of any Letter of Credit or the extension
of the existing expiry date of any Letter of Credit, as the case may be, the
Issuing Bank shall promptly notify the Company and the Agent and the Agent shall
notify each Bank of such issuance or extension, which notices shall be
accompanied by a copy of the Letter of Credit actually issued or a copy of any
amendment extending the existing expiry date of any Letter of Credit, as the
case may be.
SECTION 3.03. LETTER OF CREDIT PARTICIPATIONS. (a) All Letters of
Credit issued subsequent hereto shall be deemed to have been sold and
transferred by the Issuing Bank to each Bank, and each Bank shall be deemed
irrevocably and unconditionally to have purchased and received from the Issuing
Bank, without recourse or warranty, an undivided interest and participation, (to
the extent of such Bank's percentage participation in the Commitment) in each
such Letter of Credit (including extensions of the expiry date thereof), each
substitute Letter of Credit, each drawing made thereunder and the obligations of
the Company under this Agreement and the other Loan Documents with respect
thereto, and any security therefor or guaranty pertaining thereto.
(b) In determining whether to pay under any Letter of Credit, the
Issuing Bank shall have no obligation relative to the Banks other than to
confirm that any documents required to be delivered under such Letter of Credit
appear to have been delivered and that they appear to comply on their face with
the requirements of such Letter of Credit.
(c) In the event that the Issuing Bank makes any payment under any
Letter of Credit, the same shall be considered an Alternate Base Rate Advance
without further action by any Person. The Issuing Bank shall promptly notify the
Agent, which shall promptly notify each Bank thereof. Each Bank shall
immediately pay to the Agent for the account of the Issuing Bank the amount of
such Lender's percentage participation of such Advance. If any Bank shall not
have so made its percentage participation available to the Agent, such Lender
agrees to pay interest thereon, for each day from such date until the date such
amount is paid at the lesser of (i) the Federal Funds Effective Rate and (ii)
the Highest Lawful Rate.
<PAGE>
(d) The Issuing Bank shall not be liable for, and the obligations of
the Company and the Banks to make payments to the Agent for the account of the
Issuing Bank with respect to Letters of Credit shall not be subject to, any
qualification or exception whatsoever, including any of the following
circumstances:
(i) any lack of validity or enforceability of this Agreement or any
of the other Loan Documents;
(ii) the existence of any claim, setoff, defense or other right
which the Company may have at any time against a beneficiary named in a
Letter of Credit, any transferee of any Letter of Credit, the Agent, any
Issuing Bank, any Bank, or any other Person, whether in connection with
this Agreement, any Letter of Credit, the transactions contemplated herein
or any unrelated transactions (including any underlying transaction
between the Company and the beneficiary named in any such Letter of
Credit);
(iii) any draft, certificate or any other document presented under
the Letter of Credit proving to be forged, fraudulent, invalid or
insufficient in any respect or any statement therein being untrue or
inaccurate in any respect;
(iv) the surrender or impairment of any security for the performance
or observance of any of the terms of any of the Loan Documents; or
(v) the occurrence of any Default or Event of Default.
(e) The Issuing Bank shall not be liable for any error, omission,
interruption or delay in transmission, dispatch or delivery of any message or
advice, however transmitted, in connection with any Letter of Credit, except for
errors or omissions caused by such Issuing Bank's gross negligence or willful
misconduct. IT IS THE EXPRESS INTENTION OF THE PARTIES HERETO THAT SUCH ISSUING
BANK, ITS OFFICERS, DIRECTORS, EMPLOYEES AND AGENTS (OTHER THAN WITH RESPECT TO
ANY CLAIMS BY THE ISSUING BANK AGAINST ANY SUCH OFFICER, DIRECTOR, EMPLOYEE OR
AGENT THEREOF) SHALL BE INDEMNIFIED AND HELD HARMLESS FROM, SUBJECT TO THE SAME
TYPE OF PROTECTIONS SET FORTH IN SECTION 11.05(B), ANY ACTION TAKEN OR OMITTED
BY SUCH PERSON UNDER OR IN CONNECTION WITH ANY LETTER OF CREDIT OR ANY RELATED
DRAFT OR DOCUMENT ARISING OUT OF OR RESULTING FROM SUCH PERSON'S SOLE OR
CONTRIBUTORY NEGLIGENCE, BUT NOT FROM THE GROSS NEGLIGENCE OR WILLFUL MISCONDUCT
OF SUCH PERSON. The Company agrees that any action taken or omitted by the
Issuing Bank under or in connection with any Letter of Credit or the related
drafts or documents, if done in accordance with the standards of care specified
in the Uniform Customs and Practice for Documentary Credits (1993 Revision),
International Chamber of Commerce, Publication No. 500 (and any subsequent
revisions thereof approved by a Congress of the International Chamber of
Commerce and adhered to by the Issuing Bank) and, to the extent not inconsistent
therewith, the Uniform Commercial Code of the State of Texas, shall not result
in any liability of the Issuing Bank to the Company.
<PAGE>
SECTION 3.04. INCREASED COSTS. (a) Notwithstanding any other
provision herein, but subject to SECTION 12.08, if any Bank shall have
determined in good faith that any change after the Execution Date of any law,
rule, regulation or guideline or the application or effectiveness of any
applicable law or regulation or any change after the Execution Date in the
interpretation or administration thereof, or compliance by any Bank (or any
lending office of such Bank) with any applicable guideline or request from any
central bank or governmental authority (whether or not having the force of law)
issued after the Effective Date either (i) shall impose, modify or make
applicable any reserve, deposit, capital adequacy or similar requirement against
Letters of Credit issued, or participated in, by any Bank or (ii) shall impose
on any Bank any other conditions affecting this Agreement or any Letter of
Credit; and the result of any of the foregoing is to increase the cost to any
Bank of issuing, maintaining or participating in any Letter of Credit, or reduce
the amount received or receivable by any Bank hereunder with respect to Letters
of Credit, by an amount deemed by such Lender to be material, then, from time to
time, the Company shall pay to the Agent for the account of such Lender such
additional amount or amounts as will reasonably compensate such Lender for such
increased cost or reduction by such Lender.
(b) Each Bank will notify the Company through the Agent of any event
occurring after the date of this Agreement which will entitle such Bank to
compensation pursuant to subsection (a) above, as promptly as practicable. A
certificate of such Lender (i) stating that the compensation sought to be
recovered pursuant to this SECTION 3.04 is generally being charged to other
similarly situated customers and (ii) setting forth in reasonable detail such
amount or amounts as shall be necessary to compensate such Bank as specified in
subsection (a) above may be delivered to the Company (with a copy to the Agent)
and shall be conclusive absent manifest error. The Company shall pay to the
Agent for the account of such Bank the amount shown as due on any such
certificate upon demand; PROVIDED that with respect to events occurring prior to
any notice given under this SECTION 3.04(B), such Bank shall only be entitled to
recover compensation for such events occurring over a period of 120 days.
(c) Except as expressly provided in SECTION 3.04(B), failure on the
part of any Bank to demand compensation for any increased costs or reduction in
amounts received or receivable or reduction in return on capital with respect to
any Letter of Credit shall not constitute a waiver of such Bank's rights to
demand compensation for any increased costs or reduction in amounts received or
receivables or reduction in return on capital with respect to such Letter of
Credit.
SECTION 3.05. CONFLICT BETWEEN APPLICATIONS AND AGREEMENT. To the
extent that any provision of any application related to any Letter of Credit is
inconsistent with the provisions of this Agreement, the provisions of this
Agreement shall control.
<PAGE>
ARTICLE IV
FEES
SECTION 4.01. FEES. Subject to SECTION 12.08 hereof, the Company
agrees to pay the following fees (the "FEES"):
(a) The Company agrees to pay to the Agent for the ratable account
of the Banks a Commitment fee (the "COMMITMENT FEE") for the period from and
including the Execution Date to the Maturity Date, respectively, computed at a
rate per annum determined by the grid set forth below and calculated on the
basis of a 360 day-year on the daily average of the Unutilized Commitment of
each Bank. The rate for the Commitment Fee shall be adjusted on the first day of
each Margin Period. Commitment Fees shall be due and payable in arrears on each
Designated Payment Date commencing on the first such date following the
Execution Date and on the Maturity Date.
FUNDED DEBT/ COMMITMENT FEE
EBITDA RATIO --------------
------------
(less than) 1.00 12.5 basis points
(greater than or equal to) 1 but (less than) 1.50 25.0 basis points
(greater than or equal to) 1.50 but (less than) 2.00 25.0 basis points
(greater than or equal to) 2.00 but (less than) 2.50 37.5 basis points
(b) The Letter of Credit Fees shall be due and payable at the time
the Issuing Bank is to issue or renew any Letter of Credit. The Letter of Credit
Fee shall be adjusted, if applicable under the definition of "Letter of Credit
Fee", on the first day of each Margin Period.
(c) The fees described in that one certain Fee Letter among the
Company, the Agent, BOT and Bank One Capital Markets dated May 13, 1997 and
executed by the Company on May 16, 1997.
ARTICLE V
CONDITIONS PRECEDENT
SECTION 5.01. CONDITIONS PRECEDENT TO THE INITIAL ADVANCE. The
obligation of each Bank to make its initial Advance to the Company is subject to
the occurrence of or receipt by the Agent of the following, all in form and
substance satisfactory to the Agent, and, where relevant, executed by all
appropriate parties:
<PAGE>
(a) this Agreement (which includes the Guaranty);
(b) one Note for each Bank;
(c) a Notice of Advance with respect to the initial Advance meeting
the requirements of SECTION 2.03(A);
(d) a certificate of an officer and of the secretary or an assistant
secretary of the Company certifying, (i) true and complete copies of each of the
articles or certificate of incorporation, as amended and in effect of the
Company and each of the Guarantors, the bylaws, as amended and in effect, of the
Company and each of the Guarantors and the resolutions adopted by the board of
directors of the Company and each of the Guarantors (A) authorizing the
execution, delivery and performance by the Company and each of its Subsidiaries
of this Agreement and the other Loan Documents to which it is or will be a party
and, in the case of the Company, the Advances to be made hereunder, (B)
approving the forms of the Loan Documents to which it is or will be a party and
which will be delivered at or prior to the date of the initial Advance and (C)
authorizing officers of the Company and each of its Subsidiaries to execute and
deliver the Loan Documents to which it is or will be a party and any related
documents, including, any agreement contemplated by this Agreement, (ii) the
incumbency and specimen signatures of the officers of the Company and each of
its Subsidiaries executing any documents on its behalf and (iii) that there has
been no change in the businesses or financial condition of the Company which
could reasonably be expected to have a Material Adverse Effect since December
31, 1996.
(e) a favorable, signed opinion addressed to the Agent and the Banks
from Bracewell & Patterson, L.L.P., counsel to the Company and the Guarantors;
(f) the payment to the Agent and the Banks of all Fees owing on the
Execution Date and all reasonable fees and expenses (including the reasonable
fees and disbursements of Andrews & Kurth L.L.P.) agreed upon by such parties to
be paid on the Execution Date;
(g) certificates of appropriate public officials as to the
existence, good standing and qualification to do business as a foreign
corporation, as applicable, of the Company and its Subsidiaries in each
jurisdiction in which the ownership of its properties or the conduct of its
business requires such qualifications and where the failure to so qualify would
have a Material Adverse Effect; and
(h) The consummation of the initial public offering of the stock of
the Company pursuant to the S-1 Registration Statement filed with the Securities
and Exchange Commission on March 26, 1997, as amended, at a minimum share price
of $8.00 per share with gross proceeds of at least $48,800,000.
<PAGE>
The acceptance of the benefits of the initial Credit Event shall
constitute a representation and warranty by the Company to the Agent and each of
the Banks that, all of the conditions specified in this Section above shall have
been satisfied or waived as of that time.
SECTION 5.02. CONDITIONS PRECEDENT TO ALL CREDIT EVENTS. The
obligation of the Banks to make any Advance is, including, without limitation,
the initial Advance, subject to the further conditions precedent that on the
date of such Credit Event:
(a) The representations and warranties set forth in ARTICLE VI shall
be true and correct in all material respects as of, and as if such
representations and warranties were made on, the date of the proposed Advance
(unless such representation and warranty expressly relates to an earlier date or
is no longer true and correct solely as a result of transactions permitted by
the Loan Documents), and the Company shall be deemed to have certified to the
Agent and the Banks that such representations and warranties are true and
correct in all material respects by submitting a Notice of Advance.
(b) The Company shall have complied with the provisions of SECTION
2.03 hereof.
(c) No Default or Event of Default shall have occurred and be
continuing or would result from such Credit Event.
(d) No Material Adverse Effect shall have occurred since the
delivery of the most recent financial statements delivered pursuant to SECTION
7.01.
(e) The Agent shall have received such other approvals or documents
as the Agent or the Banks may reasonably request.
The acceptance of the benefits of each such Credit Event shall
constitute a representation and warranty by the Company to the Agent and each of
the Banks that all of the conditions specified in this Section above exist as of
that time.
SECTION 5.03. DELIVERY OF DOCUMENTS. All of the Notes, certificates,
legal opinions and other documents and papers referred to in this ARTICLE V,
unless otherwise specified, shall be delivered to the Agent for the account of
each of the Banks and, except for the Notes, in sufficient counterparts for each
of the Banks and shall be reasonably satisfactory in form and substance to the
Banks.
<PAGE>
ARTICLE VI
REPRESENTATIONS AND WARRANTIES
The Company, as to itself and each of its Subsidiaries, makes, on or
as of the occurrence of each Credit Event (except to the extent such
representations or warranties relate to an earlier date or are no longer true
and correct in all material respects solely as a result of transactions not
prohibited by the Loan Documents), the following representations and warranties
to the Agent and the Banks:
SECTION 6.01. ORGANIZATION AND QUALIFICATION. Each of the Company
and its Subsidiaries (a) is duly formed or organized, validly existing and is in
good standing under the laws of the state of its organization, (b) has the power
to own its property and to carry on its business as now conducted, except where
the failure to do so would not have a Material Adverse Effect and (c) is duly
qualified to do business and is in good standing in every jurisdiction in which
the failure to be so qualified would have a Material Adverse Effect.
SECTION 6.02. AUTHORIZATION AND VALIDITY. Each of the Company and
its Subsidiaries has the corporate power and authority to execute, deliver and
perform its obligations hereunder and under the other Loan Documents to which it
is a party and all such action has been duly authorized by all necessary
corporate proceedings on its part. The Loan Documents to which each of the
Company and its Subsidiaries is a party have been duly and validly executed and
delivered by such Person and constitute a valid and legally binding agreement of
such Person enforceable in accordance with the respective terms thereof, except,
in each case, as such enforceability may be limited by bankruptcy, insolvency,
reorganization, moratorium, fraudulent transfer or other similar laws relating
to or affecting the enforcement of creditors' rights generally, and by general
principles of equity regardless of whether such enforceability is a proceeding
in equity or at law.
SECTION 6.03. GOVERNMENTAL CONSENTS. No authorization, consent,
approval, license or exemption of or filing or registration with any court or
governmental department, commission, board, bureau, agency or instrumentality,
domestic or foreign, is necessary for the valid execution, delivery or
performance by the Company or any Subsidiary of any Loan Document.
SECTION 6.04. CONFLICTING OR ADVERSE AGREEMENTS OR RESTRICTIONS.
Neither the Company nor any Subsidiary is a party to any contract or agreement
or subject to any restriction which would reasonably be expected to have a
Material Adverse Effect. All agreements of the Company relating to the lending
of money or the issuance of letters of credit by any party in existence on the
Execution Date are described hereto on SCHEDULE 6.04. Neither the execution nor
delivery of the Loan Documents nor compliance with the terms and provisions
hereof or thereof will be contrary to the provisions of, or constitute a default
under (a) the charter or bylaws of the Company or any of its Subsidiaries or (b)
any law, regulation, order, writ, injunction or decree of any court or
governmental instrumentality that is applicable to the Company or any of its
<PAGE>
Subsidiaries or (c) any material agreement to which the Company or any of its
Subsidiaries is a party or by which it is bound or to which it is subject.
SECTION 6.05. TITLE TO ASSETS. Each of the Company and its
Subsidiaries has good title to all material personalty and good and indefeasible
title to all material realty as reflected on the Company's and the Subsidiaries'
books and records as being owned by them, except for properties disposed of in
the ordinary course of business, subject to no Liens, except those permitted
hereunder, except where the failure to do so could not reasonably be expected to
have a Material Adverse Effect. All of such assets have been and are being
maintained by the appropriate Person in good working condition in accordance
with industry standards, except where the failure to do so could not reasonably
be expected to have a Material Adverse Effect.
SECTION 6.06. LITIGATION. No proceedings against or affecting the
Company or any Subsidiary are pending or, to the knowledge of the Company,
threatened before any court or governmental agency or department which involve a
reasonable material risk of having a Material Adverse Effect except those listed
on SCHEDULE 6.06 hereof.
SECTION 6.07. FINANCIAL STATEMENTS. Prior to the Execution Date, the
Company has furnished to the Banks its audited consolidated balance sheet,
audited consolidated income statement and statement of cash flows for the twelve
(12) months ended December 31, 1996 (such financials, the "FINANCIALS"). The
Financials have been prepared in conformity with GAAP consistently applied
(except as otherwise disclosed in such financial statements) throughout the
periods involved and present fairly, in all material respects, the consolidated
financial condition of the Company and its consolidated Subsidiaries as of the
dates thereof and the consolidated results of their operations for the periods
then ended. As of the Execution Date, no Material Adverse Effect has occurred
since December 31, 1996.
SECTION 6.08. DEFAULT. Neither the Company nor any Subsidiary is in
default under any material provisions of any instrument evidencing any
Indebtedness or of any agreement relating thereto, or in default in any respect
under any order, writ, injunction or decree of any court, or in default in any
respect under or in violation of any order, injunction or decree of any
governmental instrumentality, in each case in such manner as to cause a Material
Adverse Effect.
SECTION 6.09. INVESTMENT COMPANY ACT. Neither the Company nor any
Subsidiary is, or is directly or indirectly controlled by or acting on behalf of
any Person which is, an "investment company," as such term is defined in the
Investment Company Act of 1940, as amended.
SECTION 6.10. PUBLIC UTILITY HOLDING COMPANY ACT. Neither the
Company nor any Subsidiary is a non-exempt "holding company," or subject to
regulation as such, or, to the knowledge of the Company's or such Subsidiary's
officers, an "affiliate" of a "holding company" or a "subsidiary company" of a
"holding company," within the meaning of the Public Utility Holding Company Act
of 1935, as amended.
<PAGE>
SECTION 6.11. ERISA. No accumulated funding deficiency (as defined
in Section 412 of the Code or Section 302 of ERISA), that would cause a Material
Adverse Effect whether or not waived, exists or is expected to be incurred with
respect to any Plan. No liability to the PBGC (other than required premium
payments) has been or is expected by the Company to be incurred with respect to
any Plan by the Company or any ERISA Affiliate that would cause a Material
Adverse Effect. Neither the Company nor any ERISA Affiliate has incurred any
withdrawal liability under Title IV of ERISA with respect to any Multi-Employer
Plans.
SECTION 6.12. TAX RETURNS AND PAYMENTS. Each of the Company and its
Subsidiaries has filed all federal income tax returns and other tax returns,
statements and reports (or obtained extensions with respect thereto) which are
required to be filed and has paid or deposited or made adequate provision, in
accordance with GAAP for the payment of all taxes (including estimated taxes
shown on such returns, statements and reports) which are shown to be due
pursuant to such returns, except for such taxes as are being contested in good
faith and by appropriate proceedings.
SECTION 6.13. ENVIRONMENTAL MATTERS. Each of the Company and its
Subsidiaries (a) possesses all environmental, health and safety licenses,
permits, authorizations, registrations, approvals and similar rights necessary
under law or otherwise for the Company or such Subsidiary to conduct its
operations as now being conducted (other than those with respect to which the
failure to possess or maintain would not, individually or in the aggregate for
the Company and such Subsidiaries, reasonably be expected to have a Material
Adverse Effect) and (b) each of such licenses, permits, authorizations,
registrations, approvals and similar rights is valid and subsisting, in full
force and effect and enforceable by the Company or such Subsidiary, and each of
the Company and its Subsidiaries is in compliance with all effective terms,
conditions or other provisions of such permits, authorizations, registrations,
approvals and similar rights except for such failure or noncompliance that,
individually or in the aggregate for the Company and such Subsidiaries, would
not reasonably be expected to have a Material Adverse Effect. Except as
disclosed on SCHEDULE 6.13 on the Effective Date, neither the Company nor any of
its Subsidiaries has received any notices of any violation of, noncompliance
with, or remedial obligation under, Requirements of Environmental Laws (which
violation or non-compliance has not been cured), and there are no writs,
injunctions, decrees, orders or judgments outstanding, or lawsuits, claims,
proceedings, investigations or inquiries pending or, to the knowledge of the
Company or any Subsidiary, threatened, relating to the ownership, use,
condition, maintenance or operation of, or conduct of business related to, any
property owned, leased or operated by the Company or such Subsidiary or other
assets of the Company or such Subsidiary, other than those violations, instances
of noncompliance, obligations, writs, injunctions, decrees, orders, judgments,
lawsuits, claims, proceedings, investigations or inquiries that, individually or
in the aggregate for the Company and such Subsidiaries, would not have a
Material Adverse Effect. Except as disclosed on SCHEDULE 6.13, there are no
material obligations, undertakings or liabilities arising out of or relating to
Environmental Laws to which the Company or any of its Subsidiaries has agreed,
assumed or retained, or by which the Company or any of its Subsidiaries is
adversely affected, by contract or otherwise and, further, except as disclosed
on SCHEDULE 6.13, neither the Company nor any of its
<PAGE>
Subsidiaries has received a written notice or claim to the effect that the
Company or any of its Subsidiaries is or may be liable to any other Person as
the result of a Release or threatened Release of a Hazardous Material which, in
either case, could reasonably be expected to have a Material Adverse Effect.
SECTION 6.14. PURPOSE OF LOANS. (a) The proceeds of the Loan will be
used solely for general corporate purposes, including working capital and to
finance acquisitions permitted hereunder.
(b) None of the proceeds of any Advance will be used directly or
indirectly for the purpose of purchasing or carrying any "margin stock" within
the meaning of Regulation U or for the purpose of reducing or retiring any
indebtedness which was originally incurred to purchase or carry any margin
stock.
SECTION 6.15. FRANCHISES AND OTHER RIGHTS. The Company and each of
its Subsidiaries has all franchises, permits, licenses and other authority as
are necessary to enable them to carry on their respective businesses as now
being conducted and is not in default in respect thereof where the absence of
such or any such default could reasonably be expected to have a Material Adverse
Effect.
SECTION 6.16. SUBSIDIARIES AND ASSETS. The Subsidiaries listed on
SCHEDULE 6.16 are all of the Subsidiaries of the Company as of the Execution
Date and the address given for such Guarantors is the correct mailing address as
of the Execution Date.
SECTION 6.17. SOLVENCY. After giving effect to the initial Advance
hereunder and all other Indebtedness of the Company existing at the time of such
Advance, the Company and its Subsidiaries, viewed as a consolidated entity have
at such time (a) capital sufficient to carry on their businesses and
transactions and (b) assets, the fair market value of which exceeds their
consolidated liabilities (as reflected on the Financials or on the financial
statements most recently delivered to the Banks).
ARTICLE VII
AFFIRMATIVE COVENANTS
The Company, as to itself and each of its Subsidiaries, covenants
and agrees that on and after the date hereof and for so long as this Agreement
is in effect and until the Notes have been paid in full and the Commitments have
terminated:
SECTION 7.01. INFORMATION COVENANTS. The Company will furnish to
each Bank:
(a) As soon as available, and in any event within forty-five (45)
days after the close of each month, and within forty-five (45) days after the
close of each fiscal quarter, the
<PAGE>
consolidated and consolidating balance sheet of the Company and its Subsidiaries
as of the end of such period and the related consolidated and consolidating
statements of income and cash flow for such period, setting forth, in each case,
comparative consolidated figures for the related periods in the prior fiscal
year, all of which shall be certified by the chief financial officer or chief
executive officer of the Company as fairly presenting in all material respects,
the financial position of the Company and its Subsidiaries as of the end of such
period and the results of their operations for the period then ended in
accordance with GAAP, subject to changes resulting from normal year-end audit
adjustments.
(b) As soon as available, and in any event within one hundred twenty
(120) days after the close of each fiscal year of the Company, the audited
consolidated and the unaudited consolidating balance sheets of the Company and
its Subsidiaries as at the end of such fiscal year and the related consolidated
and consolidating statements of income, stockholders equity and cash flows for
such fiscal year, setting forth, in each case, comparative figures for the
preceding fiscal year and certified by Arthur Andersen or other independent
certified public accountants of recognized national standing, whose report shall
be without limitation as to the scope of the audit and reasonably satisfactory
in substance to the Banks.
(c) Promptly after any Responsible Officer of the Company obtains
knowledge thereof, notice of:
(i) any material violation of, noncompliance with, or remedial
obligations under, Requirements of Environmental Laws that could cause a
Material Adverse Effect;
(ii) any Release or threatened material Release of Hazardous
Materials affecting any property owned, leased or operated by the Company
or any of its Subsidiaries that could cause a Material Adverse Effect;
(iii) any event or condition which constitutes a Default or an
Event of Default;
(iv) any condition or event which, in the opinion of
management of the Company, would reasonably be expected to have a Material
Adverse Effect;
(v) any Person having given any written notice to the Company
or taken any other action with respect to a claimed material default or
event under any material instrument or material agreement;
(vi) the institution of any litigation which might reasonably
be expected in the good faith judgment of the Company either to have a
Material Adverse Effect or result in a final, non-appealable judgment or
award in excess of $1,000,000.00 with respect to any single cause of
action; and
<PAGE>
(vii) all ERISA notices required by SECTION 7.07;
such notice shall specify the nature and period of existence thereof and
specifying the notice given or action taken by such Person and the nature of any
such claimed default, event or condition and, in the case of an Event of Default
or Default, what action has been taken, is being taken or is proposed to be
taken with respect thereto.
(d) At the time of the delivery of the financial statements provided
for in SECTIONS 7.01(A) and 7.01(B), a compliance certificate of a Responsible
Officer in the form attached hereto as EXHIBIT 7.01(D) to the effect that, no
Default or Event of Default exists or, if any Default or Event of Default does
exist, specifying the nature and extent thereof and the action that is being
taken or that is proposed to be taken with respect thereto, which certificate
shall set forth the calculations required to establish whether the Company was
in compliance with the provisions of SECTIONS 8.10 through 8.14 as at the end of
such fiscal period or year, as the case may be.
(e) Promptly following request by the Agent such environmental
reports, studies and audits of the Company's procedures and policies, assets and
operations in respect of Environmental Laws as the Agent may reasonably request.
(f) Promptly upon receipt thereof, a copy of any report or letter
submitted to the Company by its independent accountants in connection with any
regular or special audit of the Company's records.
(g) From time to time and with reasonable promptness, such other
information or documents as the Agent or any Bank through the Agent may
reasonably request.
SECTION 7.02. BOOKS, RECORDS AND INSPECTIONS. The Company and its
Subsidiaries will maintain, and will permit, or cause to be permitted, any
Person designated by any Bank or the Banks to visit and inspect any of the
properties of the Company and its Subsidiaries, to examine the corporate books
and financial records of the Company and its Subsidiaries and make copies
thereof or extracts therefrom and to discuss the affairs, finances and accounts
of any such corporations with the officers of the Company and its Subsidiaries
and with their independent public accountants, all at such reasonable times and
as often as the Agent or such Bank may reasonably request. Such inspections
shall be at the expense of the Bank or Banks requesting same unless there is in
existence a Default at the time of such request in which event such expense
shall be at the expense of the Company.
SECTION 7.03. INSURANCE AND MAINTENANCE OF PROPERTIES. (a) Each of
the Company and its Subsidiaries will keep reasonably adequately insured by
financially sound and reputable insurers all of its material property, which is
of a character, and in amounts and against such risks, usually and reasonably
insured by similar Persons engaged in the same or similar businesses, including,
without limitation, insurance against fire, casualty and any other hazards
normally insured against. Each of the Company and its Subsidiaries will at all
times maintain
<PAGE>
insurance against its liability for injury to Persons or property, which
insurance shall be by financially sound and reputable insurers and in such
amounts and form as are customary for corporations of established reputation
engaged in the same or a similar business and owning and operating similar
properties. The Company shall provide the Agent a listing of all such insurance
and such other certificates and other evidence thereof, on or prior to the
Execution Date hereof and annually thereafter.
(b) Each of the Company and its Subsidiaries will cause all of its
material properties used or useful in the conduct of its business to be
maintained and kept in good condition, repair and working order and supplied
with all necessary equipment and will cause to be made all reasonably necessary
repairs, renewals and replacements thereof, all as in the reasonable judgment of
such Person may be reasonably necessary so that the business carried on in
connection therewith may be properly conducted at all times, except where such
failure could not reasonably be expected to have a Material Adverse Effect.
SECTION 7.04. PAYMENT OF TAXES. Each of the Company and its
Subsidiaries will pay and discharge all taxes, assessments and governmental
charges or levies imposed upon it or upon its income or profits, or upon any
properties belonging to it, prior to the date on which penalties attach thereto,
except for such amounts that are being contested in good faith and by
appropriate proceedings, except where such failure could not reasonably be
expected to have a Material Adverse Effect.
SECTION 7.05. CORPORATE EXISTENCE. Each of the Company and its
Subsidiaries will do all things necessary to preserve and keep in full force and
effect (a) the existence of the Company, and (b) unless the failure to do so
would not reasonably be expected to have a Material Adverse Effect, the rights
and franchises of each of the Company and its Subsidiaries.
SECTION 7.06. COMPLIANCE WITH STATUTES. Each of the Company and its
Subsidiaries will comply with all applicable statutes, regulations and orders
of, and all applicable restrictions imposed by, all governmental bodies,
domestic or foreign, in respect of the conduct of its business and the ownership
of its property, except to the extent the failure to do so would not reasonably
be expected to have a Material Adverse Effect.
SECTION 7.07. ERISA. Promptly after any Responsible Officer of the
Company or any of its Subsidiaries knows or has reason to know any of the
following items are true the Company will deliver or cause to be delivered to
the Banks a certificate of the chief financial officer of the Company setting
forth details as to such occurrence and such action, if any, the Company or its
ERISA Affiliate is required or proposes to take, together with any notices
required or proposed to be given to or filed with or by the Company or its ERISA
Affiliate with respect thereto: that a Reportable Event has occurred or that an
application may be or has been made to the Secretary of the Treasury for a
waiver or modification of the minimum funding standard; that a Multiemployer
Plan has been or may be terminated, reorganized, partitioned or declared
insolvent under Title IV of ERISA; that any required contribution to a Plan or
Multiemployer Plan has not been or may not
<PAGE>
be timely made; that proceedings may be or have been instituted under Section
4069(a) of ERISA to impose liability on the Company or an ERISA Affiliate or
under Section 4042 of ERISA to terminate a Plan or appoint a trustee to
administer a Plan; that the Company or any ERISA Affiliate has incurred or may
incur any liability (including any contingent or secondary liability) on account
of the termination of or withdrawal from a Plan or a Multiemployer Plan; and
that the Company or an ERISA Affiliate may be required to provide security to a
Plan under Section 401(a)(29) of the Code.
SECTION 7.08. ADDITIONAL SUBSIDIARIES. The Company will cause any
Person that becomes a Subsidiary subsequent to the Execution Date, within ten
(10) Business Days after becoming a Subsidiary, to execute a Guaranty or a
counterpart of this Agreement and deliver same to the Agent, PROVIDED if said
Subsidiary is not incorporated under the laws of the United States or one of its
states or territories, no such guaranty will be required if the Company makes
arrangements, satisfactory to the Agent, in its sole discretion, regarding
restrictions on transfer of funds or other assets by the Company or any
Subsidiary to said new foreign Subsidiary.
SECTION 7.09. PAYMENT OF CERTAIN INDEBTEDNESS. The Company shall (a)
repay in full all of the Indebtedness described on Schedule 8.03(b)(ii) and (b)
obtain, and where applicable record in all appropriate locations, releases of
liens for all real and personal property securing same, in each case on or
before September 1, 1997.
ARTICLE VIII
NEGATIVE COVENANTS
The Company covenants and agrees, as to itself and, except as
otherwise provided herein, each of its Subsidiaries, that on and after the date
hereof and for so long as this Agreement is in effect and until the Commitments
have terminated:
SECTION 8.01. CHANGE IN BUSINESS. The Company will not, and will not
permit any of its Subsidiaries to, engage in any businesses not of the same
general type or reasonably related thereto as those conducted by the Company on
the Execution Date.
SECTION 8.02. CONSOLIDATION, MERGER OR SALE OF ASSETS. Except as
previously disclosed to the Agent, the Company will not, and will not permit any
of its Subsidiaries to, wind up, liquidate or dissolve their affairs, or enter
into any transaction of merger or consolidation, or sell or otherwise dispose of
all or any substantial part of their property or assets (other than sales of
inventory and surplus or obsolete assets in the ordinary course of business
provided that any disposal does not prejudice the Banks in any way), including
the capital stock of any Subsidiary, except for (a) mergers permitted under
SECTION 8.05(D), (b) mergers by the Company with any of its wholly-owned
Subsidiaries and mergers by the Company's wholly-owned Subsidiaries with another
of the Company's wholly-owned Subsidiaries and (c) mergers by a wholly-owned
Subsidiary of the Company with another Person in connection with an investment
permitted under SECTION 8.05(D).
<PAGE>
SECTION 8.03. INDEBTEDNESS. Neither the Company nor any Subsidiary
of the Company will create, incur, assume or permit to exist any Indebtedness of
the Company or any Subsidiary except:
(a) Indebtedness existing hereunder;
(b) Indebtedness existing on the Execution Date and described in the
Financials or, if not shown, listed on SCHEDULE 8.03(B)(I) and (II) (but subject
to SECTION 7.09);
(c) Indebtedness arising as a result of the endorsement in the
ordinary course of business of negotiable instruments in the course of
collection;
(d) accounts payable and unsecured, current and long-term,
liabilities (including accrued insurance related liabilities), not the result of
indebtedness for borrowed money, to vendors, suppliers and other Persons for
goods and services in the ordinary course of business;
(e) agreements to acquire any Person or assets issued by the Company
or any of its Subsidiaries in anticipation of acquiring such Person or assets if
such acquisition is not prohibited by this Agreement;
(f) intercompany Indebtedness of any Subsidiary of the Company to
the Company or any other Subsidiary and Indebtedness of the Company to any
Subsidiary of the Company provided that same is subordinate to the Obligations
in the manner provided in SECTION 8.05 hereof;
(g) current and deferred taxes;
(h) Other Indebtedness not in excess of $2,000,000.00 in the
aggregate at any time outstanding;
(i) Subordinated Debt incurred by Borrower solely in connection with
investments permitted by SECTION 8.05(D);
(j) Indebtedness assumed or acquired in connection with Investments
permitted under SECTION 8.05(D); provided that all of such Indebtedness in
excess of three percent (3%) of the net book value of the assets acquired in any
such Investment shall be retired within 60 days after the date of such
Investment; and
(k) renewals and extensions with the same lenders (in the same or
lesser principal amount on similar terms and conditions) of any Indebtedness
listed in subparagraphs (a) through (i) above.
<PAGE>
SECTION 8.04. LIENS. Neither the Company nor any Subsidiary of the
Company will create, incur, assume or suffer to exist any Lien upon or with
respect to any of its property or assets of any kind whether now owned or
hereafter acquired (nor will they covenant with any other Person not to grant
such a Lien to the Agent, except:
(a) Liens existing on the Execution Date and listed on SCHEDULE
8.04(A);
(b) Liens securing currently secured Indebtedness permitted under
SECTION 8.03(B) or (h) above;
(c) Permitted Liens;
(d) Liens securing Indebtedness permitted under SECTION 8.03(H) AND
8.03(J); and
(e) any renewal, extension or replacement of any Lien referred to
above with the same lenders; PROVIDED, that no Lien arising or existing as a
result of such extension, renewal or replacement shall be extended to cover any
property not theretofore subject to the Lien being extended, renewed or replaced
and PROVIDED FURTHER that the principal amount of the Indebtedness secured
thereby shall not exceed the principal amount of the Indebtedness so secured at
the time of such extension, renewal or replacement.
SECTION 8.05. INVESTMENTS. Neither the Company nor any Subsidiary
will, directly or indirectly, make or own any Investment in any Person, except:
(a) Permitted Investments;
(b) Investments owned on the Effective Date as set forth on SCHEDULE
8.05(B), including Investments in the Subsidiaries, direct and indirect;
(c) Investments arising out of loans and advances for expenses,
travel per diem and similar items in the ordinary course of business to
officers, directors and employees and intercompany Indebtedness permitted by
SECTION 8.03(F);
(d) Investments in the stock, warrants, stock appreciation rights,
other securities and/or other assets of domestic entities engaged in the same
general type of business as the Company on the Execution Date, (i) in which the
Company or one of its wholly owned Subsidiaries is the surviving entity, (ii) at
a time when no Default or Event of Default exists hereunder and (iii) the cash
portion of the purchase price for any one such Investment does not exceed
$10,000,000.00;
(e) other Investments not exceeding $500,000.00 in the aggregate at
any one time outstanding;
(f) Investments in the form of stock buybacks allowed under SECTION
8.06; and
<PAGE>
(g) Investments in capital stock of wholly-owned Subsidiaries of the
Company.
SECTION 8.06. RESTRICTED PAYMENTS. The Company will not pay any
dividends or redeem, retire, purchase or guaranty the value of or make any other
acquisition, direct or indirect, of any shares of any class of stock of the
Company, or of any warrants, rights or options to acquire any such shares, now
or hereafter outstanding, except to the extent that the consideration therefor
consists solely of shares of stock (including warrants, rights or options
relating thereto) of the Company or is approved by the Majority Banks; PROVIDED,
the Company may purchase the stock of departing officers and employees upon
their departure in a maximum, aggregate amount not to exceed $500,000.00 in the
aggregate or such larger amount at the Agent's written consent.
SECTION 8.07. CHANGE IN ACCOUNTING. The Company will not and will
not permit any Subsidiary to, change its method of accounting except for (a)
changes permitted by GAAP in which the Company's auditors concur, (b) changes
with respect to any Person or assets acquired by the Company to conform with the
Company's policies and procedures and which are permitted by GAAP or (c) changes
required by GAAP. The Company shall advise the Agent in writing promptly upon
making any material change to the extent same is not disclosed in the financial
statements required under SECTION 7.01 hereof. In the event of any such change,
the Company, the Banks and the Agent agree to negotiate amendments to SECTIONS
8.10 through 8.14 hereof (and related definitions, if relevant) so as to
equitably reflect such changes thereon with the intended result that the
criteria for evaluating the financial condition of the Company and its
Subsidiaries shall be substantially the same after such changes as before.
SECTION 8.08. CHANGE OF CERTAIN INDEBTEDNESS. The Company will not,
and will not permit any of its Subsidiaries after the occurrence and during the
continuance of any Event of Default to make any voluntary prepayments of
principal or interest on any other of the Company's Indebtedness.
SECTION 8.09. TRANSACTIONS WITH AFFILIATES. The Company will not,
directly or indirectly, engage in any transaction with any Affiliate, including
the purchase, sale or exchange of assets or the rendering of any service, except
in the ordinary course of business or pursuant to the reasonable requirements of
its business and, in each case, upon terms that are no less favorable than those
which might be obtained in an arm's-length transaction at the time from
non-Affiliates.
SECTION 8.10. CURRENT RATIO. The Company will not permit the ratio
of Current Assets to Current Liabilities to be less than 1.25 to 1.0.
SECTION 8.11. FUNDED DEBT TO EBITDA RATIO. The Company will not as
of the last day of any fiscal quarter permit the ratio of its total Funded Debt
on such day to EBITDA for the four (4) quarters then ended to be greater than
2.5 to 1.0 at any time during the term hereof.
SECTION 8.12. FUNDED DEBT TO CONSOLIDATED TANGIBLE NET WORTH RATIO.
The Company will not permit as of the last day of any fiscal quarter the ratio
of (a) its total Funded Debt
<PAGE>
minus investable cash and Permitted Investments on such day to (b) Consolidated
Tangible Net Worth plus Subordinated Debt on such day, to be greater than 1.25
to 1.0 at any time during the term hereof.
SECTION 8.13. CAPITAL EXPENDITURES. The Company will not permit
total consolidated capital expenditures (including Capitalized Lease Obligations
but exclusive of Investments permitted under SECTION 8.05(D) to be greater than
two percent (2%) of gross revenues for any fiscal year during the term hereof.
SECTION 8.14. INTEREST COVERAGE RATIO. The Company will not permit
as of the last day of any fiscal quarter the ratio EBITDA less depreciation for
the four (4) quarters ended on such day to required cash Interest Expense for
such period to be less than 4.0 to 1. This interest coverage ratio shall be
calculated on a year to date basis during the initial four quarter period during
the term hereof and on a rolling four (4) quarter basis thereafter.
ARTICLE IX
GUARANTY
SECTION 9.01. GUARANTY. In consideration of, and in order to induce
the Banks to make the Loans and the Issuing Bank to issue Letters of Credit
hereunder, the Guarantors hereby absolutely, unconditionally and irrevocably,
jointly and severally, guarantee the punctual payment and performance when due,
whether at stated maturity, by acceleration or otherwise, of the Obligations,
and all other obligations and covenants of the Company now or hereafter existing
under this Agreement, the Notes and the other Loan Documents whether for
principal, interest (including interest accruing or becoming owing both prior to
and subsequent to the commencement of any proceeding against or with respect to
the Company under any chapter of the Bankruptcy Code), Fees, commissions,
expenses (including reasonable attorneys' fees and expenses) or otherwise, and
all reasonable costs and expenses, if any, incurred by the Agent or any Bank in
connection with enforcing any rights under this Guaranty (all such obligations
being the "GUARANTEED OBLIGATIONS"), and agree to pay any and all reasonable
expenses incurred by each Bank and the Agent in enforcing this Guaranty;
PROVIDED that notwithstanding anything contained herein or in any of the Loan
Documents to the contrary, the maximum liability of each Guarantor hereunder and
under the other Loan Documents shall in no event exceed such Guarantor's Maximum
Guaranteed Amount, PROVIDED FURTHER, each Guarantor shall be unconditionally
required to pay all amounts demanded of it hereunder prior to any determination
of such Maximum Guaranteed Amount and the recipient of such payment, if so
required by a final non-appealable order of a court of competent jurisdiction,
shall then be liable for the refund of any excess amounts. If any such rebate or
refund is ever required, all other Guarantors (and the Company) shall be fully
liable for the repayment thereof to the maximum extent allowed by applicable
law. This Guaranty is an absolute, unconditional, present and continuing
guaranty of payment and not of collectibility and is in no way conditioned upon
any attempt to collect from the Company or any other action, occurrence or
circumstance whatsoever. Each Guarantor agrees that the Guaranteed Obligations
may at any time and from time to time
<PAGE>
exceed the Maximum Guaranteed Amount of such Guarantor without impairing this
Guaranty or affecting the rights and remedies of the Banks hereunder.
SECTION 9.02. CONTINUING GUARANTY. Each Guarantor guarantees that
the Guaranteed Obligations will be paid strictly in accordance with the terms of
this Agreement, the Notes and the other Loan Documents. Each Guarantor agrees
that the Guaranteed Obligations and Loan Documents may be extended or renewed,
and Loans repaid and reborrowed in whole or in part, without notice to or assent
by such Guarantor, and that it will remain bound upon this Guaranty
notwithstanding any extension, renewal or other alteration of any Guaranteed
Obligations or Loan Documents, or any repayment and reborrowing of Loans. To the
maximum extent permitted by applicable law, the obligations of each Guarantor
under this Guaranty shall be absolute, unconditional and irrevocable, and shall
be performed strictly in accordance with the terms hereof under any
circumstances whatsoever, including:
(a) any extension, renewal, modification, settlement, compromise,
waiver or release in respect of any Guaranteed Obligations;
(b) any extension, renewal, amendment, modification, rescission,
waiver or release in respect of any Loan Documents;
(c) any release, exchange, substitution, non-perfection or
invalidity of, or failure to exercise rights or remedies with respect to, any
direct or indirect security for any Guaranteed Obligations, including the
release of any Guarantor or other Person liable on any Guaranteed Obligations;
(d) any change in the corporate existence, structure or ownership of
the Company, any Guarantor, or any insolvency, bankruptcy, reorganization or
other similar proceeding affecting the Company, such Guarantor, any other
Guarantor or any of their respective assets;
(e) the existence of any claim, defense, set-off or other rights or
remedies which such Guarantor at any time may have against the Company, or the
Company or such Guarantor may have at any time against the Agent, any Bank, any
other Guarantor or any other Person, whether in connection with this Guaranty,
the Loan Documents, the transactions contemplated thereby or any other
transaction other than by the payment in full by the Company of the Guaranteed
Obligations after the termination of the Commitments of the Banks;
(f) any invalidity or unenforceability for any reason of this
Agreement or other Loan Documents, or any provision of law purporting to
prohibit the payment or performance by the Company, such Guarantor or any other
Guarantor of the Guaranteed Obligations or Loan Documents, or of any other
obligation to the Agent or any Bank; or
(g) any other circumstances or happening whatsoever, whether or not
similar to any of the foregoing.
<PAGE>
SECTION 9.03. EFFECT OF DEBTOR RELIEF LAWS. If after receipt of any
payment of, or proceeds of any security applied (or intended to be applied) to
the payment of all or any part of the Guaranteed Obligations, the Agent or any
Bank is for any reason compelled to surrender or voluntarily surrenders such
payment or proceeds to any Person (a) because such payment or application of
proceeds is or may be avoided, invalidated, declared fraudulent, set aside,
determined to be void or voidable as a preference, fraudulent conveyance,
fraudulent transfer, impermissible set-off or a diversion of trust funds or (b)
for any other similar reason, including (i) any judgment, decree or order of any
court or administrative body having jurisdiction over the Agent, any Bank or any
of their respective properties or (ii) any settlement or compromise of any such
claim effected by the Agent or any Bank with any such claimant (including the
Company), then the Guaranteed Obligations or part thereof intended to be
satisfied shall be reinstated and continue, and this Guaranty shall continue in
full force as if such payment or proceeds have not been received,
notwithstanding any revocation thereof or the cancellation of any Note or any
other instrument evidencing any Guaranteed Obligations or otherwise; and the
Guarantors, jointly and severally, shall be liable to pay the Agent and the
Banks, and hereby do indemnify the Agent and the Banks and hold them harmless
for the amount of such payment or proceeds so surrendered and all expenses
(including reasonable attorneys' fees, court costs and expenses attributable
thereto) incurred by the Agent or any Bank in the defense of any claim made
against it that any payment or proceeds received by the Agent or any Bank in
respect of all or part of the Guaranteed Obligations must be surrendered. The
provisions of this paragraph shall survive the termination of this Guaranty, and
any satisfaction and discharge of the Company by virtue of any payment, court
order or any federal or state law.
SECTION 9.04. WAIVER OF SUBROGATION. Notwithstanding any payment or
payments made by any Guarantor hereunder, or any set-off or application by the
Agent or any Bank of any security or of any credits or claims, no Guarantor will
assert or exercise any rights of the Agent or any Bank or of such Guarantor
against the Company to recover the amount of any payment made by such Guarantor
to the Agent or any Bank hereunder by way of any claim, remedy or subrogation,
reimbursement, exoneration, contribution, indemnity, participation or otherwise
arising by contract, by statute, under common law or otherwise, and such
Guarantor shall not have any right of recourse to or any claim against assets or
property of the Company, in each case unless and until the Obligations of the
Company guaranteed hereby have been fully and finally satisfied. Until such
time, each Guarantor hereby expressly waives any right to exercise any claim,
right or remedy which such Guarantor may now have or hereafter acquire against
the Company that arises under this Agreement or any other Loan Document or from
the performance by any Guarantor of the Guaranty hereunder including any claim,
remedy or right of subrogation, reimbursement, exoneration, contribution,
indemnification or participation in any claim, right or remedy of the Agent or
any Bank against the Company, or any security that the Agent or any Bank now has
or hereafter acquires, whether or not such claim, right or remedy arises in
equity, under contract, by statute, under common law or otherwise. If any amount
shall be paid to a Guarantor by the Company or another Guarantor after payment
in full of the Obligations, and the Obligations shall thereafter be reinstated
in whole or in part and the Agent or any Bank forced to repay and sums received
by any of them in payment of the Obligations, this Guaranty shall be
automatically reinstated and such amount shall be held in
<PAGE>
trust for the benefit of the Agent and the Banks and shall forthwith be paid to
the Agent to be credited and applied to the Guaranteed Obligations, whether
matured or unmatured. The provisions of this paragraph shall survive the
termination of this Guaranty, and any satisfaction and discharge of the Company
by virtue of any payment, court order or any federal or state law.
SECTION 9.05. SUBORDINATION. If any Guarantor becomes the holder of
any indebtedness payable by the Company or another Guarantor, each Guarantor
hereby subordinates all indebtedness owing to it from the Company to all
indebtedness of the Company to the Agent and the Banks, and agrees that during
the continuance of any Event of Default it shall not accept any payment on the
same until payment in full of the Obligations of the Company under this
Agreement and the other Loan Documents after the termination of the Commitments
of the Banks and shall in no circumstance whatsoever attempt to set-off or
reduce any obligations hereunder because of such indebtedness. If any amount
shall nevertheless be paid in violation of the foregoing to a Guarantor by the
Company or another Guarantor prior to payment in full of the Guaranteed
Obligations, such amount shall be held in trust for the benefit of the Agent and
the Banks and shall forthwith be paid to the Agent to be credited and applied to
the Guaranteed Obligations, whether matured or unmatured.
SECTION 9.06. WAIVER. Each Guarantor hereby waives promptness,
diligence, notice of acceptance and any other notice with respect to any of the
Guaranteed Obligations and this Guaranty and waives presentment, demand of
payment, notice of intent to accelerate, notice of dishonor or nonpayment and
any requirement that the Agent or any Bank institute suit, collection
proceedings or take any other action to collect the Guaranteed Obligations,
including any requirement that the Agent or any Bank protect, secure, perfect or
insure any Lien against any property subject thereto or exhaust any right or
take any action against the Company or any other Person or any collateral (it
being the intention of the Agent, the Banks and each Guarantor that this
Guaranty is to be a guaranty of payment and not of collection). It shall not be
necessary for the Agent or any Bank, in order to enforce any payment by any
Guarantor hereunder, to institute suit or exhaust its rights and remedies
against the Company, any other Guarantor or any other Person, including others
liable to pay any Guaranteed Obligations, or to enforce its rights against any
security ever given to secure payment thereof. Each Guarantor hereby expressly
waives to the maximum extent permitted by applicable law each and every right to
which it may be entitled by virtue of the suretyship laws of the State of Texas,
including any and all rights it may have pursuant to Rule 31, Texas Rules of
Civil Procedure, Section 17.001 of the Texas Civil Practice and Remedies Code
and Chapter 34 of the Texas Business and Commerce Code. Each Guarantor hereby
waives marshaling of assets and liabilities, notice by the Agent or any Bank of
any indebtedness or liability to which such Bank applies or may apply any
amounts received by such Bank, and of the creation, advancement, increase,
existence, extension, renewal, rearrangement or modification of the Guaranteed
Obligations. Each Guarantor expressly waives, to the extent permitted by
applicable law, the benefit of any and all laws providing for exemption of
property from execution or for valuation and appraisal upon foreclosure.
<PAGE>
SECTION 9.07. FULL FORCE AND EFFECT. This Guaranty is a continuing
guaranty and shall remain in full force and effect until all of the Obligations
of the Company under this Agreement and the other Loan Documents and all other
amounts payable under this Guaranty have been paid in full (after the
termination of the Commitments of the Banks). All rights, remedies and powers
provided in this Guaranty may be exercised, and all waivers contained in this
Guaranty may be enforced, only to the extent that the exercise or enforcement
thereof does not violate any provisions of applicable law which may not be
waived.
ARTICLE X
EVENTS OF DEFAULT AND REMEDIES
SECTION 10.01. EVENTS OF DEFAULT. The following events shall
constitute Events of Default ("EVENTS OF DEFAULT") hereunder:
(a) any installment of principal is not paid when due or any payment
of interest or Fees is not paid on the date on which such payment is due and
such failure continues for a period of five (5) days; or
(b) any representation or warranty made or deemed made by the
Company or any Subsidiary herein or in any of the Loan Documents or other
document, certificate or financial statement delivered in connection with this
Agreement or any other Loan Document shall prove to have been incorrect in any
material respect when made or deemed made or reaffirmed, as the case may be; or
(c) the Company shall fail to perform or observe or cause any
Subsidiary to fail to perform or observe (i) any duty or covenant contained in
ARTICLE VIII of this Agreement or (ii) any other duty or covenant contained
elsewhere in this Agreement or in any of the Loan Documents and such failure
continues for a period of thirty (30) days; or
(d) the Company or any Subsidiary shall (i) fail to make (whether as
primary obligor or as guarantor or other surety) any principal payment of or
interest or premium, if any, on any instrument of Indebtedness in excess of
$2,500,000 allowed hereunder outstanding beyond any period of grace provided
with respect thereto or (ii) shall fail to duly observe, perform or comply with
any agreement with any Person or any term or condition of any instrument of
Indebtedness in excess of $2,500,000, if the effect of such failure is to cause,
or to permit the holder or holders to cause, such obligations to become due
prior to any stated maturity; or
(e) an involuntary proceeding shall be commenced or an involuntary
petition shall be filed in a court of competent jurisdiction seeking (i) relief
in respect of the Company or any Subsidiary, or of a substantial part of the
property or assets of the Company or any Subsidiary, under Title 11 of the
United States Code, as now or hereafter in effect, or any successor thereto (the
"BANKRUPTCY CODE"), or any other federal or state bankruptcy, insolvency,
receivership or similar
<PAGE>
law, (ii) the appointment of a receiver, trustee, custodian, sequestrator,
conservator or similar official for the Company or any Subsidiary or for a
substantial part of the property or assets of the Company or any Subsidiary or
(iii) the winding-up or liquidation of the Company or any Subsidiary; and such
proceeding or petition shall continue undismissed for 60 days or an order or
decree approving or ordering any of the foregoing shall be entered; or
(f) the Company or any Subsidiary shall (i) voluntarily commence any
proceeding or file any petition seeking relief under the Bankruptcy Code or any
other federal or state bankruptcy, insolvency, receivership or similar law, (ii)
consent to the institution of, or fail to contest in a timely and appropriate
manner, any proceeding or the filing of any petition described in clause (e)
above, (iii) apply for or consent to the appointment of a receiver, trustee,
custodian, sequestrator, conservator or similar official for the Company or any
Subsidiary or for a substantial part of the property or assets of the Company or
any Subsidiary, (iv) file an answer admitting the material allegations of a
petition filed against it in any such proceeding, (v) make a general assignment
for the benefit of creditors, (vi) become unable, or admit in writing its
inability or fail generally to pay its debts as they become due or (vii) take
any action for the purpose of effecting any of the foregoing; or
(g) a judgment or order, which with other outstanding judgments and
orders against the Company and its Subsidiaries equal or exceed $500,000.00 in
the aggregate (to the extent not covered by insurance as to which the respective
insurer has acknowledged coverage), shall be entered against the Company or any
Subsidiary and (i) within 30 days after entry thereof such judgment shall not
have been paid or discharged or execution thereof stayed pending appeal or,
within 30 days after the expiration of any such stay, such judgment shall not
have been paid or discharged or (ii) any enforcement proceeding shall have been
commenced (and not stayed) by any creditor or upon such judgment; or
(h) a Change of Control shall occur.
SECTION 10.02. PRIMARY REMEDIES. In any such event, and at any time
after the occurrence of any of the above described events, the Agent, if
directed by the Majority Banks, shall by written notice to the Company (a
"NOTICE OF DEFAULT") take any or all of the following actions, PROVIDED that, if
an Event of Default specified in SECTION 10.01(E) or SECTION 10.01(F) shall
occur, the following shall occur automatically without the giving of any Notice
of Default: (a) declare the Commitments terminated, whereupon the Commitments
shall forthwith terminate immediately and any Commitment Fee and any other owing
and unpaid Fee shall forthwith become due and payable without any other notice
of any kind; (b) declare the principal of and any accrued and unpaid interest in
respect of all Advances, and all obligations owing hereunder, to be, whereupon
the same shall become, forthwith due and payable without presentment, demand,
notice of demand or of dishonor and non-payment, protest, notice of protest,
notice of intent to accelerate, declaration or notice of acceleration or any
other notice of any kind (except as herein expressly provided), all of which are
hereby waived by the Company; (c) set off any assets or money of the Company or
any Guarantor
<PAGE>
in its or any Bank's possession against the Obligations; and (d) exercise any
rights or remedies under any document securing any of the Loan Documents or
under any applicable state or federal law.
SECTION 10.03. OTHER REMEDIES. Upon the occurrence and during the
continuance of any Event of Default, the Agent may proceed to protect and
enforce its and the Banks' rights, either by suit in equity or by action at law
or both, whether for the specific performance of any covenant or agreement
contained in this Agreement or in any other Loan Document or in aid of the
exercise of any power granted in this Agreement or in any other Loan Document;
or may proceed to enforce the payment of all amounts owing to the Banks under
the Loan Documents and any accrued and unpaid interest thereon in the manner set
forth herein or therein; it being intended that no remedy conferred herein or in
any of the other Loan Documents is to be exclusive of any other remedy, and each
and every remedy contained herein or in any other Loan Document shall be
cumulative and shall be in addition to every other remedy given hereunder and
under the other Loan Documents or now or hereafter existing at law or in equity
or by statute or otherwise.
ARTICLE XI
THE AGENT
SECTION 11.01. AUTHORIZATION AND ACTION. Each Bank hereby
irrevocably appoints and authorizes the Agent to act on its behalf and to
exercise such powers under this Agreement and the other Loan Documents as are
specifically delegated to or required of the Agent by the terms hereof, together
with such powers as are reasonably incidental thereto. The Agent may perform any
of its duties hereunder by or through its agents and employees. The duties of
the Agent shall be mechanical and administrative in nature; the Agent shall not
have by reason of this Agreement or any other Loan Documents a fiduciary
relationship in respect of any Bank; and nothing in this Agreement or any other
Loan Document, expressed or implied, is intended to, or shall be so construed as
to, impose upon the Agent any obligations in respect of this Agreement or any
other Loan Document except as expressly set forth herein or therein. As to any
matters not expressly provided for by this Agreement, the Notes or the other
Loan Documents (including enforcement or collection of the Notes), the Agent
shall not be required to exercise any discretion or take any action, but shall
be required to act or to refrain from acting (and shall be fully protected in so
acting or refraining from acting) upon the instructions of the Majority Banks,
and such instructions shall be binding upon the Banks and all holders of Notes
and the Obligations; PROVIDED, that the Agent shall not be required to take any
action which exposes the Agent to personal liability and shall not be required
or entitled to take any action which is contrary to any of the Loan Documents or
applicable law.
SECTION 11.02. AGENT'S RELIANCE. (a) Neither the Agent nor any of
its directors, officers, agents or employees shall be liable to the Banks for
any action taken or omitted to be taken by it or them under or in connection
with this Agreement, the Notes or any of the other Loan Documents (i) with the
consent or at the request of the Majority Banks or (ii) in the absence of its
<PAGE>
or their own gross negligence or willful misconduct, IT BEING THE EXPRESS
INTENTION OF THE PARTIES HERETO THAT THE AGENT AND ITS DIRECTORS, OFFICERS,
AGENTS AND EMPLOYEES SHALL HAVE NO LIABILITY TO THE BANKS FOR ACTIONS AND
OMISSIONS UNDER THIS SECTION RESULTING FROM THEIR SOLE ORDINARY OR CONTRIBUTORY
NEGLIGENCE.
(b) Without limitation of the generality of the foregoing, the
Agent: (i) may treat the payee of each Note and the Obligations as the holder
thereof until the Agent receives written notice of the assignment or transfer
thereof signed by such payee and in form satisfactory to the Agent; (ii) may
consult with legal counsel (including counsel for the Company), independent
public accountants and other experts selected by it and shall not be liable for
any action taken or omitted to be taken in good faith by it in accordance with
the advice of such counsel, accountants or experts; (iii) makes no warranty or
representation to any Bank and shall not be responsible to any Bank for any
statements, warranties or representations made in or in connection with this
Agreement, any Note or any other Loan Document; (iv) except as otherwise
expressly provided herein, shall not have any duty to ascertain or to inquire as
to the performance or observance of any of the terms, covenants or conditions of
this Agreement, any Note or any other Loan Document or to inspect the property
(including the books and records) of the Company; (v) shall not be responsible
to any Bank for the due execution, legality, validity, enforceability,
collectibility, genuineness, sufficiency or value of this Agreement, any Note,
any other Loan Document or any other instrument or document furnished pursuant
hereto or thereto; (vi) shall not be responsible to any Bank for the perfection
or priority of any Lien securing the Obligations; and (vii) shall incur no
liability under or in respect of this Agreement, any Note or any other Loan
Document by acting upon any notice, consent, certificate or other instrument or
writing (which may be by telegram, telecopier or cable) reasonably believed by
it to be genuine and signed or sent by the proper party or parties.
SECTION 11.03. AGENT AND AFFILIATES; BOT AND AFFILIATES. Without
limiting the right of any other Bank to engage in any business transactions with
the Company or any of its Affiliates, with respect to their Commitments, the
Loans made by them and the Notes issued to them, BOT and each other Bank who may
become the Agent shall have the same rights and powers under this Agreement and
its Notes as any other Bank and may exercise the same as though it was not the
Agent; and the term "Bank" or "Banks" shall, unless otherwise expressly
indicated, include BOT and any such other Bank, in their individual capacities.
BOT, each other Person who becomes the Agent and their respective Affiliates may
be engaged in, or may hereafter engage in, one or more loan, letter of credit,
leasing or other financing activity not the subject of this Agreement
(collectively, the "OTHER FINANCINGS") with the Company, any Subsidiary or any
of its Affiliates, or may act as trustee on behalf of, or depositary for, or
otherwise engage in other business transactions with the Company, any Subsidiary
or any of its Affiliates (all Other Financings and other such business
transactions being collectively, the "OTHER ACTIVITIES") with no responsibility
to account therefor to the Banks. Without limiting the rights and remedies of
the Banks specifically set forth herein, no other Bank by virtue of being a Bank
hereunder shall have any interest in (a) any Other Activities, (b) any present
or future guaranty by or for the account of the Company not contemplated or
included herein, (c) any present or future offset exercised by the Agent in
respect of any such Other Activities, (d) any present or future property taken
as security for any such Other Activities
<PAGE>
or (e) any property now or hereafter in the possession or control of the Agent
which may be or become security for the Obligations of the Company hereunder and
under the Notes by reason of the general description of indebtedness secured, or
of property contained in any other agreements, documents or instruments related
to such Other Activities; PROVIDED, HOWEVER, that if any payment in respect of
such guaranties or such property or the proceeds thereof shall be applied to
reduction of the Obligations evidenced hereunder and by the Notes, then each
Bank shall be entitled to share in such application according to its pro rata
portion of such Obligations.
SECTION 11.04. BANK CREDIT DECISION. Each Bank acknowledges and
agrees that it has, independently and without reliance upon the Agent or any
other Bank and based on the financial statements referred to in SECTION 7.01 and
such other documents and information as it has deemed appropriate, made its own
credit analysis and decision to enter into this Agreement. Each Bank also
acknowledges and agrees that it will, independently and without reliance upon
the Agent or any other Bank and based on such documents and information as it
shall deem appropriate at the time, continue to make its own credit decisions in
taking or not taking action under this Agreement and the other Loan Documents.
SECTION 11.05. AGENT'S INDEMNITY. (a) The Agent shall not be
required to take any action hereunder or to prosecute or defend any suit in
respect of this Agreement, the Notes or any other Loan Document unless
indemnified to the Agent's satisfaction by the Banks against loss, cost,
liability and expense. If any indemnity furnished to the Agent shall become
impaired, it may call for additional indemnity and cease to do the acts
indemnified against until such additional indemnity is given. In addition, the
Banks agree to indemnify the Agent (to the extent not reimbursed by the
Company), ratably according to the respective aggregate principal amounts of the
Notes then held by each of them (or if no Notes are at the time outstanding,
ratably according to the respective amounts of the Commitments), from and
against any and all liabilities, obligations, losses, damages, penalties,
actions, judgments, suits, costs, expenses or disbursements of any kind or
nature whatsoever which may be imposed on, incurred by, or asserted against the
Agent in any way relating to or arising out of this Agreement or any action
taken or omitted by the Agent under this Agreement, the Notes and the other Loan
Documents. Without limitation of the foregoing, each Bank agrees to reimburse
the Agent promptly upon demand for its ratable share of any out-of-pocket
expenses (including reasonable counsel fees) incurred by the Agent in connection
with the preparation, execution, administration, or enforcement of, or legal
advice in respect of rights or responsibilities under, this Agreement, the Notes
and the other Loan Documents to the extent that the Agent is not reimbursed for
such expenses by the Company. The provisions of this Section shall survive the
termination of this Agreement, the payment of the Obligations and/or the
assignment of any of the Notes.
(b) Notwithstanding the foregoing, no Bank shall be liable under
this Section to the Agent for any portion of such liabilities, obligations,
losses, damages, penalties, actions, judgments, suits, costs, expenses or
disbursements due to the Agent resulting from the Agent's gross negligence or
willful misconduct. EACH BANK AGREES, HOWEVER, THAT IT EXPRESSLY INTENDS, UNDER
THIS SECTION, TO INDEMNIFY THE AGENT RATABLY AS AFORESAID FOR ALL SUCH
LIABILITIES, OBLIGATIONS,
<PAGE>
LOSSES, DAMAGES, PENALTIES, ACTIONS, JUDGMENTS, SUITS, COSTS, EXPENSES AND
DISBURSEMENTS ARISING OUT OF OR RESULTING FROM THE AGENT'S SOLE ORDINARY OR
CONTRIBUTORY NEGLIGENCE.
SECTION 11.06. SUCCESSOR AGENT. The Agent may resign at any time by
giving written notice thereof to the Banks and the Company and may be removed as
Agent under this Agreement, the Notes and the other Loan Documents at any time
with or without cause by the Majority Banks. Upon any such resignation or
removal, the Majority Banks shall have the right to appoint a successor Agent.
If no successor Agent shall have been so appointed by the Majority Banks, and
shall have accepted such appointment, within 30 calendar days after the retiring
Agent's giving of notice of resignation or the Majority Banks' removal of the
retiring Agent, then the retiring Agent may, on behalf of the Banks, appoint a
successor Agent, which shall be an Eligible Assignee. Upon the acceptance of any
appointment as Agent hereunder and under the Notes and the other Loan Documents
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, the Notes and the other Loan Documents. After any retiring
Agent's resignation or removal as Agent hereunder and under the Notes and the
other Loan Documents, the provisions of this ARTICLE XI shall inure to its
benefit as to any actions taken or omitted to be taken by it while it was Agent
under this Agreement, the Notes and the other Loan Documents.
SECTION 11.07. NOTICE OF DEFAULT. The Agent shall not be deemed to
have knowledge or notice of the occurrence of any Default or Event of Default
hereunder unless the Agent shall have received notice from a Bank or the Company
referring to this Agreement, describing such Default or Event of Default and
stating that such notice is a "notice of default." If the Agent receives such
notice, the Agent shall give notice thereof to the Banks; PROVIDED, HOWEVER, if
such notice is received from a Bank, the Agent also shall give notice thereof to
the Company. The Agent shall be entitled to take action or refrain from taking
action with respect to such Default or Event of Default as provided in SECTION
10.01 and SECTION 10.02.
ARTICLE XII
MISCELLANEOUS
SECTION 12.01. AMENDMENTS. No amendment or waiver of any provision
of this Agreement, any Note or any other Loan Document, nor consent to any
departure by the Company herefrom or therefrom, shall in any event be effective
unless the same shall be in writing and signed by the Company, as to amendments,
and by the Majority Banks in all cases, and then, in any case, such waiver or
consent shall be effective only in the specific instance and for the specific
purpose for which given PROVIDED, no such amendment shall be effective unless
signed by all of the Banks if it attempts to: (a) change the definition of
"COMMITMENT", "DESIGNATED PAYMENT DATE", "MAJORITY BANKS", "MARGIN" or "MATURITY
DATE"; (b) modify this Section or SECTIONS 4.01 (a) or (b) ; (c) release any
Guarantor; (d) to waive any Default under SECTION 10.01(A) or (e), in any other
manner change
<PAGE>
the repayment terms of the Loans, including required principal payments, the
rate, amount or time of interest payments or the reimbursement obligations under
any Letter of Credit.
SECTION 12.02. NOTICES. Except with respect to telephone
notifications specifically permitted pursuant to ARTICLE II, all notices,
consents, requests, approvals, demands and other communications provided for
herein shall be in writing (including telecopy communications) and mailed,
telecopied, sent by overnight courier or delivered:
(a) If to the Company and the Guarantors:
Comfort Systems USA, Inc.
4801 Woodway Drive, Suite 300E
Houston, Texas 77056
Telephone No.: (713) 964-2685
Telecopy No: (713) 964-2657
Attention: J. Gordon Beittenmiller
(b) If to the Agent:
Bank One, Texas, N.A.
910 Travis, 7th Floor
Houston, Texas 77002
Telephone No.: (713) 751-3828
Telecopy No: (713) 751-6199
Attention: Mr. H. Gale Smith, Jr.
and to:
Andrews & Kurth L.L.P.
4200 Texas Commerce Tower
Houston, Texas 77002
Telephone No.:(713) 220-4274
Telecopy No.: (713) 220-4285
Attention: Mr. Douglas J. Dillon
or, in the case of any party hereto, such other address or telecopy number as
such party may hereafter specify for such purpose by notice to the other
parties.
(c) If to any Bank, to the address shown on the signature page
hereof or specified by such Bank (or the Agent on behalf of any Bank) to the
Company.
All communications shall, when mailed, telecopied or delivered, be
effective when mailed by certified mail, return receipt requested to any party
at its address specified above, or
<PAGE>
telecopied to any party to the telecopy number set forth above, or delivered
personally to any party at its address specified above; PROVIDED, that
communications to the Agent pursuant to ARTICLE II shall not be effective until
actually received by the Agent, and PROVIDED FURTHER that communications sent by
telecopy after 5:00 p.m., Houston, Texas time, shall be effective on the next
succeeding business day.
SECTION 12.03. NO WAIVER; REMEDIES. No failure on the part of any
Bank or the Agent to exercise, and no delay in exercising, any right hereunder,
under any Note or under any other Loan Document shall operate as a waiver
thereof; nor shall any single or partial exercise of any such right, or any
abandonment or discontinuance of any steps to enforce such right, preclude any
other or further exercise thereof or the exercise of any other right. No notice
to or demand on the Company in any case shall entitle the Company to any other
or further notice or demand in similar or other circumstances. The remedies
herein are cumulative and not exclusive of any other remedies provided by law,
at equity or in any other agreement.
SECTION 12.04. COSTS, EXPENSES AND TAXES. The Company agrees to pay
on demand: (a) all reasonable out-of-pocket costs and expenses of the Agent in
connection with the preparation, execution and delivery of this Agreement, the
Notes, the other Loan Documents and the other documents to be delivered
hereunder, including the reasonable fees and out-of-pocket expenses of counsel
for the Agent with respect thereto and with respect to advising the Agent as to
its rights and responsibilities under this Agreement, the Notes and the other
Loan Documents, and any modification, supplement or waiver of any of the terms
of this Agreement or any other Loan Document, (b) all reasonable costs and
expenses of any Bank and any other holder of an interest in the Notes, and the
Obligations of the Company hereunder and under the Loan Documents, including
reasonable legal fees and expenses, in connection with the enforcement of this
Agreement, the Notes and the other Loan Documents and (c) reasonable costs and
expenses incurred in connection with third party professional services required
by the Agent such as appraisers, environmental consultants, accountants or
similar Persons, PROVIDED THAT, prior to any Event of Default hereunder, the
Agent will first obtain the consent of the Company to such expense, which
consent shall not be unreasonably withheld. Without prejudice to the survival of
any other obligations of the Company hereunder and under the Notes, the
obligations of the Company under this Section shall survive the termination of
this Agreement or the replacement of the Agent and each assignment of the Notes.
SECTION 12.05. INDEMNITY. (a) The Company shall and hereby does
indemnify the Agent and each Bank and each Affiliate thereof and their
respective directors, officers, employees and agents from, and hold each of them
harmless against, any and all losses, liabilities, claims or damages (including
reasonable legal fees and expenses) to which any of them may become subject,
insofar as such losses, liabilities, claims or damages arise out of or result
from any actual or proposed use by the Company of the proceeds of any extension
of credit hereunder or any investigation, litigation or other proceeding
(including any threatened investigation or proceeding) relating to the foregoing
or any of the other Loan Documents, and the Company shall reimburse each Bank
and each Affiliate thereof and their respective directors, officers, employees
and agents, upon demand for any expenses (including legal fees) reasonably
incurred in connection with any such
<PAGE>
investigation or proceeding; but excluding any such losses, liabilities, claims,
damages or expenses incurred by reason of the gross negligence or willful
misconduct of the Person to be indemnified (the "INDEMNIFIED OBLIGATIONS").
(B) WITHOUT LIMITING ANY PROVISION OF THIS AGREEMENT, IT IS THE
EXPRESS INTENTION OF THE PARTIES HERETO THAT EACH PERSON TO BE INDEMNIFIED
HEREUNDER SHALL BE INDEMNIFIED AND HELD HARMLESS AGAINST ANY AND ALL INDEMNIFIED
OBLIGATIONS: (I) ARISING OUT OF OR RESULTING FROM THE ORDINARY SOLE OR
CONTRIBUTORY NEGLIGENCE OF SUCH PERSON OR (II) IMPOSED UPON SAID PARTY UNDER ANY
THEORY OF STRICT LIABILITY. Without prejudice to the survival of any other
obligations of the Company hereunder and under the other Loan Documents, the
obligations of the Company under this Section shall survive the termination of
this Agreement and the other Loan Documents and the payment of the Obligations
or the assignment of the Notes.
SECTION 12.06. RIGHT OF SETOFF. Without limiting the remedies
provided for in ARTICLE X, each Bank is hereby authorized at any time and from
time to time, to the fullest extent permitted by law, to set off and apply any
and all deposits held and other indebtedness owing by such Bank, or any branch,
subsidiary or Affiliate, to or for the credit or the account of the Company
against any and all the Obligations of the Company now or hereafter existing
under this Agreement and the other Loan Documents and other obligations of the
Company held by such Bank, irrespective of whether or not such Bank shall have
made any demand under this Agreement, its Note or the Obligations and although
the Obligations may be unmatured. The rights of each Bank under this Section are
in addition to other rights and remedies (including other rights of setoff)
which such Bank may have.
SECTION 12.07. GOVERNING LAW. This Agreement, all Notes, the other
Loan Documents and all other documents executed in connection herewith shall be
deemed to be contracts and agreements executed by the Company and each Bank
under the laws of the State of Texas and of the United States of America and for
all purposes shall be construed in accordance with, and governed by, the laws of
said state and of the United States of America. Without limitation of the
foregoing, nothing in this Agreement, or in the Notes or in any other Loan
Document shall be deemed to constitute a waiver of any rights which any Bank may
have under applicable federal legislation relating to the amount of interest
which such Bank may contract for, take, receive or charge in respect of the Loan
and the Loan Documents, including any right to take, receive, reserve and charge
interest at the rate allowed by the law of the state where any Bank is located.
The Agent, each Bank and the Company further agree that insofar as the
provisions of Article 5069-1.04, of the Revised Civil Statutes of Texas, as
amended, are applicable to the determination of the Highest Lawful Rate with
respect to the Notes and the Obligations hereunder and under the other Loan
Documents, the indicated rate ceiling of such Article shall be applicable;
PROVIDED, HOWEVER, that to the extent permitted by such Article, the Agent may
from time to time by notice to the Company revise the election of such interest
rate ceiling as such ceiling affects the then current or future balances of the
Loans. The provisions of Article 5069-15.01 ET SEQ. do not apply to this
Agreement, any Note issued hereunder or the other Loan Documents.
<PAGE>
SECTION 12.08. INTEREST. Each provision in this Agreement and each
other Loan Document is expressly limited so that in no event whatsoever shall
the amount paid, or otherwise agreed to be paid, to the Agent or any Bank, or
charged, contracted for, reserved, taken or received by the Agent or any Bank,
for the use, forbearance or detention of the money to be loaned under this
Agreement or any Loan Document or otherwise (including any sums paid as required
by any covenant or obligation contained herein or in any other Loan Document
which is for the use, forbearance or detention of such money), exceed that
amount of money which would cause the effective rate of interest to exceed the
Highest Lawful Rate, and all amounts owed under this Agreement and each other
Loan Document shall be held to be subject to reduction to the effect that such
amounts so paid or agreed to be paid, charged, contracted for, reserved, taken
or received which are for the use, forbearance or detention of money under this
Agreement or such Loan Document shall in no event exceed that amount of money
which would cause the effective rate of interest to exceed the Highest Lawful
Rate. Anything in any Note or any other Loan Document to the contrary
notwithstanding, the Company shall not be required to pay unearned interest on
any Note and the Company shall not be required to pay interest on the
Obligations at a rate in excess of the Highest Lawful Rate, and if the effective
rate of interest which would otherwise be payable under such Note and such Loan
Documents would exceed the Highest Lawful Rate, or if the holder of such Note
shall receive any unearned interest or shall receive monies that are deemed to
constitute interest which would increase the effective rate of interest payable
by the Company under such Note and the other Loan Documents to a rate in excess
of the Highest Lawful Rate, then (a) the amount of interest which would
otherwise be payable by the Company shall be reduced to the amount allowed under
applicable law and (b) any unearned interest paid by the Company or any interest
paid by the Company in excess of the Highest Lawful Rate shall in the first
instance be credited on the principal of the Obligations of the Company (or if
all such Obligations shall have been paid in full, refunded to the Company). It
is further agreed that, without limitation of the foregoing, all calculations of
the rate of interest contracted for, reserved, taken, charged or received by any
Bank under the Notes and the Obligations and under the other Loan Documents are
made for the purpose of determining whether such rate exceeds the Highest Lawful
Rate, and shall be made, to the extent permitted by usury laws applicable to
such Bank, by amortizing, prorating and spreading in equal parts during the
period of the full stated term of the Notes and this Agreement all interest at
any time contracted for, charged or received by such Bank in connection
therewith. Furthermore, in the event that the maturity of any Note or other
obligation is accelerated or in the event of any required or permitted
prepayment, then such consideration that constitutes interest under applicable
law may never include more than the maximum amount allowed by applicable law and
excess interest, if any, provided for in this Agreement, any Note or otherwise
shall be canceled automatically as of the date of such acceleration or
prepayment and, if theretofore paid, shall be refunded to the Company.
SECTION 12.09. SURVIVAL OF REPRESENTATIONS AND WARRANTIES. All
representations, warranties and covenants contained herein or made in writing by
the Company in connection herewith and the other Loan Documents shall survive
the execution and delivery of this Agreement, the Notes and the other Loan
Documents, the termination of the Commitments of the Banks and will bind and
inure to the benefit of the respective successors and assigns of the parties
hereto, whether
<PAGE>
so expressed or not, PROVIDED, that the Commitments of the Banks shall not inure
to the benefit of any successor or assign of the Company.
SECTION 12.10. SUCCESSORS AND ASSIGNS; PARTICIPATIONS. (a) All
covenants, promises and agreements by or on behalf of the Company or the Banks
that are contained in this Agreement shall bind and inure to the benefit of
their respective permitted successors and assigns. The Company may not assign or
transfer any of its rights or obligations hereunder.
(b) Any of the Banks may assign to or sell participations to one or
more banks of all or a portion of its rights and obligations under this
Agreement and the other Loan Documents (including all or a portion of its
Commitment, the Advances and the Obligations of the Company owing to it and the
Notes); PROVIDED, that the participating banks or other entities shall be
entitled to the cost protection provisions contained in Article II and SECTION
12.04 and the Company shall continue to deal solely and directly with the Agent
in connection with its rights and obligations under this Agreement and the other
Loan Documents. Except with respect to cost protections provided to a
participant pursuant to this paragraph and the items listed in SECTION 12.01
hereof, no participant shall be a third party beneficiary of this Agreement nor
shall it be entitled to enforce any rights provided to the Banks against the
Company under this Agreement.
(c) A Bank may assign to any other Bank or Banks or to any Affiliate
of a Bank and, with the prior written consent of the Company and the Agent
(which consent shall not be unreasonably withheld), a Bank may assign to one or
more other Eligible Assignees all or a portion of its interests, rights, and
obligations under this Agreement and the other Loan Documents (including all or
a portion of its Commitment and the same portion of the Loans and other
Obligations of the Company at the time owing to it and the Note held by it);
PROVIDED, HOWEVER, that (i) each such assignment shall be in a minimum principal
amount of not less than $5,000,000.00 all Types of Loans and shall be of a
constant, and not a varying, percentage of all the assigning Bank's Commitment,
rights and obligations under this Agreement, (ii) the parties to each such
assignment shall execute and deliver to the Agent, for its acceptance, an
Assignment and Acceptance, substantially in the form of EXHIBIT 12.10(C) hereto,
in form and substance satisfactory to the Agent (an "ASSIGNMENT AND ACCEPTANCE")
and any Note subject to such assignment and (iii) no assignment shall be
effective until receipt by the Agent of a reasonable service fee from the
assignee in respect of said assignment equal to $2,000.00. Upon such execution,
delivery, acceptance and recording, from and after the effective date specified
in each Assignment and Acceptance, which effective date (unless otherwise agreed
to by the assigning Bank, the Eligible Assignee thereunder and the Agent) shall
be at least five Business Days after the execution thereof, (x) the Eligible
Assignee thereunder shall be a party hereto and to the other Loan Documents and,
to the extent provided in such Assignment and Acceptance, have the rights and
obligations of a Bank hereunder and under the other Loan Documents and (y) the
assignor Bank thereunder shall, to the extent provided in such Assignment and
Acceptance, be released from its obligations under this Agreement and the other
Loan Documents (and, in the case of an Assignment and Acceptance covering all of
the remaining portion of an assigning Bank's rights and obligations under this
Agreement and the other Loan Documents, such Bank shall cease to be a party
hereto).
<PAGE>
(d) Notwithstanding any other provision herein, any Bank may, in
connection with any assignment or participation or proposed assignment or
participation pursuant to this section, disclose to the assignee or participant
or proposed assignee or participant, any information relating to the Company
furnished to such Bank by or on behalf of the Company.
SECTION 12.11. CONFIDENTIALITY. Each Bank agrees to exercise its
best efforts to keep any information delivered or made available by the Company
to it which is clearly indicated to be confidential information, confidential
from anyone other than Persons employed or retained by such Bank who are or are
expected to become engaged in evaluating, approving, structuring or
administering the Loans; PROVIDED that nothing herein shall prevent any Bank
from disclosing such information (a) to any other Bank, (b) pursuant to subpoena
or upon the order of any court or administrative agency, (c) upon the request or
demand of any regulatory agency or authority having jurisdiction over such Bank,
(d) which has been publicly disclosed, (e) to the extent reasonably required in
connection with any litigation to which the Agent, any Bank, the Company or its
respective Affiliates may be a party, (f) to the extent reasonably required in
connection with the exercise of any remedy hereunder, (g) to such Bank's legal
counsel and independent auditors and (h) to any actual or proposed participant
or assignee of all or part of its rights hereunder which has agreed in writing
to be bound by the provisions of this Section. Each Bank will promptly notify
the Company of any information that it is required or requested to deliver
pursuant to clause (b) or (c) of this Section and, if the Company is a party to
any such litigation, clause (e) of this Section .
SECTION 12.12. PRO RATA TREATMENT. (a) Except as otherwise
specifically permitted hereunder, each payment or prepayment of principal, if
permitted under this Agreement, and each payment of interest with respect to an
Advance shall be made pro rata among the Banks.
(b) Each Bank agrees that if, through the exercise of a right of
banker's Lien, setoff or claim of any kind against the Company as a result of
which the unpaid principal portion of the Notes and the Obligations held by it
shall be proportionately less than the unpaid principal portion of the Notes and
Obligations held by any other Bank, it shall be deemed to have simultaneously
purchased from such other Bank a participation in the Notes and Obligations held
by such other Bank, in the amount required to render such amounts proportional;
PROVIDED, HOWEVER, that if any such purchase or purchases or adjustments shall
be made pursuant to this Section and the payment giving rise thereto shall
thereafter be recovered, such purchase or purchases or adjustments shall be
rescinded to the extent of such recovery and the purchase price or prices or
adjustments restored without interest.
SECTION 12.13. SEPARABILITY. Should any clause, sentence, paragraph
or Section of this Agreement be judicially declared to be invalid, unenforceable
or void, such decision will not have the effect of invalidating or voiding the
remainder of this Agreement, and the parties hereto agree that the part or parts
of this Agreement so held to be invalid, unenforceable or void will be deemed to
have been stricken herefrom and the remainder will have the same force and
effectiveness as if such part or parts had never been included herein.
<PAGE>
SECTION 12.14. EXECUTION IN COUNTERPARTS. This Agreement may be
executed in any number of counterparts and by different parties hereto in
separate counterparts, each of which when so executed shall be deemed to be an
original and all of which taken together shall constitute one and the same
agreement. Any Subsidiary of the Company that executes this Agreement after the
date of this Agreement shall, upon such execution, become a party hereto as a
Guarantor.
SECTION 12.15. INTERPRETATION. (a) In this Agreement, unless a clear
contrary intention appears:
(i) the singular number includes the plural number and VICE
VERSA;
(ii) reference to any gender includes each other gender;
(iii) the words "herein," "hereof" and "hereunder" and other
words of similar import refer to this Agreement as a whole and not to any
particular Article, Section or other subdivision;
(iv) reference to any Person includes such Person's successors
and assigns but, if applicable, only if such successors and assigns are
permitted by this Agreement, and reference to a Person in a particular
capacity excludes such Person in any other capacity or individually,
PROVIDED that nothing in this clause is intended to authorize any
assignment not otherwise permitted by this Agreement;
(v) except as expressly provided to the contrary herein,
reference to any agreement, document or instrument (including this
Agreement) means such agreement, document or instrument as amended,
supplemented or modified and in effect from time to time in accordance
with the terms thereof and, if applicable, the terms hereof, and reference
to any Note or other note includes any Note issued pursuant hereto in
extension or renewal thereof and in substitution or replacement therefor;
(vi) unless the context indicates otherwise, reference to any
Article, Section, Schedule or Exhibit means such Article or Section hereof
or such Schedule or Exhibit hereto;
(vii) the words "including" (and with correlative meaning
"include") means including, without limiting the generality of any
description preceding such term;
(viii) with respect to the determination of any period of
time, except as expressly provided to the contrary, the word "from" means
"from and including" and the word "to" means "to but excluding"; and
(ix) reference to any law, rule or regulation means such as
amended, modified, codified or reenacted, in whole or in part, and in
effect from time to time.
<PAGE>
(b) The Article and Section headings herein and the Table of
Contents are for convenience only and shall not affect the construction hereof.
(c) No provision of this Agreement shall be interpreted or construed
against any Person solely because that Person or its legal representative
drafted such provision.
(d) In the event of any conflict between the specific provisions of
this Agreement and the provisions of any application pertaining to any Letter of
Credit, the terms of this Agreement shall control.
SECTION 12.16. SUBMISSION TO JURISDICTION. (a) ANY LEGAL ACTION OR
PROCEEDING WITH RESPECT TO THIS AGREEMENT AND THE OTHER LOAN DOCUMENTS MAY BE
BROUGHT IN THE COURTS OF THE STATE OF TEXAS, IN HARRIS COUNTY OR OF THE UNITED
STATES FOR THE SOUTHERN DISTRICT OF TEXAS AND, BY EXECUTION AND DELIVERY OF THIS
AGREEMENT, EACH OF THE COMPANY AND EACH GUARANTOR HEREBY IRREVOCABLY ACCEPTS FOR
ITSELF AND IN RESPECT OF ITS PROPERTY, UNCONDITIONALLY, THE JURISDICTION OF THE
AFORESAID COURTS WITH RESPECT TO ANY SUCH ACTION OR PROCEEDING. THE COMPANY AND
EACH GUARANTOR FURTHER IRREVOCABLY CONSENT TO THE SERVICE OF PROCESS OUT OF ANY
OF THE AFOREMENTIONED COURTS IN ANY SUCH ACTION OR PROCEEDING BY THE MAILING OF
COPIES THEREOF BY REGISTERED OR CERTIFIED MAIL, POSTAGE PREPAID, TO IT AT ITS
ADDRESS PROVIDED IN SECTION 12.02 AND WITH RESPECT TO ANY GUARANTOR, AT THE
ADDRESS PROVIDED ON SCHEDULE 6.16 HERETO, SUCH SERVICE TO BECOME EFFECTIVE
THIRTY (30) DAYS AFTER SUCH MAILING. NOTHING HEREIN SHALL AFFECT THE RIGHT OF
THE AGENT OR ANY BANK TO SERVE PROCESS IN ANY OTHER MANNER PERMITTED BY LAW OR
TO COMMENCE LEGAL PROCEEDINGS OR OTHERWISE PROCEED AGAINST THE COMPANY IN ANY
OTHER JURISDICTION.
(b) EACH OF THE COMPANY AND THE GUARANTORS HEREBY IRREVOCABLY WAIVES
ANY OBJECTION WHICH IT MAY NOW OR HEREAFTER HAVE TO THE LAYING OF VENUE OF ANY
OF THE AFORESAID ACTIONS OR PROCEEDINGS ARISING OUT OF OR IN CONNECTION WITH
THIS AGREEMENT BROUGHT IN THE COURTS REFERRED TO IN CLAUSE (a) ABOVE AND HEREBY
FURTHER IRREVOCABLY WAIVES AND AGREES NOT TO PLEAD OR CLAIM IN ANY SUCH COURT
THAT ANY SUCH ACTION OR PROCEEDING BROUGHT IN ANY SUCH COURT HAS BEEN BROUGHT IN
AN INCONVENIENT FORUM.
SECTION 12.17. WAIVER OF JURY TRIAL. EACH OF THE COMPANY AND EACH
GUARANTOR HEREBY WAIVES, TO THE EXTENT PERMITTED BY APPLICABLE LAW, ANY RIGHT TO
A TRIAL BY JURY IN ANY ACTION OR PROCEEDING TO ENFORCE OR DEFEND ANY RIGHTS
UNDER THIS AGREEMENT OR UNDER ANY AMENDMENT, INSTRUMENT, DOCUMENT OR AGREEMENT
<PAGE>
DELIVERED OR WHICH MAY IN THE FUTURE BE DELIVERED IN CONNECTION HEREWITH OR
ARISING FROM OR RELATING TO ANY BANKING RELATIONSHIP EXISTING IN CONNECTION WITH
THIS AGREEMENT, AND AGREES, TO THE EXTENT PERMITTED BY APPLICABLE LAW, THAT ANY
SUCH ACTION OR PROCEEDING SHALL BE TRIED BEFORE A COURT AND NOT BEFORE A JURY.
SECTION 12.18. FINAL AGREEMENT OF THE PARTIES. THIS AGREEMENT
(INCLUDING THE SCHEDULES AND EXHIBITS HERETO), THE NOTES AND THE OTHER LOAN
DOCUMENTS CONSTITUTE A "LOAN AGREEMENT" AS DEFINED IN SECTION 26.02(A) OF THE
TEXAS BUSINESS AND COMMERCE CODE, AND REPRESENT THE FINAL AGREEMENT BETWEEN THE
PARTIES RELATING TO THE SUBJECT MATTER HEREOF AND THEREOF AND MAY NOT BE
CONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS OR SUBSEQUENT ORAL AGREEMENTS
OF THE PARTIES. THERE ARE NO UNWRITTEN ORAL AGREEMENTS BETWEEN THE PARTIES.
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to
be executed by their respective officers thereunto duly authorized as of the
date first above written.
BORROWER:
COMFORT SYSTEMS USA, INC.
By: _____________________________
J. Gordon Beittenmiller
Chief Financial Officer
GUARANTORS:
ACCURATE AIR SYSTEMS, INC.
ATLAS COMFORT SERVICES USA, INC.
ATLAS AIR CONDITIONING COMPANY
CONTRACT SERVICE, INC.
EASTERN HEATING & COOLING, INC.
EASTERN REFRIGERATION CO., INC.
FREEWAY HEATING & AIR CONDITIONING, INC.
LAWRENCE SERVICE, INC.
QUALITY AIR HEATING & COOLING, INC.
SEASONAIR, INC.
S.M. LAWRENCE COMPANY, INC.
STANDARD HEATING & AIR CONDITIONING COMPANY
TECH HEATING AND AIR CONDITIONING, INC.
TECH MECHANICAL, INC.
TRI-CITY MECHANICAL, INC.
WESTERN BUILDING SERVICES, INC.
By: _____________________________
J. Gordon Beittenmiller
Vice President
<PAGE>
AMOUNT OF COMMITMENT: AGENT/BANK:
$75,000,000.00 BANK ONE, TEXAS, N.A.,
as Agent and Individually, as a Bank
By: _____________________________
H. Gale Smith, Jr.
<PAGE>
BANKS:
AMOUNT OF COMMITMENT:
$_____________________ _______________________________________
By: _____________________________
Name: ___________________________
Title: __________________________
By: _____________________________
Name: ___________________________
Title: __________________________
ADDRESS FOR NOTICE:
<PAGE>
AMOUNT OF COMMITMENT:
$_____________________ _______________________________________
By: _____________________________
Name: ___________________________
Title: __________________________
By: _____________________________
Name: ___________________________
Title: __________________________
ADDRESS FOR NOTICE:
EXHIBIT 10.26
INDEMNITY AGREEMENT
This Indemnity Agreement ("Agreement") is made and entered into by and
between Comfort Systems USA, Inc., a Delaware corporation ("Company"), and the
individuals listed on ANNEX A to this Agreement (individually, "Indemnitee").
INTRODUCTION
Indemnitee is a director and/or officer of the Company. The parties desire
that the Company provide indemnification (including advancement of expenses) to
Indemnitee against any and all liabilities asserted against Indemnitee to the
fullest extent permitted by the Delaware General Corporation Law ("Act"), as the
Act presently exists and may be expanded from time to time. Based on such
premise, and for certain good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the parties hereby agree as
follows:
1. CONTINUED SERVICE. Indemnitee will serve at the will of the Company or
under separate contract, if such exists, as a director and/or officer of the
Company for so long as Indemnitee is duly elected and qualified in accordance
with the Bylaws of the Company or until Indemnitee tenders his or her
resignation to the Company.
2. INDEMNIFICATION. The Company shall indemnify Indemnitee as follows:
2.1. The Company shall indemnify Indemnitee when Indemnitee was or
is a party or is threatened to be made a party to any threatened, pending or
completed action, suit or proceeding, whether civil, criminal, administrative or
investigative (other than an action by or in the right of the Company), by
reason of the fact that Indemnitee is or was a director, officer, employee or
agent of the Company, or is or was serving at the request of the Company as a
director, officer, employee or agent of another corporation, partnership, joint
venture, trust or other enterprise, against expenses (including attorneys'
fees), judgments, fines and amounts paid in settlement actually and reasonably
incurred by Indemnitee in connection with such action, suit or proceeding if
Indemnitee acted in good faith and in a manner Indemnitee reasonably believed to
be in or not opposed to the best interests of the Company, and, with respect to
any criminal action or proceeding, had no reasonable cause to believe that
Indemnitee's conduct was unlawful. The termination of any action, suit or
proceeding by judgment, order, settlement or conviction or upon a plea of nolo
contendere or its equivalent shall not, of itself, create a presumption that
Indemnitee did not act in good faith and in a manner which Indemnitee reasonably
believed to be in or not opposed to the best interests
<PAGE>
of the Company, and, with respect to any criminal action or proceeding, had
reasonable cause to believe that Indemnitee's conduct was unlawful.
2.2. The Company shall indemnify Indemnitee when Indemnitee was or
is a party or is threatened to be made a party to any threatened, pending or
completed action or suit by or in the right of the Company to procure a judgment
in its favor by reason of the fact that Indemnitee is or was a director,
officer, employee or agent of the Company, or is or was serving at the request
of the Company as a director, officer, employee or agent of another corporation,
partnership, joint venture, trust or other enterprise against expenses
(including attorneys' fees) actually and reasonably incurred by Indemnitee in
connection with the defense or settlement of such action or suit if Indemnitee
acted in good faith and in a manner that Indemnitee reasonably believed to be in
or not opposed to the best interests of the Company and except that no
indemnification pursuant to this Agreement shall be made in respect of any
claim, issue or matter as to which Indemnitee shall have been adjudged to be
liable to the Company unless and only to the extent that the Court of Chancery
or the court in which such action or suit was brought shall determine upon
application that, despite the adjudication of liability but in view of all the
circumstances of the case, Indemnitee is fairly and reasonably entitled to
indemnity for such expenses which the Court of Chancery or such other court
shall deem proper.
2.3. Any indemnification under Sections 2.1 and 2.2 (unless ordered
by a court) shall be made by the Company only as authorized in the specific case
upon a determination, in accordance with the procedures set forth in Section 3,
that indemnification of Indemnitee is proper in the circumstances because
Indemnitee has met the applicable standard of conduct set forth in such Sections
2.1 and 2.2. Such determination shall be made (1) by the board of directors of
the Company by a majority vote of a quorum consisting of directors who were not
parties to such action, suit or proceeding, or (2) if such a quorum is not
obtainable, or, even if obtainable a quorum of disinterested directors so
directs, by independent legal counsel in a written opinion, or (3) by the
stockholders of the Company.
2.4. Expenses (including attorneys' fees) incurred by Indemnitee in
defending any civil, criminal, administrative, or investigative action, suit or
proceeding shall be paid by the Company in advance of the final disposition of
such action, suit or proceeding, as authorized in the manner provided in Section
2.3, within 14 days after the receipt by the Company from Indemnitee of a
Statement of Undertaking in substantially the form set forth in Exhibit A, in
which Indemnitee (1) states that Indemnitee has reasonably incurred actual
expenses in defending a civil, criminal, administrative, or investigative
action, suit or proceeding and (2) undertakes to repay such amount if it shall
ultimately be determined that Indemnitee is not entitled to be indemnified by
the Company as authorized in this Section 2.
-2-
<PAGE>
2.5. The indemnification and advancement of expenses provided by, or
granted pursuant to, this Section 2 shall not be deemed exclusive of any other
rights to which Indemnitee may be entitled under any bylaw, agreement, vote of
stockholders or disinterested directors or otherwise, both as to action in
Indemnitee's official capacity and as to action in another capacity while
holding such office, shall continue after Indemnitee has ceased to be a
director, officer, employee or agent of the Company, and shall inure to the
benefit of the heirs, executors and administrators of Indemnitee.
3. DETERMINATION OF RIGHT TO INDEMNIFICATION. For the purpose of making
the determination of whether to indemnify Indemnitee in a specific case under
Section 2.3, the board of directors of the Company, independent legal counsel or
stockholders, as the case may be, shall make the determination in accordance
with the following procedures:
3.1. Indemnitee shall submit to the board of directors a Statement
of Request for Indemnification in substantially the form set forth in Exhibit B,
in which Indemnitee states that Indemnitee has met the applicable standard of
conduct set forth in Sections 2.1 and 2.2.
3.2. Indemnitee's submission of a Statement of Request for
Indemnification to the board of directors shall create a rebuttable presumption
that Indemnitee has met the applicable standard of conduct set forth in Sections
2.1 and 2.2 and, therefore, is entitled to indemnification under Section 2. The
board of directors, independent legal counsel or stockholders, as the case may
be, shall determine, within 30 days after submission of the Statement of Request
for Indemnification, specifically that Indemnitee is so entitled, unless it or
they shall possess clear and convincing evidence to rebut the foregoing
presumption, which evidence shall be disclosed to Indemnitee with particularity
in a sworn written statement signed by all persons who participated in the
determination and voted to deny indemnification.
4. MERGER, CONSOLIDATION OR CHANGE IN CONTROL. If the Company is a
constituent corporation in a merger or consolidation, whether the Company is the
resulting or surviving corporation or is absorbed as a result thereof, or if
there is a change in control of the Company, Indemnitee shall stand in the same
position under this Agreement with respect to the resulting, surviving or
changed corporation as Indemnitee would have with respect to the Company if its
separate existence had continued or if there had been no change in the control
of the Company.
5. CERTAIN DEFINITIONS. For the purposes of this Agreement, the following
terms shall have the indicated meanings and understandings:
5.1. The term "other enterprise" shall include, among others,
employee benefit plans and civic, non-profit and charitable organizations,
whether or not incorporated.
-3-
<PAGE>
5.2. The term "fines" shall include any excise taxes assessed on
Indemnitee with respect to any employee benefit plan.
5.3. The term "serving at the request of the Company" shall include
any service, at the request or with the express or implied authorization of the
Company, as a director, officer, employee or agent of another corporation,
partnership, joint venture, trust or other enterprise, which service imposes
duties on, or involves services by, Indemnitee with respect to such corporation,
partnership, joint venture, trust or other enterprise, its participants or
beneficiaries. If Indemnitee acted in good faith and in a manner Indemnitee
reasonably believed to be in or not opposed to the best interests of such other
enterprise, its participants or beneficiaries, Indemnitee shall be deemed to
have acted in a manner not opposed to the best interests of the Company.
5.4. The term "change of control" shall include any change in the
ownership of a majority of the outstanding voting securities of the Company or
in the composition of a majority of the members of the board of directors of the
Company.
6. ATTORNEYS' FEES. If Indemnitee institutes any legal action to enforce
Indemnitee's rights under this Agreement, or to recover damages for breach of
this Agreement, Indemnitee, if Indemnitee prevails in whole or in part, shall be
entitled to recover from the Company all fees and expenses (including attorneys'
fees) incurred by Indemnitee in connection therewith.
7. DEPOSIT OF FUNDS IN TRUST. If the Company voluntarily decides to
dissolve or to file a petition for relief under the applicable bankruptcy,
moratorium or similar laws, then not later than 10 days prior to such
dissolution or filing, the Company shall deposit in trust for the sole and
exclusive benefit of Indemnitee a cash amount equal to all amounts previously
authorized to be paid to Indemnitee hereunder, such amounts to be used to
discharge the Company's obligations to Indemnitee hereunder. Any amounts in such
trust not required for such purpose shall be returned to the Company. This
Section 7 shall not apply to the dissolution of the Company in connection with a
transaction as to which Section 4 applies.
8. AMENDMENTS TO ACT. This Agreement is intended to provide indemnity to
Indemnitee to the fullest extent allowed under Delaware law. Accordingly, to the
extent permitted by law, if the Act permits greater indemnity than the indemnity
set forth herein, or if any amendment is made to the Act expanding the indemnity
permissible under Delaware law, the indemnity obligations contained herein
automatically shall be expanded, without the necessity of action on the part of
any party, to the extent necessary to provide to Indemnitee the fullest
indemnity permissible under Delaware law.
-4-
<PAGE>
9. MISCELLANEOUS PROVISIONS.
9.1. SURVIVAL. The provisions of this Agreement shall survive the
termination of Indemnitee's service as a director or officer of the Company.
9.2. ENTIRE AGREEMENT. This Agreement constitutes the full
understanding of the parties and a complete and exclusive statement of the terms
and conditions of their agreement relating to the subject matter hereof and
supersedes all prior negotiations, understandings and agree ments, whether
written or oral, between the parties, their affiliates, and their respective
principals, shareholders, directors, officers, employees, consultants and agents
with respect thereto.
9.3. AMENDMENTS AND WAIVERS. No alteration, modification, amendment,
change or waiver of any provision of this Agreement shall be effective or
binding on any party hereto unless the same is in writing and is executed by all
parties hereto.
9.4. MODIFICATION AND SEVERABILITY. If a court of competent
jurisdiction declares that any provision of this Agreement is illegal, invalid
or unenforceable, then such provision shall be modified automatically to the
extent necessary to make such provision fully legal, valid or enforce able. If
such court does not modify any such provision as contemplated herein, but
instead declares it to be wholly illegal, invalid or unenforceable, then such
provision shall be severed from this Agreement, this Agreement and the rights
and obligations of the parties hereto shall be construed as if this Agreement
did not contain such severed provision, and this Agreement otherwise shall
remain in full force and effect.
9.5. ENFORCEABILITY. This Agreement shall be enforceable by and
against the Company, the Indemnitee and their respective executors, legal
representatives, administrators, heirs, successors and assignees.
9.6. GOVERNING LAW. This Agreement shall be governed by, construed
under, and enforce in accordance with the laws of the State of Delaware without
reference to the conflict-of-laws provisions thereof.
9.7. MULTIPLE COUNTERPARTS. This Agreement may be executed by the
parties hereto in multiple counterparts, each of which shall be deemed an
original for all purposes, and all of which together shall constitute one and
the same instrument.
-5-
<PAGE>
The parties hereto have executed this Agreement to be effective as of
___________, 1997.
COMPANY:
Comfort Systems USA, Inc.
By: ___________________________
Name: _________________________
Title: ________________________
INDEMNITEE:
By: ___________________________
Name: _________________________
Title: ________________________
-6-
<PAGE>
ANNEX A
Steven S. Harter
Robert J. Powers
Michael Nothum, Jr.
Robert R. Cook
Brian S. Atlas
Thomas J. Beaty
Fred M. Ferreira
John C. Phillips
Samuel M. Lawrence III
Alfred J. Giardenelli, Jr.
Charles W. Klapperich
J. Gordon Beittenmiller
Reagan S. Busbee
William George, III
Larry Martin
John Mercandante, Jr.
-7-
<PAGE>
EXHIBIT A
STATEMENT OF UNDERTAKING
STATE OF __________________ ss.
ss.
COUNTY OF _________________ ss.
I, __________________________________, being first duly sworn, depose and
say as follows:
1. This Statement of Undertaking is submitted pursuant to the Indemnity
Agreement dated __________________, between _____________________, a Delaware
corporation ("Company"), and me.
2. I am requesting the advancement of certain actual expenses which I have
reasonably incurred in defending a civil or criminal action, suit or proceeding
by reason of the fact that I am or was a director and/or officer of the Company.
3. I hereby undertake to repay this advancement of expenses if it is
ultimately determined that I am not entitled to be indemnified by the Company.
4. I am requesting the advancement of expenses in connection with the
following action, suit or proceeding:
I have executed this Statement of Undertaking on .
___________________________
Signature
___________________________
Print Name
Subscribed and sworn to before me on ___________________.
___________________________
Notary Public in and for
said state and county
My commission expires: _____________
-8-
<PAGE>
EXHIBIT B
STATEMENT OF REQUEST FOR INDEMNIFICATION
STATE OF __________________ ss.
ss.
COUNTY OF _________________ ss.
I, _______________________________, being first duly sworn, depose and say
as follows:
1. This Statement of Request for Indemnification is submitted pursuant to
the Indemnity Agreement dated _________________, between ____________________, a
Delaware corporation ("Company"), and me.
2. I am requesting indemnification against expenses (including attorneys'
fees) and, with respect to any action not by or in the right of the Company,
judgments, fines and amounts paid in settlement, all of which have been actually
and reasonably incurred by me in connection with a certain action, suit or
proceeding to which I am a party or am threatened to be made a party by reason
of the fact that I am or was a director and/or officer of the Company.
3. With respect to all matters related to any such action, suit or
proceeding, I acted in good faith and in a manner I reasonably believed to be in
or not opposed to the best interests of the Company, and, with respect to any
criminal action or proceeding, I had no reason to believe that my conduct was
unlawful.
4. I am requesting indemnification in connection with the following suit,
action or proceeding:
I have executed this Statement of Request for Indemnification on
_______________.
___________________________
Signature
___________________________
Print Name
Subscribed and sworn to before me on ___________________.
___________________________
Notary Public in and for
said state and county
My commission expires: _____________
-9-
EXHIBIT 10.27
INDEMNITY AGREEMENT
This Indemnity Agreement ("Agreement") is made and entered into by and
between Comfort Systems USA, Inc., a Delaware corporation ("Company"), and Notre
Capital Ventures II, L.L.C., a Texas limited liability company ("Indemnitee").
INTRODUCTION
Indemnitee is an organizer and promoter of the Company and has provided,
and continues to provide, the Company with valuable expertise in connection with
the organization of the Company and the formulation of its strategy regarding
the consolidation of the HVAC industry and related matters. In consideration of
these services, the Company has agreed to indemnify Indemnitee against any and
all liabilities asserted against the Indemnitee or its managers, officers,
directors, employees, agents, members, partners and owners (collectively, the
"Indemnified Parties") in connection with or as a result of Indemnitee's status
as an organizer and/or promoter (as that term is defined in Rule 405 under the
Securities Act of 1933, as amended) of the Company. Based on such premise, and
for other good and valuable consideration, the receipt and sufficiency of which
are hereby acknowledged, the parties hereby agree as follows:
1. INDEMNIFICATION. The Company shall indemnify the Indemnified Parties as
follows:
1.1. The Company shall indemnify the Indemnified Parties when any of
such Indemnified Parties was or is a party or is threatened to be made a party
to any threatened, pending or completed action, suit or proceeding, whether
civil (including under federal and/or state securities laws), criminal,
administrative or investigative, by reason of the fact that the Indemnified
Parties, or any of them, is or was an organizer and/or promoter of the Company,
against expenses (including attorneys' fees), judgments, fines and amounts paid
in settlement actually and reasonably incurred by such Indemnified Parties in
connection with such action, suit or proceeding.
1.2. Expenses (including attorneys' fees) incurred by the
Indemnified Parties, or any of them, in defending any such civil (including
under federal and/or state securities laws), criminal, administrative, or
investigative action, suit or proceeding shall be paid by the Company in advance
of the final disposition of such action, suit or proceeding, within 14 days
after the receipt by the Company from the Indemnified Parties, or any of them,
of notice in which such Indemnified Party states that it has reasonably incurred
actual expenses in defending a civil (including under federal and/or state
securities laws), criminal, administrative, or investigative action, suit or
proceeding by reason of the fact that such Indemnified Party is or was an
organizer and/or promoter of the Company.
1.3. The indemnification and advancement of expenses provided by, or
granted pursuant to, this Section 1 shall not be deemed exclusive of any other
rights to which the Indemnified Parties may be entitled under any law or
agreement, and shall continue after each of the Indemnified Parties has ceased
to be an organizer and/or promoter of the Company.
<PAGE>
2. ATTORNEYS' FEES. If the Indemnified Parties, or any of them, institute
any legal action to enforce their rights under this Agreement, or to recover
damages for breach of this Agreement, such Indemnified Parties, if they prevail
in whole or in part, shall be entitled to recover from the Company all fees and
expenses (including attorneys' fees) incurred by such Indemnified Parties, or
any of them, in connection therewith.
3. DEPOSIT OF FUNDS IN TRUST. If the Company voluntarily decides to
dissolve or to file a petition for relief under the applicable bankruptcy,
moratorium or similar laws, then not later than 10 days prior to such
dissolution or filing, the Company shall deposit in trust for the sole and
exclusive benefit of the Indemnified Parties a cash amount equal to all amounts
previously authorized to be paid to the Indemnified Parties hereunder, such
amounts to be used to discharge the Company's obligations to the Indemnified
Parties hereunder. Any amounts in such trust not required for such purpose shall
be returned to the Company.
4. MERGER, CONSOLIDATION OR CHANGE IN CONTROL. If the Company is a
constituent corporation in a merger or consolidation, whether the Company is the
resulting or surviving corporation or is absorbed as a result thereof, or if
there is a change in control of the Company, The Indemnified Parties shall stand
in the same position under this Agreement with respect to the resulting,
surviving or changed corporation as the Indemnified Parties would have with
respect to the Company if its separate existence had continued or if there had
been no change in the control of the Company.
5. MISCELLANEOUS PROVISIONS.
5.1. SURVIVAL. The provisions of this Agreement shall survive the
termination of any of the Indemnified Parties' status as an organizer and/or
promoter of the Company.
5.2. ENTIRE AGREEMENT. This Agreement constitutes the full
understanding of the parties and a complete and exclusive statement of the terms
and conditions of their agreement relating to the subject matter hereof and
supersedes all prior negotiations, understandings and agree ments, whether
written or oral, between the parties, their affiliates, and their respective
principals, shareholders, directors, officers, employees, consultants and agents
with respect thereto.
5.3. AMENDMENTS AND WAIVERS. No alteration, modification, amendment,
change or waiver of any provision of this Agreement shall be effective or
binding on any party hereto unless the same is in writing and is executed by all
parties hereto.
5.4. MODIFICATION AND SEVERABILITY. If a court of competent
jurisdiction declares that any provision of this Agreement is illegal, invalid
or unenforceable, then such provision shall be modified automatically to the
extent necessary to make such provision fully legal, valid or enforce able. If
such court does not modify any such provision as contemplated herein, but
instead declares it to be wholly illegal, invalid or unenforceable, then such
provision shall be severed from this
-2-
<PAGE>
Agreement, this Agreement and the rights and obligations of the parties hereto
shall be construed as if this Agreement did not contain such severed provision,
and this Agreement otherwise shall remain in full force and effect.
5.5. ENFORCEABILITY. This Agreement shall be enforceable by and
against the Company, the Indemnified Parties and their respective successors and
assignees.
5.6. GOVERNING LAW. This Agreement shall be governed by, construed
under, and enforce in accordance with the laws of the State of Delaware without
reference to the conflict-of-laws provisions thereof.
5.7. MULTIPLE COUNTERPARTS. This Agreement may be executed by the
parties hereto in multiple counterparts, each of which shall be deemed an
original for all purposes, and all of which together shall constitute one and
the same instrument.
The parties hereto have executed this Agreement on June 27, 1997.
COMPANY:
Comfort Systems USA, Inc.
By: /S/ FRED M. FERREIRA
Name: Fred M. Ferreira
Title: Chief Executive Officer
INDEMNITEE:
Notre Capital Ventures II, L.L.C.
By: /S/ STEVEN S. HARTER
Name: Steven S. Harter
Title: President
-3-
EXHIBIT 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use of our
reports (and to all references to our Firm) included in or made a part of this
registration statement.
ARTHUR ANDERSEN LLP
Houston, Texas
July 28, 1997
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THE FINANCIAL DATA SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED
FROM THE FINANCIAL STATEMENTS OF COMFORT SYSTEMS USA, INC. AS OF DECEMBER 31,
1996 AND THE TWELVE MONTHS ENDED DECEMBER 31, 1996 AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. AMOUNTS IN THOUSANDS, EXCEPT
PER SHARE DATA
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> DEC-31-1996
<CASH> 1
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 1
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 178
<CURRENT-LIABILITIES> 177
<BONDS> 0
0
0
<COMMON> 1
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 178
<SALES> 0
<TOTAL-REVENUES> 0
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 0
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 0
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
