UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR
15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1999
Commission file number: 1-13011
COMFORT SYSTEMS USA, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 76-0526487
(STATE OR OTHER JURISDICTION (I.R.S. EMPLOYER
OF INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
777 POST OAK BLVD.
SUITE 500
HOUSTON, TEXAS 77056
(713) 830-9600
(ADDRESS AND TELEPHONE NUMBER OF PRINCIPAL EXECUTIVE OFFICES)
Securities registered pursuant to Section 12(b) of the Act:
NAME OF EACH EXCHANGE ON
TITLE OF EACH CLASS WHICH REGISTERED
- ------------------------------------- -----------------------------------------
Common Stock, $.01 par value New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the registrant (1) has filed all reports to
be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
As of March 13, 2000, the aggregate market value of the 28,777,072 shares
of the registrant's common stock held by non-affiliates of the registrant was
$226,619,442 based on the $7.875 last sale price of the registrant's common
stock on the New York Stock Exchange on that date.
As of March 13, 2000, 37,450,576 shares of the registrant's common stock
were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE: The information required by Part III
(other than the required information regarding executive officers) is
incorporated by reference from the registrant's definitive proxy statement,
which will be filed with the Commission not later than 120 days following
December 31, 1999.
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FORWARD-LOOKING STATEMENTS
This report contains "forward-looking statements" within the meaning of
Section 27A of the Securities Act of 1933, as amended ("Securities Act") and
Section 21E of the Exchange Act. Such forward-looking statements are made only
as of the date of this report and involve known and unknown risks, uncertainties
and other important factors that could cause the actual results, performance or
achievements of the Company, or industry results, to differ materially from any
future results, performance or achievements expressed or implied by such
forward-looking statements. Such risks, uncertainties and other important
factors include, among others, risks associated with fluctuations in operating
results because of acquisitions and changes in economic factors that reduce
demand for Company services, difficulty in maintaining key personnel, changes in
government regulations, competition, and risks entailed in the operations and
growth of the newly acquired businesses. Important factors that could cause
actual results to differ are discussed under "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Factors Which May
Affect Future Results."
PART I
ITEM 1. BUSINESS
Comfort Systems USA(Registered Trademark), Inc., a Delaware corporation
("Comfort Systems" and collectively with its subsidiaries, the "Company"), is a
leading national provider of comprehensive heating, ventilation and air
conditioning ("HVAC") installation, maintenance, repair and replacement
services. Founded in December 1996, the Company is composed of companies within
the commercial and industrial HVAC markets, and performs most of its services
within manufacturing plants, office buildings, retail centers, apartment
complexes, and healthcare, education and government facilities. In addition to
standard HVAC services, the Company also provides specialized applications such
as process cooling, control systems, electronic monitoring and process piping.
Certain locations also perform related services such as electrical and plumbing.
Approximately 97% of the Company's consolidated 1999 revenues were derived from
commercial and industrial customers with approximately 60% of the revenues
attributable to installation services and 40% attributable to maintenance,
repair and replacement services.
On July 2, 1997, Comfort Systems completed the initial public offering (the
"IPO") of its common stock (the "Common Stock") and simultaneously acquired
12 companies (collectively referred to as the "Founding Companies") engaged in
providing HVAC services. The Founding Companies had 18 operating locations in 10
states. Subsequent to the IPO, and through December 31, 1999, the Company
acquired 107 HVAC and complementary businesses (collectively with the Founding
Companies, the "Acquired Companies"). The companies acquired subsequent to the
IPO added 108 operating locations in 21 additional states. These acquisitions
included 26 "tuck-in" operations that have been or are currently being
integrated with existing Company operations.
INDUSTRY OVERVIEW
The HVAC industry as a whole is estimated to generate annual revenues in
excess of $75 billion, over $40 billion of which is in the commercial and
industrial markets. HVAC systems are 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 circulating fresh air in such
buildings. Older commercial and industrial facilities often have poor air
quality as well as inadequate air conditioning, and older HVAC systems result in
significantly higher energy costs than do modern systems. 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 air
quality and the effectiveness of the HVAC system. These factors cause many
facility owners to consider early replacement of older systems.
Growth in the HVAC industry is 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, (iii) the increasing
opportunities associated with utility deregulation and (iv) the increasing
standards relating to indoor air quality, and the reduction or elimination of
the refrigerants commonly used in older HVAC
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systems. These factors are expected to increase demand for the reconfiguration
or replacement of existing HVAC systems. The Company believes that these factors
may also mitigate to some extent the effect on the HVAC industry of the
cyclicality inherent in the traditional construction industry.
The HVAC industry can be broadly divided into installation services and
maintenance, repair and replacement services.
INSTALLATION SERVICES. Installation services consist 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 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 and 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 a third party architect or
consulting engineer designs the HVAC systems 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 by a third party and resulting bid process may
often take months to complete. Furthermore, in "plan and spec" projects, the
HVAC firm is not responsible for project design and any changes must be approved
by other parties, thereby increasing overall project time and cost.
Approximately 60% of the Company's consolidated 1999 revenues related to
installation services and the majority of the revenues from installation
projects was performed on a "design and build/negotiated" basis.
MAINTENANCE, REPAIR AND REPLACEMENT SERVICES. These services include the
maintenance, repair, replacement, reconfiguration and monitoring of previously
installed HVAC systems and controls. The growth and aging of the installed base
of HVAC systems and the increasing demand for more efficient, sophisticated and
complex systems and controls have fueled growth in this service line. The
increasing sophistication and complexity of these HVAC systems is leading many
commercial and industrial building owners and property managers to increase
attention to maintenance and 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 indoor air quality concerns, may increase
demand for the reconfiguration and replacement of existing HVAC systems.
State-of-the-art control and monitoring systems feature electronic sensors and
microprocessors. These systems require specialized training to install, maintain
and repair, and the typical building engineer has not received this training.
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. Approximately 40% of
the Company's consolidated 1999 revenues related to maintenance, repair and
replacement services.
STRATEGY
The Company has implemented an operating strategy that emphasizes
strengthening operating competencies and continued internal growth.
OPERATING STRATEGY. The key elements of the Company's operating strategy
are:
FOCUS ON COMMERCIAL AND INDUSTRIAL MARKETS. The Company primarily
focuses on the commercial and industrial markets with particular emphasis
on "design and build" installation services and maintenance, repair and
replacement services. The Company believes that the commercial and
industrial HVAC markets are attractive because of their growth
opportunities, diverse customer base, reduced weather exposure as compared
to residential markets, attractive margins and potential for long-term
relationships with building owners, property managers, general contractors
and architects. Approximately 97% of the Company's consolidated 1999
revenues were derived from commercial and industrial customers.
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ACHIEVE EXCELLENCE IN CORE COMPETENCIES. The Company has identified
six core competencies, which it believes are critical to attracting and
retaining customers, increasing revenue and creating additional employment
opportunities. The six core competencies are: (i) customer cultivation and
intimacy, (ii) design and build expertise, (iii) estimating, (iv) job
costing and job measurements, (v) safety and (vi) service capability.
ACHIEVE OPERATING EFFICIENCIES. The Company believes there are
opportunities to achieve operating efficiencies and cost savings through
purchasing economies, the adoption of "best practices" operating programs
and a focus on job management to deliver services in a cost-effective and
efficient manner. The Company has begun and will continue to use its
growing purchasing power to gain volume discounts on products and services
such as HVAC components, raw materials, service vehicles, advertising,
bonding, insurance and benefits.
ATTRACT AND RETAIN QUALITY EMPLOYEES. The Company seeks 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) attractive benefits packages.
GROWTH. A key component of the Company's strategy is to nurture growth at
the Company's subsidiaries. The key elements of the Company's internal
growth strategy are:
EXPAND NATIONAL SERVICE CAPABILITIES. The Company believes that
significant demand exists from large regional and national companies to
utilize the services of a single HVAC service company capable of providing
commercial and industrial services on a regional or national basis. The
Company has significantly increased its ability to handle multi-location
service opportunities by internally developing a National Service
Organization to facilitate these activities and through the acquisition of
Outbound Services in November 1999. Outbound Services is an Internet based
technology platform and call center designed to manage HVAC and related
service along with the information needs of multi-location customers
including asset data management, warranty tracking capability, real-time
status of services performed and automated invoicing.
EXPAND ALLIANCES WITH ENERGY PROVIDERS. The Company believes that
there is significant potential for mutually beneficial relationships with
companies that market energy and energy services. The Company is currently
working with several companies in the utility industry through cooperative
marketing of the Company's services and is seeking to provide utilities the
opportunity to profit and to benefit from the Company's own customer
relationships. The Company believes it can expand these relationships as it
gains experience with successful programs and as its geographic presence
increases.
CAPITALIZE ON SPECIALIZED TECHNICAL AND MARKETING STRENGTHS. The
Company believes it will be able to continue to expand the services it
offers in its markets by leveraging the specialized technical and marketing
strengths of individual companies. The Company also believes its
geographical coverage will enable it to serve existing customers' needs in
new regions that may have been beyond the service area of the Company's
operations that originated the existing customer relationship.
ENTER NEW GEOGRAPHIC MARKETS. From time to time, the Company expects
to opportunistically target leading local or regional companies providing
HVAC and related services with a solid customer base, technical skills and
infrastructure. The Company seeks businesses that are located in attractive
markets, have a significant service and replacement component, are
financially stable, are experienced in the industry and have a strong
management team. The Company also enters new markets from time to time by
opening new or branch offices, particularly where the Company has
established customer opportunities.
OPERATIONS SERVICES PROVIDED
The Company provides a wide range of installation, maintenance, repair and
replacement services for HVAC and related systems in commercial and industrial
properties. The Company manages its locations on
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a decentralized basis, with local management maintaining responsibility for
day-to-day operating decisions. In addition to senior management, local
personnel generally include design engineers, sales personnel, customer service
personnel, installation service technicians, sheet metal and prefabrication
technicians, estimators and administrative personnel. The Company has
centralized certain administrative functions such as insurance, employee
benefits, safety programs and cash management to enable the management of its
locations to focus on pursuing new business opportunities and improving
operating efficiencies. The Company is centralizing training programs, project
financing programs, national sales and purchasing programs and joint marketing
programs.
INSTALLATION SERVICES. The Company's installation business, which
comprised approximately 60% of the Company's 1999 consolidated revenues,
involves the design, engineering, integration, installation and start-up of HVAC
and related systems. The commercial and industrial installation services
performed by the Company consist of "design and build" and under some
circumstances, "plan and spec" services for manufacturing plants, office
buildings, retail centers, apartment complexes, health care, education and
government facilities and other commercial and industrial 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 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. 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. In "plan and spec"
installation the Company participates in a bid process to provide labor,
materials and installation based on plans and engineering provided by a customer
or a general contractor.
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, eliminating the need to subcontract ductwork or piping
fabrication. 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 $50,000 to
$3,000,000 per project. These projects are generally billed periodically as
costs are incurred and, in most cases, with retainage of up to 10% held back
until completion and successful start-up of the HVAC system.
The Company also installs process cooling systems, building automation
controls 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 to maintain pre-established temperature or
climate standards for commercial or industrial facilities. Building automation
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. This monitoring can be performed on-site or remotely through a
PC-based communications system. The monitoring system will communicate an
exception when an operating 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 material,
support utilities and finished products.
MAINTENANCE, REPAIR AND REPLACEMENT SERVICES. The Company's maintenance,
repair and replacement services comprised approximately 40% of the Company's
1999 consolidated revenues, and include the maintenance, repair, replacement,
reconfiguration and monitoring of HVAC systems and industrial process piping.
Over two-thirds of the Company's maintenance, repair and replacement 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-effective, energy-
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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
communication technology to process orders, arrange service calls, communicate
with customers, dispatch technicians and invoice customers. Service technicians
work from service vehicles 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. The Company also provides remote
monitoring of temperature, pressure, humidity and air flow for HVAC systems. 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.
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 extend to a month or more. Chillers for large units typically have the
longest delivery time and generally have lead times of up to six months. The
major components of commercial 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 building automation control systems are Honeywell Inc., Johnson
Controls Inc., York, Automated Logic, Novar and Andover Control Corporation. The
Company does not have any significant contracts guaranteeing the Company a
supply of raw materials or components.
SALES AND MARKETING
The Company has a diverse customer base, with no single customer accounting
for more than 2% of consolidated 1999 revenues. Management and a dedicated sales
force have been responsible for developing and maintaining successful long-term
relationships with key customers. Customers 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 receives technical and sales training to enhance the
comprehensive selling skills necessary to serve the HVAC needs of their
customers.
The Company has a national sales team to capitalize on cross-marketing and
business development opportunities that management believes are available to the
Company as a regional or national provider of comprehensive commercial and
industrial HVAC and related services. Management believes that it can
increasingly leverage the diverse technical and marketing strengths at
individual locations to expand the services offered in other local markets.
EMPLOYEES
As of December 31, 1999, the Company had 10,853 employees, including 593
management personnel, 8,829 engineers, service and installation technicians, 313
sales personnel and 1,118 administrative personnel. As it executes its growth
strategy, the Company expects the number of employees to increase. Certain of
the Company's subsidiaries have collective bargaining agreements that cover, in
the aggregate, approximately 2,690 employees. The Company has not experienced
any significant strikes or work stoppages and believes its relations with
employees covered by collective bargaining agreements are good.
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RECRUITING, TRAINING AND SAFETY
The Company's continued 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 has a national recruiting network and also recruits via
the internet and at local technical schools and community colleges where
students focus on learning basic industry skills. Additionally, Comfort Systems
provides on-the-job training, technical training, apprenticeship programs,
attractive benefit packages, steady employment and career advancement
opportunities within the Company.
The Company is working to establish "best practices" safety programs
throughout its operations to ensure that all technicians comply with safety
standards established by the Company and federal, state and local laws and
regulations. Additionally, the Company has implemented a "best practices"
safety program throughout its operations, which provides employees with
incentives to improve safety performance and decrease workplace accidents.
Regional safety directors establish safety programs and benchmarking to improve
safety within their region. 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.
RISK MANAGEMENT, INSURANCE AND LITIGATION
The primary risks in the Company's operations are bodily injury, property
damage and injured workers' compensation. The Company maintains liability
insurance for bodily injury, third party property damage and workers'
compensation which it considers sufficient to insure against these risks,
subject to self-insured amounts.
The Company is subject to certain claims and lawsuits arising in the normal
course of business and maintains various insurance coverages to minimize
financial risk associated with these claims. The Company has provided accruals
for probable losses and legal fees associated with certain of these actions in
its consolidated financial statements. In the opinion of management, uninsured
losses, if any, resulting from the ultimate resolution of these matters will not
have a material adverse effect on the Company's financial position or results of
operations.
The Company's subsidiaries typically warrant labor for the first year after
installation on new HVAC systems and pass through to the customer manufacturers'
warranties on equipment. The Company's subsidiaries generally warrant labor for
30 days after servicing of existing HVAC systems. The Company does not expect
warranty claims to have a material adverse effect on its financial position or
results of operations.
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's strategy of focusing on both the highly
consultative "design and build" installation market and the maintenance,
repair and replacement market promotes the development and strengthening of
long-term customer relationships. In addition, the Company's ability to provide
multi-location coverage, project financing and specialized technical skills for
facilities owners gives it a strategic advantage over smaller competitors who
may be unable to provide these services to customers at a competitive price.
Many of the Company's competitors are small, owner-operated companies that
typically operate in a limited geographic area. There are also public companies,
divisions of utility companies and equipment manufacturers that are focused on
providing HVAC services in some of the same service lines provided by the
Company. Certain of the Company's competitors and potential competitors may have
greater financial
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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.
FACILITIES AND VEHICLES
The Company leases the majority of its facilities. In most instances these
leases are with the former owners who are now employed by the Company. Leased
premises range in size from 1,500 square feet to over 100,000 square feet. The
Company believes that its facilities are sufficient for its current needs.
The Company operates a fleet of various owned or leased service trucks,
vans and support vehicles. The Company believes that these vehicles generally
are well-maintained and adequate for its current 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 of the Company's service technicians who work in the state or
county that issued the permit or license. The Company is implementing 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
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.
EXECUTIVE OFFICERS
The Company has five executive officers.
Fred M. Ferreira, age 57, 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 Capital Ventures II, L.L.C.
("Notre") and was primarily responsible for the organization of the Company.
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.
J. Gordon Beittenmiller, age 41, has served as Executive Vice President,
Chief Financial Officer and a director of Comfort Systems since May 1998, and
was Senior Vice President, Chief Financial Officer and a director of Comfort
Systems from February 1997 to April 1998. From 1994 to February 1997, Mr.
Beittenmiller was Corporate Controller of Keystone International, Inc.
("Keystone"), a publicly-traded
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manufacturer of industrial valves and actuators, and served Keystone in other
financial positions from 1991 to 1994. From 1987 to 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.
Gary E. Hess, age 52, has served as Chief Operating Officer and Executive
Vice President of Comfort Systems since June 1999 and prior to this he was the
Senior Vice President -- Operations from February 1999 to May 1999. In March
2000, the Board of Directors unanimously elected Mr. Hess as a director of
Comfort Systems. He served Comfort Systems as director of its Northeast region
from August 1998 to January 1999. Prior to that, he was employed by Hess
Mechanical Corporation, a wholly owned subsidiary of the Company, since 1980,
serving as Chairman and Chief Executive Officer. Mr. Hess was President of
Associated Builders and Contractors during 1996 and was selected as their 1997
Contractor of the Year. He is a decorated Vietnam veteran.
Reagan S. Busbee, age 36, 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 consolidator of the
printing industry. From August 1986 to May 1992, he held various positions and
was a Certified Public Accountant with Arthur Andersen LLP.
William George, III, age 35, has served as Senior Vice President, General
Counsel and Secretary of Comfort Systems since May 1998, and was Vice President,
General Counsel and Secretary of Comfort Systems from March 1997 to April 1998.
From October 1995 to February 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 Boston,
Massachusetts law firm.
ITEM 2. PROPERTIES
Most of the Company's subsidiaries lease the real property and buildings
from which they operate. The Company's facilities consist of offices, shops,
maintenance and warehouse facilities. Generally, leases range from five to ten
years and are on terms the Company believes to be commercially reasonable.
Certain of these facilities are leased from related parties. In order to
maximize available capital, the Company generally intends to continue to lease
the majority of its properties. The Company believes that its facilities are
adequate for its current needs.
The Company leases its executive and administrative offices in Houston,
Texas.
ITEM 3. LEGAL PROCEEDINGS
The Company is party to litigation in the ordinary course of business.
There are currently no pending legal proceedings that, in management's opinion,
will have a material adverse effect on the Company's consolidated operating
results or financial condition.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The following table sets forth the reported high and low sales prices of
the Common Stock for the quarters indicated as traded at the New York Stock
Exchange. The Common Stock is traded under the symbol FIX.
<TABLE>
<CAPTION>
HIGH LOW
---------- ----------
<S> <C> <C>
First Quarter, 1998.................. $ 22.25 $ 18.125
Second Quarter, 1998................. $ 24.75 $ 19.125
Third Quarter, 1998.................. $ 26.625 $ 15.25
Fourth Quarter, 1998................. $ 20.50 $ 14.1875
First Quarter, 1999.................. $ 18.50 $ 11.375
Second Quarter, 1999................. $ 18.5625 $ 13.125
Third Quarter, 1999.................. $ 18.625 $ 11.25
Fourth Quarter, 1999................. $ 12.00 $ 6.4375
January 1 - March 13, 2000........... $ 9.375 $ 6.75
</TABLE>
As of March 13, 2000, there were approximately 1,458 stockholders of record
of the Company's Common Stock, and the last reported sale price on that date was
$7.875 per share.
The Company has never declared or paid a dividend on its Common Stock. The
Company currently expects to retain future earnings in order to repay debt,
repurchase shares of the Company's Common Stock and finance growth and,
consequently, does not intend to declare any dividend on the Common Stock for
the foreseeable future. In addition, the Company's revolving credit agreement
restricts the ability of the Company to pay dividends without the lenders'
consent. The Company's Restricted Voting Common Stock converts to Common Stock
upon sale and under certain other conditions.
RECENT SALES OF UNREGISTERED SECURITIES
During 1999, the Company issued a total of 256,363 unregistered shares of
its Common Stock in connection with the acquisition of four HVAC businesses,
none of which was material. In each case, the shares were issued without
registration under the Securities Act in reliance on the exemption provided by
Section 4(2), no public offering being involved.
ITEM 6. SELECTED FINANCIAL DATA
Comfort Systems acquired the 12 Founding Companies in connection with the
IPO on July 2, 1997. Subsequent to the IPO and through December 31, 1999, the
Company completed 107 acquisitions, 17 of which were accounted for as
poolings-of-interests (the "Pooled Companies") and 90 of which were accounted
for as purchases (the "Purchased Companies"). The following selected
historical financial data has been derived from the audited financial statements
of the Company for each of the four years ended December 31, 1996, 1997, 1998,
and 1999. The remaining selected historical financial data of the Company has
been derived from unaudited financial statements of the Company. These unaudited
financial statements have been prepared on the same basis as the audited
financial statements of the Company, and in the opinion of the Company, reflect
all adjustments necessary for a fair presentation of that historical
information. The historical financial statement data reflects the acquisitions
of the Founding Companies and Purchased Companies as of their respective
acquisition dates and reflects 15 of the Pooled Companies (the "Restated
Companies") for all periods presented. Two of the Pooled Companies are
considered immaterial poolings based upon criteria set forth by the Securities
and Exchange Commission and have not been
9
<PAGE>
restated for all periods presented. The selected historical financial data below
should be read in conjunction with the historical Consolidated Financial
Statements and related notes.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------------------------------
1995 1996 1997 1998 1999
---------- ---------- ---------- ---------- ------------
<S> <C> <C> <C> <C> <C>
(IN THOUSANDS)
STATEMENT OF OPERATIONS DATA:
Revenues........................ $ 126,794 $ 161,419 $ 297,646 $ 853,961 $ 1,370,035
Operating income................ $ 4,011 $ 6,575 $ 5,699 $ 68,497 $ 93,204
Net income (loss)............... $ 3,137 $ 4,589 $ (2,064) $ 35,013 $ 42,322
BALANCE SHEET DATA:
Working capital................. $ 10,110 $ 13,971 $ 63,137 $ 133,390 $ 172,566
Total assets.................... $ 42,035 $ 50,366 $ 308,779 $ 789,293 $ 943,272
Total debt, including current
portion....................... $ 9,076 $ 8,376 $ 24,726 $ 236,446 $ 305,833
Stockholders' equity............ $ 10,731 $ 15,429 $ 217,635 $ 379,932 $ 418,965
</TABLE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
INTRODUCTION
The following discussion should be read in conjunction with the
consolidated historical financial statements of the Company and related notes
thereto. This discussion contains forward-looking statements regarding the
business and industry of Comfort Systems within the meaning of the Private
Securities Litigation Reform Act of 1995. These statements are based on the
current plans and expectations of the Company and involve risks and uncertanties
that could cause actual future activities and results of operations to be
materially different from those set forth in the forward-looking statements.
Important factors that could cause actual results to differ are discussed under
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Factors Which May Affect Future Results."
Comfort Systems was founded in December 1996 to become a leading national
provider of HVAC services, primarily focusing on commercial and industrial
markets. On July 2, 1997, Comfort Systems completed the IPO and simultaneously
acquired the 12 Founding Companies, which are engaged in providing HVAC
services. Subsequent to the IPO, and through December 31, 1999, the Company
acquired 107 additional HVAC and complementary businesses. Of these additional
acquisitions, 17 acquisitions were accounted for as poolings-of-interests and
are referred to herein as the Pooled Companies, and the remaining 90
acquisitions were accounted for as purchases and are referred to herein as the
Purchased Companies. The consolidated historical financial statements of the
Company have been retroactively restated to give effect to the operations of 15
of the Pooled Companies. Two of the Pooled Companies are considered immaterial
poolings based upon criteria set forth by the Securities and Exchange Commission
and have not been restated for all periods presented.
Historical results are not necessarily indicative of future results of the
Company because, among other things, the Acquired Companies were not under
common control or management prior to their acquisition. The results of the
Company have historically been subject to seasonal fluctuations. The timing and
magnitude of acquisitions, assimilation costs and the seasonal nature of the
HVAC industry may materially affect operating results. Accordingly, the
operating results for any period are not necessarily indicative of the results
that may be achieved for any subsequent period. These historical statements of
operations should be read in conjunction with the historical Consolidated
Financial Statements and related notes of Comfort Systems, filed herewith.
RESULTS OF OPERATIONS -- HISTORICAL
The following historical consolidated financial information represents the
operations of the Restated Companies for all periods presented and the Founding
Companies and Purchased Companies from their respective dates of acquisition.
Historical selling, general, and administrative expenses for the periods
presented in the consolidated financial statements of the Company reflect
compensation and related benefits
10
<PAGE>
the owners of those businesses received prior to acquisition. The following
historical financial information for 1997 includes the non-recurring, non-cash
compensation charge of $11.6 million recorded by Comfort Systems in the first
quarter of 1997, non-recurring acquisition-related costs and reflects normal
recurring corporate costs of Comfort Systems subsequent to the IPO. This
compensation charge is not deductible for federal and state income taxes. This
historical consolidated information has been derived from the audited
consolidated financial statements of the Company.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------------------------------------
1997 1998 1999
--------------------- --------------------- -----------------------
<S> <C> <C> <C> <C> <C> <C> <C>
(IN THOUSANDS)
Revenues............................. $ 297,646 100.0% $ 853,961 100.0% $ 1,370,035 100.0%
Cost of services..................... 220,419 74.1 647,512 75.8 1,077,329 78.6
---------- --------- ---------- --------- ------------ ---------
Gross profit......................... 77,227 25.9 206,449 24.2 292,706 21.4
Selling, general and administrative
expenses........................... 69,677 23.4 130,820 15.3 187,771 13.7
Goodwill amortization................ 1,851 0.6 7,132 0.8 11,731 0.9
---------- --------- ---------- --------- ------------ ---------
Operating income..................... 5,699 1.9 68,497 8.1 93,204 6.8
Other income (expense)............... (161) -- (6,435) (0.8) (19,144) (1.4)
---------- --------- ---------- --------- ------------ ---------
Income before taxes.................. 5,538 1.9 62,062 7.3 74,060 5.4
Provision for income taxes........... 7,602 -- 27,049 -- 31,738 --
---------- --------- ---------- --------- ------------ ---------
Net income (loss).................... $ (2,064) (0.7)% $ 35,013 4.1% $ 42,322 3.1%
========== ========= ========== ========= ============ =========
</TABLE>
1999 COMPARED TO 1998
REVENUES -- Revenues increased $516.1 million, or 60.4%, to $1.4 billion in
1999 compared to 1998. The increase in revenues over the prior year is primarily
due to the acquisition of Purchased Companies in 1998 and 1999, however, the
Company has experienced lower internal revenue growth in the latter part of
fiscal 1999 as compared to previous periods. The Company believes that this is
primarily attributable to a slowing in the growth of the construction industry
due to shortages in both labor and specialty building materials, which in turn
impacted HVAC installations.
GROSS PROFIT -- Gross profit increased $86.3 million, or 41.8%, to $292.7
million in 1999 compared to 1998. The increase in gross profit is primarily due
to the acquisitions described above. As a percentage of revenues, gross profit
decreased from 24.2% in 1998 to 21.4% in 1999. This decrease primarily resulted
from the change in classification of certain costs from selling, general and
administrative expenses to cost of services. These costs relate to activities
that directly support project or service work. Management believes this revised
presentation better aligns the presentation of cost of services and selling,
general and administrative expenses across all of our acquired operations.
Excluding the effect of this change in classification for 1999 of approximately
$37.2 million, gross profit as a percentage of revenues remained relatively
unchanged at 24.1% in 1999 versus 24.2% in 1998. During 1999, the Company
experienced increased gross profit margins from strong performances in
commercial and industrial markets in the Northeast, Phoenix and Orlando as well
as operating synergies achieved between its western Michigan companies. However,
in the latter part of fiscal 1999 the Company has experienced lower internal
revenue growth as a result of construction industry capacity issues as discussed
above. In addition, there has been a shift in the mix of installation projects
to higher labor-intensive projects with lower gross profit percentages, pricing
competition in certain markets and execution shortfalls and inefficiencies as
the Company sought stronger revenue growth levels.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES -- SG&A increased $57.0
million, or 43.5%, to $187.8 million in 1999 compared to 1998. Most of this
increase was related to Purchased Companies along with an increase in corporate
personnel and corporate office expenses commensurate with the increase in the
number of Acquired Companies. As a percentage of revenues, selling, general and
administrative expenses decreased from 15.3% in 1998 to 13.7% in 1999. This
decrease is primarily attributable to the change in classification of certain
costs as described above. Excluding the effect of this change in classification
for 1999 of approximately $37.2 million, SG&A expenses as a percentage of
revenues increased from 15.3% for 1998 to 16.4% for 1999. This increase in SG&A
as a percentage of revenues resulted primarily from lower internal revenue
growth as discussed above and increased healthcare costs under the Company's
self-insured medical plan. SG&A for 1998 includes $1.8 million of salaries
11
<PAGE>
and benefits paid to the former owners of the Pooled Companies which the former
owners contractually agreed would not continue following their acquisition by
Comfort Systems.
OPERATING INCOME -- Operating income increased $24.7 million, or 36.1%, to
$93.2 million in 1999 compared to 1998 primarily due to the addition of
Purchased Companies. As a percentage of revenues, operating income decreased
from 8.1% in 1998 to 6.8% in 1999. The decrease in operating income as a
percentage of revenues resulted from issues discussed above.
OTHER INCOME (EXPENSE) -- Other expense, net, increased $12.7 million, or
197.5%, to $19.1 million in 1999 compared to 1998 primarily due to the increase
in interest expense related to the acquisition of the Purchased Companies.
1998 COMPARED TO 1997
REVENUES -- Revenues increased $556.3 million, or 186.9%, to $854.0 million
in 1998 compared to 1997. The increase in revenues over the prior year was
primarily due to the acquisition of the Founding Companies and Purchased
Companies coupled with broad growth in certain of its Pooled Companies located
in the Cincinnati, Syracuse and Kansas City, Kansas markets.
GROSS PROFIT -- Gross profit increased $129.2 million, or 167.3%, to $206.4
million in 1998 compared to 1997. The increase in gross profit was primarily due
to the acquisitions described above. As a percentage of revenues, gross profit
decreased from 25.9% in 1997 to 24.2% in 1998. This decline resulted primarily
from the acquisition of the Purchased Companies, which, taken as a whole, have
gross margins that are lower than the Company's historical average.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES -- SG&A, excluding goodwill
amortization, in 1997 and 1998 includes $10.3 million and $1.8 million,
respectively, of Compensation Differential and acquisition related costs which
will be eliminated prospectively. Additionally, the Company recorded the non-
recurring, non-cash compensation charge of $11.6 million in the first quarter of
1997. Excluding the Compensation Differential, the compensation charge, and
goodwill amortization, SG&A increased $81.3 million to $129.1 million in 1998.
Most of this increase was related to the Founding Companies and Purchased
Companies acquired since the IPO, along with corporate office and management
expenses associated with the Company's establishment as a public company.
OPERATING INCOME -- Operating income increased $62.8 million, or 1,101.9%
to $68.5 million in 1998 compared to 1997 primarily due to increased revenues at
the Founding Companies, the addition of the Purchased Companies and incremental
increases in volume at some of the Pooled Companies. As a percentage of
revenues, operating income increased from 1.9% in 1997 to 8.1% in 1998. As
discussed above, this increase primarily resulted from the Compensation
Differential and the compensation charge recorded in 1997.
OTHER INCOME (EXPENSE) -- Other expense, net, increased to $6.4 million in
1998 compared to 1997 primarily due to the increase in interest expense related
to the acquisition of the Purchased Companies acquired subsequent to the IPO and
through the end of 1998.
LIQUIDITY AND CAPITAL RESOURCES
For the year ended December 31, 1999, net cash provided by operating
activities was $18.4 million, or an increase of $23.9 million over the prior
year. This increase was primarily due to an increase in accounts payable and
accrued liabilities which were partially offset by an increase in accounts
receivable. Cash used in operations for 1998 was $5.5 million and cash provided
from operations in 1997 was $1.0 million.
Cash used in investing activities was $46.5 million for the year ended
December 31, 1999, primarily in connection with the acquisition of Purchased
Companies for $31.4 million, net of cash acquired. Cash flows used in investing
activities for 1998 and 1997 were $143.1 million and $57.6 million,
respectively. The uses
12
<PAGE>
of cash in 1998 and 1997 were primarily for the acquisition of the Founding
Companies and Purchased Companies, net of cash acquired.
Cash provided by financing activities for the year ended December 31, 1999
was $24.7 million primarily from net borrowings of long-term debt which were
primarily used to fund acquisitions. Net cash provided by financing activities
in 1998 was $137.5 million and was primarily attributable to the $16.7 million
received from the second public offering (the "Second Public Offering") and
net borrowings of long-term debt of $124.2 million, which were primarily used to
fund acquisitions. Net cash provided by financing activities in 1997 was $66.6
million and was primarily attributable to the $79.9 million from the IPO, which
was partially offset by a net reduction in outstanding debt.
On July 2, 1997, Comfort Systems completed the offering of 6,100,000 shares
of Common Stock to the public at $13.00 per share. The net proceeds to Comfort
Systems from the IPO (after deducting underwriting commissions and offering
expenses) were $68.8 million. Of this amount, $45.3 million was used to pay the
cash portion of the purchase prices of the Founding Companies. In connection
with the IPO, the Company granted its underwriters an option to sell an
additional 915,000 shares at $13.00 per share. On July 9, 1997, the underwriters
exercised this option. Net proceeds to the Company from this sale of shares were
$11.1 million after deducting underwriting commissions.
On June 16, 1998, the Company completed a Second Public Offering of 400,000
shares of its Common Stock to the public at $20.00 per share. The net proceeds
from this offering of $7.6 million, after deducting underwriting commissions and
offering expenses, were used to repay debt. In connection with the Second Public
Offering, the Company granted its underwriters an option to sell additional
shares at $20.00 per share. On July 21, 1998, the underwriters exercised this
option. An additional 461,479 shares of Common Stock were sold and the net
proceeds of $8.8 million, after deducting underwriting commissions, were used to
repay debt.
In July 1997, the Company entered into a credit agreement with Bank One,
Texas, N.A. (the "Credit Facility"). The Credit Facility was amended and
restated in September 1997 primarily to provide for additional banks to lend to
the Company under the Credit Facility. At that time, the Credit Facility
provided the Company with an unsecured revolving line of credit of $75 million.
The Credit Facility was further amended in April 1998 and again in December 1998
in order to increase borrowing capacity and to provide for additional banks to
lend to the Company under the Credit Facility. The Credit Facility currently
provides the Company with a revolving line of credit of up to $300 million
secured by accounts receivable, inventory and the shares of capital stock of the
Company's subsidiaries. The Company currently has a choice of two interest rate
options when borrowing under the Credit Facility. Under one option, the interest
rate is determined based on the higher of the Federal Funds Rate plus 0.5% or
the bank's prime rate. An additional margin of zero to 1.25% is then added to
the higher of these two rates. Under the other interest rate option, borrowings
bear interest based on designated short-term Eurodollar rates (which generally
approximate LIBOR) plus 1.0% to 2.5%. The additional margin for both options
depends on the ratio of the Company's debt to EBITDA. Commitment fees of 0.25%
to 0.5% per annum, also depending on the ratio of debt to EBITDA, are payable on
the unused portion of the facility. The Credit Facility prohibits the payment of
dividends by the Company without the lenders' approval and requires the Company
to comply with certain financial covenants. The amended Credit Facility expires
on November 1, 2001, at which time all amounts outstanding under the Credit
Facility are due.
As of December 31, 1999, the Company had borrowed $225.2 million under the
Credit Facility at an average interest rate of approximately 7.4% for the year
ended December 31, 1999. The Company's unused committed borrowing capacity under
the Credit Facility was $72.9 million at December 31, 1999. As of March 13,
2000, $249.2 million was outstanding under this Facility.
On October 5, 1999, the Company announced that its Board of Directors had
approved a share repurchase program authorizing the Company to buy up to 4
million shares of its Common Stock. As of December 31, 1999, the Company
purchased approximately 1.8 million shares at a cost of approximately $12.9
million. Subsequent to yearend, the Company has purchased approximately 0.1
million additional shares at a cost of approximately $0.8 million through March
13, 2000.
13
<PAGE>
The Company anticipates that available borrowings under its Credit Facility
and cash flow from operations will be sufficient to meet the Company's normal
working capital and capital expenditure needs, debt service requirements and
additional acquisition opportunities. Should the Company accelerate or revise
its acquisition program, the Company may need to seek additional financing
through the public or private sale of equity or debt securities or increase its
Credit Facility. There can be no assurance that the Company will secure such
financing if and when it is needed, or that such financing will be available on
terms that the Company deems acceptable.
YEAR 2000
Computers, software, and other equipment utilizing embedded technology that
use only two digits to identify a year in a date field may be unable to
accurately process certain date-based information at or after the year 2000.
This is commonly referred to as the "Year 2000 issue." The Company implemented
a Year 2000 program and used both internal and external resources to assess and
replace or reprogram computers, software and other equipment as needed. Key
areas of the Company's operations that were addressed included external
customers, external suppliers and internal computers, software and potential
back-up and contingency plans. To date, the Company has not experienced any
significant Year 2000 issues.
The Company's initial assessment identified Year 2000 issues within the
Company's operating systems. The total cost of Year 2000 enhancements was
approximately $800,000 and was funded from operating cash flows. The majority of
such costs was for the acquisition of hardware and software and were
capitalized. The remaining costs were expensed as incurred and did not have a
material effect on the results of operations.
The ability of third parties with which the Company transacts business to
adequately address remaining Year 2000 issues is outside of the Company's
control. There can be no assurance that the failure of the Company, or such
third parties, to adequately address their respective remaining Year 2000 issues
will not have a material adverse effect on the Company's financial condition or
results of operations. Accordingly, as part of the Year 2000 program,
contingency plans were developed to respond to any failures. At this time, the
Company does not expect that any failure of the Company or third parties to
achieve Year 2000 compliance will adversely affect the Company.
SEASONALITY AND CYCLICALITY
The HVAC industry is subject to seasonal variations. Specifically, the
demand for new installation and replacement is generally lower during the winter
months due to reduced construction activity 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 calendar quarters due to increased
construction activity and 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 calendar 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.
FACTORS WHICH MAY AFFECT FUTURE RESULTS
The Company's future operating results are difficult to predict and may be
affected by a number of factors, including the lack of a combined operating
history and the difficulty of integrating acquired businesses, a downturn in
construction, shortages of labor and specialty building materials, cyclical and
seasonal fluctuations in the demand for HVAC systems, the use of incorrect
estimates for bidding a fixed price contract, difficulties in implementing its
acquisition strategy and the availability of acquisition financing. As a result
of these and other factors, there can be no assurance that the Company will not
experience material fluctuations in future operating results on a quarterly or
annual basis.
The Company's success depends in part on its ability to integrate the
companies it has acquired. The businesses operated as separate, independent
entities prior to their affiliation with the Company, and there
14
<PAGE>
can be no assurance that the Company will be able to integrate the operations of
these businesses successfully or institute the necessary systems and procedures,
including accounting and financial reporting systems, to effectively manage the
combined enterprise on a profitable basis. The historical results are not
necessarily indicative of future results of the Company because, among other
things, the Acquired Companies were not under common control or management prior
to their acquisition.
Key elements of the Company's strategy are to both maintain and improve the
profitability of the individual businesses and to continue to expand the
revenues of such businesses. The Company's level of success in this strategy, if
any, will be affected by demand for new or replacement HVAC systems. In part,
such demand will be contingent upon factors outside the Company's control, such
as the level of new construction or the potential for slower replacement based
upon the overall level of activity in the economy. The HVAC industry is subject
to both seasonal and cyclical variations, meaning that temperate weather and
downturns in the domestic or regional economies will negatively affect overall
demand for the Company's services.
The Company has grown significantly through the acquisition of additional
HVAC and complementary businesses and intends to continue acquisition activity
in the future, albeit more opportunistically. However, the Company could face
difficulties in continuing to acquire select companies. The HVAC industry
continues to undergo consolidation on both a national and a regional level by
the Company and by other companies that have acquisition objectives that are
similar to the Company's objectives. Additionally, HVAC equipment manufacturers
and certain public utilities are beginning to provide maintenance, repair and
replacement services within 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.
Recently acquired businesses also involve a number of special risks,
including failure of the acquired business to achieve expected results,
diversion of management's attention and failure to retain key personnel of the
acquired business. There are also risks associated with unanticipated events or
liabilities resulting from the acquired businesses' operations prior to their
acquisition. Any of these risks, or a combination of them, could have a material
adverse effect on the Company's business, financial condition and results of
operations.
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. In addition, the Company depends on the
senior management of the businesses it acquires and regional and corporate
management to remain committed to the success of the Company. Accordingly, the
Company's ability to maintain and increase its productivity and profitability is
also affected by its ability to employ, train and retain the skilled technicians
necessary to meet the Company's service requirements, and to retain senior
management in acquired businesses and at the corporate and regional level.
HVAC systems are also 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. The Company's
failure to comply, or the costs of compliance, with such laws and regulations
could adversely affect the Company's future results.
Because of these and other factors, past financial performance should not
necessarily be considered an indicator of future performance. Investors should
not rely solely on historical trends to anticipate future results and should be
aware that the trading price of the Company's Common Stock may be subject to
wide fluctuations in response to quarter-to-quarter variations in operating
results, general conditions in the HVAC industry, the increasing supply of
tradable stock, changes in analysts' earnings estimates, recommendations by
analysts, or other events.
ITEM 7-A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is exposed to market risk primarily related to potential
adverse changes in interest rates as discussed below. Management is actively
involved in monitoring exposure to market risk and continues to develop and
utilize appropriate risk management techniques. The Company is not exposed to
any other
15
<PAGE>
significant financial market risks including commodity price risk, foreign
currency exchange risk or interest rate risks from the use of derivative
financial instruments. Management does not use derivative financial instruments
for trading or to speculate on changes in interest rates or commodity prices.
The Company's exposure to changes in interest rates primarily results from
its short-term and long-term debt with both fixed and floating interest rates.
The Company's debt with fixed interest rates consists of capital leases,
convertible subordinated notes, subordinated notes and various other notes
payable. The Company's debt with variable interest rates consists entirely of
its revolving Credit Facility. The following table presents principal amounts
(stated in thousands) and related average interest rates by year of maturity for
the Company's debt obligations and their indicated fair market value at December
31, 1999:
<TABLE>
<CAPTION>
FAIR
2000 2001 2002 2003 2004 THEREAFTER VALUE
--------- ---------- --------- --------- --------- ---------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Liabilities -- Long-Term Debt:
Variable Rate Debt.................... $ -- $ 225,215 $ -- $ -- $ -- $-- $225,215
Average Interest Rate.............. -- % 7.4% -- % -- % -- % -- % 7.4%
Fixed Rate Debt....................... $ 27,889 $ 29,274 $ 22,072 $ 1,383 $ -- $-- $ 80,618
Average Interest Rate.............. 5.8% 5.8% 5.7% 5.5% -- % -- % 5.8%
</TABLE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
Comfort Systems USA, Inc.
Report of Independent Public 17
Accountants....................
Consolidated Balance Sheets..... 18
Consolidated Statements of 19
Operations.....................
Consolidated Statements of 20
Stockholders' Equity...........
Consolidated Statements of Cash 21
Flow...........................
Notes to Consolidated Financial 22
Statements.....................
</TABLE>
16
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Comfort Systems USA, Inc.:
We have audited the accompanying consolidated balance sheets of Comfort
Systems USA, Inc. (a Delaware corporation) and subsidiaries as of December 31,
1998 and 1999, and the related consolidated statements of operations,
stockholders' equity and cash flows for each of the three years in the period
ended December 31, 1999. 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 auditing standards generally
accepted in the United States. 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
Comfort Systems USA, Inc., and subsidiaries as of December 31, 1998 and 1999,
and the consolidated results of their operations and their cash flows for each
of the three years in the period ended December 31, 1999, in conformity with
accounting principles generally accepted in the United States.
ARTHUR ANDERSEN LLP
Houston, Texas
February 22, 2000
17
<PAGE>
COMFORT SYSTEMS USA, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
1998 1999
---------- ----------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents.......... $ 6,985 $ 3,664
Accounts receivable................ 241,332 314,599
Less -- Allowance............. 4,758 5,568
---------- ----------
Accounts receivable,
net................... 236,574 309,031
Other receivables.................. 2,733 4,575
Inventories........................ 14,768 20,907
Prepaid expenses and other......... 14,264 19,891
Costs and estimated earnings in
excess of billings................ 37,228 54,575
---------- ----------
Total current assets..... 312,552 412,643
PROPERTY AND EQUIPMENT, net............. 34,413 41,964
GOODWILL, net........................... 430,526 474,529
OTHER NONCURRENT ASSETS................. 11,802 14,136
---------- ----------
Total assets............. $ 789,293 $ 943,272
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current maturities of long-term
debt.............................. $ 1,568 $ 3,353
Current maturities of notes to
affiliates and former owners...... 7,509 24,536
Accounts payable................... 74,161 96,032
Accrued compensation and
benefits.......................... 25,869 36,187
Billings in excess of costs and
estimated earnings................ 43,968 52,170
Income taxes payable............... 1,299 --
Other current liabilities.......... 24,788 27,799
---------- ----------
Total current
liabilities........... 179,162 240,077
DEFERRED INCOME TAXES................... 1,124 4,547
LONG-TERM DEBT, NET OF CURRENT
MATURITIES............................ 171,039 225,471
NOTES TO AFFILIATES AND FORMER OWNERS,
NET OF CURRENT MATURITIES............. 56,330 52,473
OTHER LONG-TERM LIABILITIES............. 1,706 1,739
---------- ----------
Total liabilities........ 409,361 524,307
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Preferred stock, $.01 par,
5,000,000 shares authorized, none
issued and outstanding............ -- --
Common stock, $.01 par, 102,969,912
shares authorized, 38,141,180 and
39,258,913 shares issued,
respectively...................... 381 393
Treasury stock, at cost, 1,695,524
shares at December 31, 1999....... -- (11,978)
Additional paid-in capital......... 333,978 342,655
Retained earnings.................. 45,573 87,895
---------- ----------
Total stockholders'
equity................ 379,932 418,965
---------- ----------
Total liabilities and
stockholders'
equity................ $ 789,293 $ 943,272
========== ==========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
18
<PAGE>
COMFORT SYSTEMS USA, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------
1997 1998 1999
---------- ---------- ------------
<S> <C> <C> <C>
REVENUES............................. $ 297,646 $ 853,961 $ 1,370,035
COST OF SERVICES..................... 220,419 647,512 1,077,329
---------- ---------- ------------
Gross profit............... 77,227 206,449 292,706
SELLING, GENERAL AND ADMINISTRATIVE
EXPENSES........................... 69,102 130,370 187,771
GOODWILL AND OTHER AMORTIZATION...... 1,851 7,132 11,731
ACQUISITION RELATED EXPENSES......... 575 450 --
---------- ---------- ------------
Operating income........... 5,699 68,497 93,204
OTHER INCOME (EXPENSE):
Interest income................. 1,187 957 841
Interest expense................ (1,331) (7,633) (20,033)
Other........................... (17) 241 48
---------- ---------- ------------
Other income (expense)..... (161) (6,435) (19,144)
---------- ---------- ------------
INCOME BEFORE INCOME TAXES........... 5,538 62,062 74,060
PROVISION FOR INCOME TAXES........... 7,602 27,049 31,738
---------- ---------- ------------
NET INCOME (LOSS).................... $ (2,064) $ 35,013 $ 42,322
========== ========== ============
NET INCOME (LOSS) PER SHARE:
Basic........................... $ (0.11) $ 1.06 $ 1.10
========== ========== ============
Diluted......................... $ (0.11) $ 1.04 $ 1.09
========== ========== ============
SHARES USED IN COMPUTING NET INCOME
(LOSS) PER SHARE:
Basic........................... 18,954 32,962 38,561
========== ========== ============
Diluted......................... 18,954 34,329 39,699
========== ========== ============
</TABLE>
Reflects a 121.1387-for-one stock split effective on March 19, 1997
The accompanying notes are an integral part of these consolidated financial
statements.
19
<PAGE>
COMFORT SYSTEMS USA, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
COMMON STOCK TREASURY STOCK ADDITIONAL TOTAL
------------------ --------------------- PAID-IN RETAINED STOCKHOLDERS'
SHARES AMOUNT SHARES AMOUNT CAPITAL EARNINGS EQUITY
--------- ------ ---------- -------- ---------- --------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE AT DECEMBER 31, 1996............ 6,066,312 $ 60 -- $ -- $ 216 $15,153 $ 15,429
Issuance of Common Stock:
Initial Public Offering......... 7,015,000 70 -- -- 79,805 -- 79,875
Acquisition of Founding
Companies..................... 9,720,927 98 -- -- 100,999 -- 101,097
Issuance of management shares... 4,118,708 41 -- -- 11,556 -- 11,597
Acquisition of Purchased
Companies..................... 1,092,489 11 -- -- 13,253 -- 13,264
S Corporation distributions made by
certain Pooled Companies.......... -- -- -- -- -- (2,191) (2,191)
Adjustments to conform fiscal
year-ends of Pooled Companies..... -- -- -- -- -- 727 727
Net loss............................ -- -- -- -- -- (2,064) (2,064)
Other............................... -- -- -- -- -- (99) (99)
--------- ------ ---------- -------- ---------- --------- -------------
BALANCE AT DECEMBER 31, 1997............ 28,013,436 280 -- -- 205,829 11,526 217,635
Issuance of Common Stock:
Second Public Offering.......... 861,479 9 -- -- 15,892 -- 15,901
Acquisition of Purchased
Companies..................... 9,212,573 92 -- -- 111,456 -- 111,548
Issuance of Employee Stock
Purchase Plan shares.......... 29,362 -- -- -- 482 -- 482
Issuance of shares for options
exercised..................... 24,330 -- -- -- 319 -- 319
S Corporation distributions made by
certain Pooled Companies.......... -- -- -- -- -- (966) (966)
Net income.......................... -- -- -- -- -- 35,013 35,013
--------- ------ ---------- -------- ---------- --------- -------------
BALANCE AT DECEMBER 31, 1998............ 38,141,180 381 -- -- 333,978 45,573 379,932
Issuance of Common Stock:
Acquisition of Purchased
Companies..................... 958,533 10 125,197 885 6,164 -- 7,059
Issuance of Employee Stock
Purchase Plan shares.......... 142,276 2 -- -- 2,036 -- 2,038
Issuance of shares for options
exercised..................... 16,924 -- -- -- 477 -- 477
Common Stock repurchases............ -- -- (1,820,721) (12,863) -- -- (12,863)
Net income.......................... -- -- -- -- -- 42,322 42,322
--------- ------ ---------- -------- ---------- --------- -------------
BALANCE AT DECEMBER 31, 1999............ 39,258,913 $393 (1,695,524) $(11,978) $342,655 $87,895 $ 418,965
========= ====== ========== ======== ========== ========= =============
</TABLE>
Reflects a 121.1387-for-one stock split effective on March 19, 1997
The accompanying notes are an integral part of these consolidated financial
statements.
20
<PAGE>
COMFORT SYSTEMS USA, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------
1997 1998 1999
---------- ------------ ------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)....................... $ (2,064) $ 35,013 $ 42,322
Adjustments to reconcile net income
(loss) to net cash provided by (used
in) operating activities
Depreciation and amortization
expense.......................... 4,786 14,001 23,055
Bad debt expense................... 583 1,253 1,650
Compensation expense related to
issuance of management shares.... 11,556 -- --
Deferred tax expense (benefit)..... (630) 960 1,339
Gain on sale of property and
equipment........................ (95) (274) (260)
Adjustment to conform year-end of
certain Pooled Companies......... 727 -- --
Changes in operating assets and
liabilities, net of effects of
acquisitions of Founding and
Purchased Companies --
(Increase) decrease in --
Receivables, net......... (12,066) (34,915) (58,096)
Inventories.............. 1,008 (788) (4,822)
Prepaid expenses and
other current
assets................ 503 2,437 3,213
Cost and estimated
earnings in excess of
billings.............. (5,167) (7,926) (15,433)
Other noncurrent
assets................ 65 113 (293)
Increase (decrease) in --
Accounts payable and
accrued liabilities... 1,170 (14,991) 20,166
Billings in excess of
costs and estimated
earnings.............. 546 208 6,080
Other, net............... 31 (616) (507)
---------- ------------ ------------
Net cash provided by (used in)
operating activities....... 953 (5,525) 18,414
---------- ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and
equipment........................ (4,501) (11,137) (16,054)
Proceeds from sales of property and
equipment........................ 936 1,369 1,507
Cash paid for Founding Companies,
net of cash acquired............. (42,295) -- --
Cash paid for Purchased Companies,
net of cash acquired............. (11,781) (133,338) (31,417)
Other.............................. -- -- (500)
---------- ------------ ------------
Net cash used in investing
activities................. (57,641) (143,106) (46,464)
---------- ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments on long-term debt......... (38,157) (109,508) (236,372)
Borrowings of long-term debt....... 27,107 233,684 271,706
S Corporation distributions paid by
certain Pooled Companies......... (2,090) (966) --
Proceeds from issuance of common
stock, net of offering costs..... 79,916 16,702 2,258
Repurchases of common stock........ -- -- (12,863)
Other.............................. (189) (2,393) --
---------- ------------ ------------
Net cash provided by financing
activities................. 66,587 137,519 24,729
---------- ------------ ------------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS........................... 9,899 (11,112) (3,321)
CASH AND CASH EQUIVALENTS, beginning of
year.................................. 8,198 18,097 6,985
---------- ------------ ------------
CASH AND CASH EQUIVALENTS, end of
year.................................. $ 18,097 $ 6,985 $ 3,664
========== ============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
21
<PAGE>
COMFORT SYSTEMS USA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999
1. BUSINESS AND ORGANIZATION:
Comfort Systems USA, Inc., a Delaware corporation ("Comfort Systems" and
collectively with its subsidiaries, the "Company"), is a leading national
provider of comprehensive heating, ventilation and air conditioning ("HVAC")
installation, maintenance, repair and replacement services. Founded in December
1996, the Company is composed of companies within the commercial and industrial
HVAC markets, and performs most of its services within manufacturing plants,
office buildings, retail centers, apartment complexes, and healthcare, education
and government facilities. In addition to standard HVAC services, the Company
also provides specialized applications such as process cooling, control systems,
electronic monitoring and process piping. Certain locations also perform related
services such as electrical and plumbing.
On July 2, 1997, Comfort Systems completed the initial public offering (the
"IPO") of its common stock (the "Common Stock") and simultaneously acquired
12 companies (collectively referred to as the "Founding Companies") engaged in
providing HVAC services. The Founding Companies had 18 operating locations in 10
states. Subsequent to the IPO, and through December 31, 1999, the Company
acquired 107 additional HVAC and complementary businesses (collectively with the
Founding Companies, the "Acquired Companies"). The companies acquired
subsequent to the IPO added 108 operating locations in 21 additional states.
These acquisitions included 26 "tuck-in" operations that have been or are
currently being integrated with existing Company operations.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
BASIS OF PRESENTATION
For financial statement purposes, Comfort Systems has been identified as
the accounting acquirer. Accordingly, the historical financial statements
include those of Comfort Systems since December 1996. Of the 107 acquisitions
noted above, 17 were accounted for as poolings-of-interests (the "Pooled
Companies") and 90 were accounted for as purchases (the "Purchased
Companies"). These consolidated financial statements reflect the acquisitions
of the Founding Companies and Purchased Companies as of their respective
acquisition dates and reflects 15 of the Pooled Companies (the "Restated
Companies") for all periods presented. Two of the Pooled Companies are
considered immaterial poolings based upon criteria set forth by the Securities
and Exchange Commission and have not been restated for all periods presented.
The acquisitions of the Founding and Purchased Companies were accounted for
using the purchase method of accounting. The allocations of the purchase prices
to the assets acquired and liabilities assumed of certain of these companies
have been recorded based on preliminary estimates of fair value and may be
changed as additional information becomes available.
Prior to their acquisition by Comfort Systems, seven of the Pooled
Companies reported annual results based on fiscal year-ends other than December
31. An adjustment to conform the year-ends of five of these companies to
December 31 year-ends was made in 1996. An adjustment to conform the year-ends
of two of these companies to December 31 year-ends was made in 1997 resulting in
an increase of approximately $727,000 to retained earnings and cash flows for
1997.
PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements include the accounts of
Comfort Systems and its wholly-owned subsidiaries. All significant intercompany
accounts and transactions have been eliminated.
22
<PAGE>
COMFORT SYSTEMS USA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
CASH FLOW INFORMATION
The Company considers all highly liquid investments purchased with an
original maturity of three months or less to be cash equivalents.
Cash paid for interest in 1997, 1998 and 1999 was approximately $0.7
million, $6.6 million and $17.8 million, respectively. Cash paid for income
taxes in 1997, 1998 and 1999 was approximately $1.0 million, $33.3 million and
$33.6 million, respectively.
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 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
expected 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 over the
remaining useful life of the equipment. 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.
GOODWILL
Goodwill represents the excess of the aggregate purchase price paid by the
Company in acquisitions accounted for as purchases over the fair value of the
net tangible assets acquired. Goodwill is amortized on a straight-line basis
over periods not exceeding 40 years.
As of December 31, 1998 and 1999, accumulated amortization of goodwill was
approximately $9.1 million and $20.7 million, respectively.
LONG-LIVED ASSETS
Long-lived assets are comprised principally of goodwill and property and
equipment. The Company periodically evaluates whether events and circumstances
have occurred that indicate that the remaining balances of these assets may not
be recoverable. The Company uses an estimate of future income from operations
and cash flows, as well as other economic and business factors as a measure of
recoverability of these assets.
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.
Contract costs include all direct material (net of estimated rebates), labor and
subcontract costs and those indirect costs related to contract performance, such
as indirect labor, supplies, tools, repairs and depreciation costs. 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 revenues, and their effects are recognized in the period in which
the revisions are determined.
23
<PAGE>
COMFORT SYSTEMS USA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Receivable balances billed but not paid by customers pursuant to retainage
provisions in construction contracts are 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 is billed and collected in the
upcoming fiscal year. The retainage balances at December 31, 1998 and 1999 are
$45.3 million and $58.2 million, respectively.
WARRANTY COSTS
The Company typically 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 based upon the historical
level of warranty claims and management's estimate of future costs.
INCOME TAXES
The Company files a consolidated return for federal income tax purposes.
Income taxes are provided for under the liability method, which takes into
account differences between financial statement treatment and tax treatment of
certain transactions. Deferred tax assets represent the tax effect of activity
that has been reflected in the financial statements but which will not be
deductible for tax purposes until future periods. Deferred tax liabilities
represent the tax effect of activity that has been reflected in the financial
statements but which will not be taxable until future periods.
Certain of the Pooled Companies were S Corporations for income tax purposes
and, accordingly, any income tax liabilities for the periods prior to the
acquisition date are the responsibility of the respective stockholders. All
acquired entities are subject to corporate income taxes subsequent to their
acquisition.
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 revenues, expenses, assets,
liabilities and contingent assets and liabilities at the date of the financial
statements. Actual results could differ from those estimates.
CONCENTRATIONS OF CREDIT RISK
The Company provides services to a broad range of geographical regions. The
Company's credit risk primarily consists of receivables from a variety of
customers including general contractors, property owners and developers, and
commercial and industrial companies. The Company reviews its accounts receivable
and provides allowances as deemed necessary.
The Company's financial instruments consist of cash and cash equivalents,
accounts receivable, receivables from related parties, other receivables,
accounts payable, a line of credit, notes payable, notes payable to related
parties and long-term debt. The Company believes that the carrying value of
these instruments on the accompanying balance sheets approximates their fair
value.
CHANGE IN CLASSIFICATION OF CERTAIN COSTS
During 1999, the Company began presenting certain costs in cost of services
that related to activities that directly support project or service work. These
costs were previously presented in selling, general and administrative expenses
(SG&A). Management believes this revised presentation better aligns cost of
services and SG&A across all acquired operations. The change in classification
in 1999 resulted in approximately $37.2 million of costs included in cost of
services which would have been included in SG&A under the prior presentation.
Exclusive of this change in classification, gross profit in 1999 would have been
approximately $329.9 million. Prior periods have not been restated.
24
<PAGE>
COMFORT SYSTEMS USA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
3. BUSINESS COMBINATIONS:
POOLINGS
During 1997 and 1998, the Company acquired all of the outstanding stock of
the Pooled Companies in exchange for 4,507,406 and 1,437,767 shares of Common
Stock, respectively. These acquisitions have been accounted for as
poolings-of-interests as described in Note 2. These companies provide HVAC and
related services. The historical financial statements for 1997 and 1998 reflect
the operations of the Restated Companies prior to their acquisition by the
Company.
PURCHASES
Subsequent to the IPO, and through December 31, 1997, Comfort Systems
acquired 13 of the Purchased Companies. These companies provide HVAC and related
services. The aggregate consideration paid in these transactions was $14.5
million in cash, 1,092,489 shares of the Company's stock with a market value at
the date of acquisition totaling $13.3 million and $5.0 million in the form of
convertible subordinated notes. Subsequent to the issuance of certain of the
convertible subordinated notes, the Company entered into agreements with certain
of the convertible noteholders to modify the terms of $4.7 million of these
notes in order to eliminate the provisions relating to convertibility into the
Company's Common Stock. The remaining convertible subordinated notes have
subsequently been paid.
During 1998, the Company acquired 52 of the Purchased Companies. These
companies provide HVAC and related services. The aggregate consideration paid in
these transactions was $161.2 million in cash, 9,212,573 shares of the Company's
stock with a market value at the date of acquisition totaling $111.5 million,
$57.4 million in the form of convertible subordinated notes and $3.1 million in
the form of subordinated notes (collectively the "Notes"). Subsequent to the
issuance of certain of the convertible subordinated notes, the Company entered
into agreements with certain of the convertible noteholders to modify the terms
of $49.3 million of these notes in order to eliminate the provisions relating to
convertibility into the Company's Common Stock. The remaining convertible
subordinated notes are convertible at various dates in 2000 into 74,975 shares
of Common Stock.
During 1999, the Company acquired 25 of the Purchased Companies. These
companies provide HVAC and related services. The aggregate consideration paid in
these transactions was $38.0 million in cash, 1,151,907 shares of the Company's
stock with a market value at the date of acquisition totaling $8.5 million, $2.2
million in the form of convertible subordinated notes and $21.3 million in the
form of subordinated notes. In addition, the Company received 68,177 shares from
a former owner related to a prior year acquisition. Subsequent to the issuance
of certain of the convertible subordinated notes, the Company entered into
agreements with certain of the convertible noteholders to modify the terms of
$2.1 million of these notes in order to eliminate the provisions relating to
convertibility into the Company's Common Stock. The remaining convertible
subordinated notes are convertible at various dates in 2000 into 5,133 shares of
Common Stock.
The accompanying balance sheet as of December 31, 1999 includes allocations
of the respective purchase prices to the assets acquired and liabilities assumed
based on preliminary estimates of fair value and is subject to final adjustment.
The allocations in 1998 and 1999 resulted in $277.4 million and $55.7 million in
goodwill, respectively, which represents the excess of the purchase price over
the estimated fair
25
<PAGE>
COMFORT SYSTEMS USA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
value of the net assets acquired for the Purchased Companies. In conjunction
with the acquisitions, goodwill was determined as follows (in thousands):
<TABLE>
<CAPTION>
1998 1999
------------ ----------
<S> <C> <C>
Fair value of assets acquired, net of
cash acquired...................... $ (261,754) $ (27,806)
Liabilities assumed.................. 233,669 20,138
Cash paid, net of cash acquired...... 133,338 31,417
Estimated market value of stock
consideration...................... 111,681 8,463
Issuance of Notes.................... 60,482 23,473
------------ ----------
Goodwill............................. $ 277,416 $ 55,685
============ ==========
</TABLE>
The unaudited pro forma data presented below consists of the income
statement data presented in these consolidated financial statements plus income
statement data for the Purchased Companies as if the acquisitions were effective
on January 1, 1998 through the respective dates of acquisitions (in thousands,
except per share data):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------
1998 1999
------------ ------------
(UNAUDITED)
<S> <C> <C>
Revenues............................. $ 1,355,733 $ 1,421,118
Net income........................... $ 40,657 $ 41,992
Net income per share -- diluted...... $ 1.03 $ 1.06
Shares used in computing net income
per share -- diluted............... 40,113 40,156
</TABLE>
Pro forma adjustments included in the preceding table regarding the
Purchased Companies primarily relate to (a) certain reductions in salaries and
benefits to the former owners (the "Compensation Differential") of the Pooled
Companies and Purchased Companies which the former owners agreed would take
effect as of the acquisition date, (b) elimination of merger costs in connection
with the acquisition of the Pooled Companies, (c) amortization of goodwill
related to the Purchased Companies, (d) interest expense on borrowings of $11.8
million that would have been necessary to fund certain S Corporation
distributions if they had occurred at the beginning of each period presented,
(e) interest expense on borrowings of $197.6 million related to the purchase
price of the Purchased Companies acquired during 1998 and 1999 and (f) interest
expense related to the subordinated notes issued in connection with the
acquisition of certain Acquired Companies. In addition, an incremental tax
provision has been recorded as if all applicable Purchased Companies and Pooled
Companies which were C Corporations had been subject to federal and state income
taxes.
The pro forma results presented above are not necessarily indicative of
actual results which might have occurred had the operations and management teams
of the Company, the Purchased Companies and Pooled Companies been combined at
the beginning of the periods presented.
26
<PAGE>
COMFORT SYSTEMS USA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
4. PROPERTY AND EQUIPMENT:
Property and equipment consist of the following (dollars in thousands):
<TABLE>
<CAPTION>
ESTIMATED DECEMBER 31,
USEFUL LIVES --------------------
IN YEARS 1998 1999
------------- --------- ---------
<S> <C> <C> <C>
Land................................. N/A $ 124 $ 178
Transportation equipment............. 3-10 31,776 32,781
Machinery and equipment.............. 3-15 23,002 27,542
Computer and telephone equipment..... 3-7 10,168 15,942
Buildings and leasehold
improvements....................... 3-39 8,564 12,079
Furniture and fixtures............... 3-10 8,082 8,815
--------- ---------
81,716 97,337
Less -- Accumulated depreciation..... 47,303 55,373
--------- ---------
Property and equipment, net..... $ 34,413 $ 41,964
========= =========
</TABLE>
5. DETAIL OF CERTAIN BALANCE SHEET ACCOUNTS:
Activity in the Company's allowance for doubtful accounts consists of the
following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------
1997 1998 1999
--------- --------- ---------
<S> <C> <C> <C>
Balance at beginning of year......... $ 994 $ 1,698 $ 4,758
Additions for bad debt expense....... 583 1,253 1,650
Deductions for recoveries and for
uncollectible receivables written
off................................ (488) (909) (1,940)
Allowance for doubtful accounts of
Founding and Purchased Companies at
date of acquisition................ 609 2,716 1,100
--------- --------- ---------
Balance at end of year............... $ 1,698 $ 4,758 $ 5,568
========= ========= =========
</TABLE>
Other current liabilities consist of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1998 1999
--------- ---------
<S> <C> <C>
Accrued warranty costs............... $ 4,596 $ 4,587
Accrued insurance expense............ 4,851 6,835
Deferred income taxes................ 4,940 4,195
Deferred revenue..................... 525 2,210
Other current liabilities............ 9,876 9,972
--------- ---------
$ 24,788 $ 27,799
========= =========
</TABLE>
27
<PAGE>
COMFORT SYSTEMS USA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Installation contracts in progress are as follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------
1998 1999
------------ --------------
<S> <C> <C>
Costs incurred on contracts in
progress........................... $ 748,542 $ 895,662
Estimated earnings, net of losses.... 151,792 209,887
Less -- Billings to date............. (907,074) (1,103,144)
------------ --------------
$ (6,740) $ 2,405
============ ==============
Costs and estimated earnings in
excess of billings on
uncompleted contracts.............. $ 37,228 $ 54,575
Billings in excess of costs and
estimated earnings on
uncompleted contracts.............. (43,968) (52,170)
------------ --------------
$ (6,740) $ 2,405
============ ==============
</TABLE>
6. LONG-TERM DEBT OBLIGATIONS:
Long-term debt obligations consist of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
1998 1999
---------- ----------
<S> <C> <C>
Revolving credit facility............ $ 170,700 $ 225,215
Notes to affiliates and former
owners............................. 63,839 77,009
Other................................ 1,907 3,609
---------- ----------
Total debt........................... 236,446 305,833
Less: current maturities............. 9,077 27,889
---------- ----------
$ 227,369 $ 277,944
========== ==========
</TABLE>
At December 31, 1999, future principal payments of long-term debt are as
follows (in thousands):
YEAR ENDING DECEMBER 31 --
2000............................ $ 27,889
2001............................ 254,489
2002............................ 22,072
2003............................ 1,383
----------
$ 305,833
==========
REVOLVING CREDIT FACILITY
In July 1997, the Company entered into a credit agreement with Bank One,
Texas, N.A. (the "Credit Facility"). The Credit Facility was amended and
restated in September 1997 primarily to provide for additional banks to lend to
the Company under the Credit Facility. At that time, the Credit Facility
provided the Company with an unsecured revolving line of credit of $75 million.
The Credit Facility was further amended in April 1998 and again in December 1998
in order to increase borrowing capacity and to provide for additional banks to
lend to the Company under the Credit Facility. The Credit Facility currently
provides the Company with a revolving line of credit of up to $300 million
secured by accounts receivable, inventory and the shares of capital stock of the
Company's subsidiaries. The Company currently has a choice of two interest rate
options when borrowing under the Credit Facility. Under one option, the interest
rate is determined based on the higher of the Federal Funds Rate plus 0.5% or
the bank's prime rate. An additional margin of zero to 1.25% is then added to
the higher of these two rates. Under the other interest rate option,
28
<PAGE>
COMFORT SYSTEMS USA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
borrowings bear interest based on designated short-term Eurodollar rates (which
generally approximate LIBOR) plus 1.0% to 2.5%. The additional margin for both
options depends on the ratio of the Company's debt to EBITDA. Commitment fees of
0.25% to 0.5% per annum, also depending on the ratio of debt to EBITDA, are
payable on the unused portion of the facility. The Credit Facility prohibits the
payment of dividends by the Company without the lenders' approval and requires
the Company to comply with certain financial covenants. The amended Credit
Facility expires on November 1, 2001, at which time all amounts outstanding
under the Credit Facility are due.
As of December 31, 1999, the Company had borrowed $225.2 million under the
Credit Facility at an average interest rate of approximately 7.4% for the year
ended December 31, 1999. The Company's unused committed borrowing capacity under
the Credit Facility was $72.9 million at December 31, 1999. As of March 13,
2000, $249.2 million (unaudited) was outstanding under this facility.
NOTES TO AFFILIATES AND FORMER OWNERS
The Notes in the amount of $77.0 million referred to above were issued to
former owners of certain Purchased Companies as partial consideration of the
acquisition purchase price. Of these Notes, $76.4 million bear interest, payable
quarterly, at a weighted average interest rate of 5.84% and $2.0 million of
these Notes are convertible by the holder into shares of the Company's Common
Stock at a weighted average price of $25.66 per share. The remaining Notes in
the amount of $0.6 million are non-interest bearing and require $0.2 million of
principal payments in 2000 and $0.4 million of principal payments in equal
annual installments in 2001, 2002, and 2003. The terms of the convertible
subordinated notes require $0.4 million of principal payments in 2000, $0.6
million of principal payments in 2001, $0.6 million of principal payments in
2002, and $0.4 million of principal payments in 2003. The terms of the
nonconvertible interest bearing subordinated notes require $23.9 million of
principal payments in 2000, $28.3 million of principal payments in 2001, $21.3
million of principal payments in 2002, and $0.9 million of principal payments in
2003.
The Company estimates the fair value of long-term debt as of December 31,
1998 and 1999 to be approximately the same as the recorded value.
7. INCOME TAXES:
The Company has implemented SFAS No. 109, "Accounting for Income Taxes,"
which provides for a liability approach to accounting for income taxes. The
provision for income taxes consists of the following (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
1997 1998 1999
--------- --------- ---------
<S> <C> <C> <C>
Current --
Federal......................... $ 6,469 $ 21,650 $ 25,622
State and Puerto Rico........... 1,763 4,439 4,777
--------- --------- ---------
8,232 26,089 30,399
--------- --------- ---------
Deferred --
Federal......................... (688) 907 2,067
State and Puerto Rico........... 58 53 (728)
--------- --------- ---------
(630) 960 1,339
--------- --------- ---------
$ 7,602 $ 27,049 $ 31,738
========= ========= =========
</TABLE>
29
<PAGE>
COMFORT SYSTEMS USA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The difference in income taxes provided for and the amounts determined by
applying the federal statutory tax rate to income before income taxes result
from the following (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
1997 1998 1999
--------- --------- ---------
<S> <C> <C> <C>
Income tax expense at the statutory
rate............................... $ 1,937 $ 21,713 $ 25,921
Increase (decrease) resulting from --
State income taxes, net of
federal tax effect............ 1,245 3,148 2,567
Non-deductible expenses......... 428 364 492
Non-recurring, non-cash
compensation charge........... 4,045 -- --
Effect of S Corporation income
previously taxed to the former
owners........................ (1,089) (308) --
Non-deductible goodwill
amortization.................. 633 2,047 2,730
Non-deductible acquisition costs
related to Pooled Companies... 201 157 --
Provision (benefit) recognized
upon termination of Subchapter
S election.................... 100 (101) --
Other........................... 102 29 28
--------- --------- ---------
$ 7,602 $ 27,049 $ 31,738
========= ========= =========
</TABLE>
Deferred income tax provisions result from current period activity that has
been reflected in the financial statements but which is not includable in
determining the Company's tax liabilities until future periods. Deferred tax
assets and liabilities reflect the tax effect in future periods of all such
activity to date that has been reflected in the financial statements but which
is not includable in determining the Company's tax liabilities until future
periods.
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1998 1999
--------- ---------
<S> <C> <C>
(IN THOUSANDS)
Deferred income tax assets --
Accounts receivable and
allowance for doubtful
accounts...................... $ 1,699 $ 1,854
Accrued liabilities and
expenses...................... 6,038 7,206
Net operating loss.............. 126 1,343
Other........................... 344 630
--------- ---------
Total deferred income tax
assets.................. 8,207 11,033
--------- ---------
Deferred income tax liabilities --
Property and equipment.......... (873) (1,113)
Long-term installation
contracts..................... (4,716) (3,821)
Goodwill........................ (31) (3,180)
Other........................... (444) (628)
--------- ---------
Total deferred income tax
liabilities............. (6,064) (8,742)
--------- ---------
Net deferred income tax
assets.................. $ 2,143 $ 2,291
========= =========
</TABLE>
30
<PAGE>
COMFORT SYSTEMS USA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The deferred tax assets and liabilities reflected above are included in the
consolidated balance sheets as follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1998 1999
--------- ---------
<S> <C> <C>
Deferred income tax assets --
Prepaid expenses and other...... $ 7,778 $ 9,403
Other non-current assets....... 429 1,630
Deferred income tax liabilities --
Other current liabilities....... (4,940) (4,195)
Deferred income taxes........... (1,124) (4,547)
--------- ---------
Net deferred income tax assets....... $ 2,143 $ 2,291
========= =========
</TABLE>
8. EMPLOYEE BENEFIT PLANS:
Certain of the Company's subsidiaries sponsor various retirement plans for
most full-time and some part-time employees. These plans consist of defined
contribution plans and multi-employer pension plans and cover employees at
substantially all of the Company's operating locations. The defined contribution
plans provide for contributions ranging from 2% to 6% of covered employees'
salaries or wages and totaled $1.8 million for 1997, $3.6 million for 1998 and
$5.4 million for 1999. Of these amounts, approximately $2.2 million and $2.5
million was payable to the plans at December 31, 1998 and 1999, respectively.
Certain of the Company's subsidiaries also participate in several
multi-employer pension plans for the benefit of their employees who are union
members. Company contributions to these plans were approximately $2.1 million
for 1997, $8.1 million for 1998 and $14.6 million for 1999. The data available
from administrators of the multi-employer pension plans is not sufficient to
determine the accumulated benefit obligations, nor the net assets attributable
to the multi-employer plans in which Company employees participate.
9. COMMITMENTS AND CONTINGENCIES:
LEASES
The Company leases certain facilities and equipment under noncancelable
operating leases. Rent expense for the years ended December 31, 1997, 1998, and
1999 was $2.2 million, $6.7 million and $17.5 million, respectively. Concurrent
with the acquisitions of certain Acquired Companies, the Company entered into
various agreements with previous owners to lease land and buildings used in the
Company's operations. The terms of these leases range from five years to ten
years and provide for certain escalations in the rental expenses each year.
Included in the 1997, 1998 and 1999 rent expense above is approximately $1.2
million, $3.9 million and $6.1 million of rent paid to these related parties,
respectively. The following represents future minimum rental payments under
noncancelable operating leases (in thousands):
Year ending December 31 --
2000............................ $ 13,403
2001............................ 12,000
2002............................ 10,500
2003............................ 7,629
2004............................ 5,445
Thereafter...................... 13,132
---------
$ 62,109
=========
31
<PAGE>
COMFORT SYSTEMS USA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
CLAIMS AND LAWSUITS
The Company is party to litigation in the ordinary course of business.
There are currently no pending legal proceedings that, in management's opinion,
would have a material adverse effect on the Company's operating results or
financial condition. The Company maintains various insurance coverages in order
to minimize financial risk associated with certain claims. The Company has
provided accruals for probable losses and legal fees associated with certain of
these actions in the accompanying consolidated financial statements. A
wholly-owned insurance company subsidiary reinsures a portion of the risk
associated with surety bonds issued by a third party insurance company. Because
no claims have been made against these financial instruments in the past,
management does not expect these instruments will have a material effect on the
Company's consolidated financial statements.
10. STOCKHOLDERS' 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 then outstanding. During 1998, the
Company increased the number of shares of Common Stock authorized to
102,969,912.
In December 1996, 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 Capital Ventures II, L.L.C. ("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 of 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 $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.
On July 2, 1997, Comfort Systems completed the offering of 6,100,000 shares
of Common Stock to the public at $13.00 per share. The net proceeds to Comfort
Systems from the IPO (after deducting underwriting commissions and offering
expenses) were $68.8 million. Of this amount, $45.3 million was used to pay the
cash portion of the purchase prices of the Founding Companies. In connection
with the IPO, the Company granted its underwriters an option to sell an
additional 915,000 shares at $13.00 per share. On July 9, 1997, the underwriters
exercised this option. Net proceeds to the Company from this sale of shares were
$11.1 million after deducting underwriting commissions.
On June 16, 1998, the Company completed a second public offering (the
"Second Public Offering") of 400,000 shares of its Common Stock. The net
proceeds from this offering of $7.6 million, after deducting underwriting
commissions, were used to repay debt. On July 21, 1998, the underwriters
exercised their overallotment option in connection with the Second Public
Offering completed in June 1998. An additional 461,479 shares of Common Stock
were sold and the net proceeds of $8.8 million, after deducting underwriting
commissions, were used to repay debt.
TREASURY STOCK
On October 5, 1999, the Company announced that its Board of Directors had
approved a share repurchase program authorizing the Company to buy up to 4
million shares of its Common Stock. As of December 31, 1999, the Company
purchased approximately 1.8 million shares at a cost of approximately $12.9
million. Subsequent to yearend, the Company has purchased approximately 0.1
million additional shares at a cost of approximately $0.8 million (unaudited)
through March 13, 2000.
RESTRICTED COMMON STOCK
In March 1997, Notre exchanged 2,742,912 shares of Common Stock for an
equal number of shares of restricted voting common stock ("Restricted Voting
Common Stock"). The holder of Restricted Voting 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 Voting Common Stock are not entitled to vote on the election of any
other directors.
Each share of Restricted Voting 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 Voting Common Stock by
32
<PAGE>
COMFORT SYSTEMS USA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 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 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 Voting Common Stock into shares of Common Stock
in the event that 80% or more of the originally outstanding shares of Restricted
Voting Common Stock have been previously converted into shares of Common Stock.
At December 31, 1999, 756,744 shares of Restricted Voting Common Stock had been
converted to shares of Common Stock.
EARNINGS PER SHARE
Basic earnings per share ("EPS") is computed by dividing net income by
the weighted average number of shares of common stock outstanding during the
year. Diluted EPS is computed considering the dilutive effect of stock options
and convertible subordinated notes. Options to purchase 2.2 million shares of
Common Stock at prices ranging from $15.375 to $21.438 per share were
outstanding in 1999, but were not included in the computation of diluted
earnings per share because the options' exercise prices were greater than the
respective average market price of the Common Stock. Diluted EPS is also
computed by adjusting both net earnings and shares outstanding as if the
conversion of the convertible subordinated notes occurred on the first day of
the year. The after tax interest expense related to the assumed conversion of
the convertible subordinated notes in 1998 and 1999 was $753,000 and $766,000,
respectively.
The following table summarizes weighted average shares outstanding for each
of the periods presented (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
1997 1998 1999
--------- --------- ---------
<S> <C> <C> <C>
Shares issued in connection with the
acquisitions of Founding Companies.... 5,008 9,721 9,721
Shares sold pursuant to the IPO......... 3,142 6,100 6,100
Shares held by Notre, management and
consultants........................... 4,240 4,240 4,240
Shares issued in connection with the
acquisitions of Pooled Companies...... 5,946 5,946 5,946
Weighted average shares issued in
connection with the underwriter's
overallotment......................... 434 1,122 1,376
Weighted average shares issued in
connection with the acquisitions of
the Purchased Companies............... 184 5,597 10,932
Weighted average shares repurchased..... -- -- (303)
Weighted average shares sold in the
Second Public Offering................ -- 215 400
Weighted average portion of shares
issued in connection with the Employee
Stock Purchase Plan................... -- 12 117
Weighted average portion of shares
issued in connection with the exercise
of stock options...................... -- 9 32
--------- --------- ---------
Weighted average shares
outstanding -- Basic.................. 18,954 32,962 38,561
Weighted average portion of shares
related to stock options under the
treasury stock method................. -- 462 69
Weighted average shares related to the
issuance of convertible notes......... -- 905 1,069
--------- --------- ---------
Weighted average shares
outstanding -- Diluted................ 18,954 34,329 39,699
========= ========= =========
</TABLE>
33
<PAGE>
COMFORT SYSTEMS USA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
11. STOCK OPTION PLANS:
LONG-TERM INCENTIVE PLANS
In March 1997, the Company's stockholders approved the Company's 1997
Long-Term Incentive Plan which provides for the granting or awarding of
incentive or non-qualified stock options, stock appreciation rights, restricted
or deferred stock, dividend equivalents or other incentive awards to directors,
officers, key employees and consultants to the Company.
The Company's 1997 Long-Term Incentive Plan provides for the granting of
options to key employees to purchase an aggregate of not more than 13% of the
total number of shares of the Company's Common Stock outstanding at the time of
grant. Such options have been issued by the Company at fair market value on the
date of grant and become exercisable in five equal annual installments beginning
on the first anniversary of the date of grant. The options expire after seven
years from the date of grant if unexercised. Outstanding options may be canceled
and reissued under terms specified in the plan.
The following table summarizes activity under the Company's stock option
plan:
<TABLE>
<CAPTION>
1997 1998
---------------------------- ----------------------------
WEIGHTED-AVERAGE WEIGHTED-AVERAGE
FIXED OPTIONS SHARES EXERCISE PRICE SHARES EXERCISE PRICE
- ---------------------------------------- -------- ---------------- --------- ----------------
<S> <C> <C> <C> <C>
Outstanding at beginning of year........ -- $ -- 2,537,203 $ 13.72
Granted................................. 2,537,203 $ 13.72 1,495,500 $ 18.54
Exercised............................... -- $ -- (24,330) $ 13.45
Forfeited............................... -- $ -- (53,344) $ 16.01
Expired................................. -- $ -- -- $ --
-------- ---------
Outstanding at end of year.............. 2,537,203 $ 13.72 3,955,029 $ 15.51
======== =========
Options exercisable at year-end......... -- 518,281
Weighted-average fair value of options
granted during the year............... $ 3.53 $ 7.33
</TABLE>
1999
----------------------------
WEIGHTED-AVERAGE
FIXED OPTIONS SHARES EXERCISE PRICE
- ---------------------------------------- -------- ----------------
Outstanding at beginning of year........ 3,955,029 $15.51
Granted................................. 758,200 $13.36
Exercised............................... (16,924) $13.00
Forfeited............................... (125,642) $14.78
Expired................................. (13,530) $15.90
---------
Outstanding at end of year.............. 4,557,133 $15.18
=========
Options exercisable at year-end......... 1,287,229
Weighted-average fair value of options
granted during the year............... $ 6.26
The following table summarizes information about fixed stock options
outstanding at December 31, 1999:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
----------------------------------------------------- --------------------------------
NUMBER WEIGHTED-AVERAGE NUMBER
RANGE OF OUTSTANDING REMAINING WEIGHTED-AVERAGE EXERCISABLE WEIGHTED-AVERAGE
EXERCISE PRICES AT 12/31/99 CONTRACTUAL LIFE EXERCSE PRICE AT 12/31/99 EXERCISE PRICE
- ------------------------------------- ------------ ------------------ ------------------ ------------ -----------------
<S> <C> <C> <C> <C> <C>
$ 7.63- 7.63 96,700 6.8 years $ 7.63 -- $ --
$11.75-16.88 3,086,403 5.0 years $13.78 970,876 $ 13.57
$17.88-21.44 1,374,030 5.5 years $18.85 316,353 $ 18.85
------------ ------------
$ 7.63-21.44 4,557,133 5.2 years $15.18 1,287,229 $ 14.87
============ ============
</TABLE>
In September 1997, the Company's stockholders approved the Company's 1998
Employee Stock Purchase Plan which allows employees to purchase shares from the
Company's authorized but unissued shares of Common Stock or from shares of
Common Stock reacquired by the Company, including shares repurchased on the open
market.
34
<PAGE>
COMFORT SYSTEMS USA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The Company's 1998 Employee Stock Purchase Plan provides for the purchase
of 300,000 shares at semi-annual intervals. Full-time employees are eligible to
purchase shares with payroll deductions ranging from 2% to 8% of compensation
with a maximum deduction of $2,000 for any purchase period for each participant.
The purchase price per share is 85% of the lower of the market price on the
first business day of the purchase period or the purchase date.
The Company accounts for its stock-based compensation under Accounting
Principles Board Statement No. 25, "Accounting for Stock Issued to Employees"
(APB 25). Under this accounting method, no expense in connection with the stock
option plan or the stock purchase plan is recognized in the consolidated
statements of operations when the exercise price of the stock options is greater
than or equal to the value of the Common Stock on the date of grant. In October
1995, the Financial Accounting Standards Board issued SFAS No. 123, "Accounting
for Stock-Based Compensation," which requires that if a company accounts for
stock-based compensation in accordance with APB 25, the company must also
disclose the effects on its results of operations as if an estimate of the value
of stock-based compensation at the date of grant was recorded as an expense in
the company's statement of operations. These effects for the Company are as
follows (in thousands, except per share data):
<TABLE>
<CAPTION>
1997 1998 1999
--------- --------- ---------
<S> <C> <C> <C> <C>
Net Income As reported........................ $ (2,064) $ 35,013 $ 42,322
Pro forma for SFAS No. 123......... $ (2,436) $ 33,341 $ 39,519
Income Per Share -- Basic As reported........................ $ (.11) $ 1.06 $ 1.10
Pro forma for SFAS No. 123......... $ (.13) $ 1.01 $ 1.02
Income Per Share -- Diluted As reported........................ $ (.11) $ 1.04 $ 1.09
Pro forma for SFAS No. 123......... $ (.13) $ 0.97 $ 1.01
</TABLE>
LONG-TERM INCENTIVE PLAN -- The effects of applying SFAS No. 123 in the pro
forma disclosure may not be indicative of future amounts as additional option
awards in future years are anticipated. The fair value of each option grant is
estimated on the date of grant using the Black-Scholes option-pricing model with
the following assumptions:
<TABLE>
<CAPTION>
1997 1998 1999
------------- ------------- ------------
<S> <C> <C> <C>
Expected dividend yield.............. 0.00% 0.00% 0.00%
Expected stock price volatility...... 39.41% 44.87% 65.63%
Risk free interest rate.............. 5.77%-6.15% 5.00%-6.15% 4.64%-5.87%
Expected life of options............. 7 years 4 years 4 years
</TABLE>
EMPLOYEE STOCK PURCHASE PLAN -- The effects of applying SFAS No. 123 in the
pro forma disclosure may not be indicative of future amounts as the granting of
additional purchase rights is anticipated. Compensation cost associated with the
stock purchase plan is recognized for the fair value of the employees' purchase
rights, which is estimated using the Black-Scholes model with the following
assumptions:
<TABLE>
<CAPTION>
1998 1999
------------- ------------
<S> <C> <C>
Expected dividend yield.............. 0.00% 0.00%
Expected volatility.................. 42.10% 53.8%
Risk free interest rate.............. 5.19%-5.25% 4.56%-4.94%
Expected life of purchase rights..... 0.5 years 0.5 years
</TABLE>
The weighted average fair values of the purchase rights granted in 1998 and
1999 were $5.37 and $4.88, respectively.
35
<PAGE>
COMFORT SYSTEMS USA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 non-employees. The
number of shares authorized and reserved for issuance under the Directors' Plan
is 250,000 shares. The Directors' Plan provided for the automatic grant of
options to purchase 10,000 shares to each non-employee director serving at the
commencement of the IPO.
Each non-employee director will be granted options to purchase 10,000
shares at the time of the initial election. In addition, each non-employee
director is automatically granted options to purchase an additional 5,000 shares
at each annual meeting of the stockholders that is more than two months after
the date of the director's initial election. All options are granted with an
exercise price equal to the fair market value at the date of grant and are
immediately vested upon grant.
Either at the time of the IPO or upon election as a director, options were
granted to four members of the board of directors to purchase in each case
10,000 shares of Common Stock at the IPO price or at the price in effect at the
time of their election. Each of these directors received an option for 5,000
shares on the dates of the annual meetings which they have attended. These
options will expire at the earlier of 10 years from the date of grant or one
year after termination of service as a director.
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. No Deferred Shares have been issued.
12. SIGNIFICANT VENDORS:
Significant vendors are defined as those that account for greater than 10%
of the Company's purchases. For the years ended December 31, 1998 and 1999,
there were no significant vendors. For the year ended December 31, 1997, one
vendor accounted for 10.5% of the Company's purchases.
13. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED):
Quarterly financial information for the years ended December 31, 1998 and
1999 is summarized as follows (in thousands, except per share data):
<TABLE>
<CAPTION>
QUARTER ENDED QUARTER ENDED
------------------------------------------------------- ---------------------
MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31, MARCH 31, JUNE 30,
1998 1998 1998 1998 1999 1999
---------- -------- ------------- ------------ --------- --------
<S> <C> <C> <C> <C> <C> <C>
Revenues............................. $132,608 $194,350 $ 232,381 $294,622 $291,926 $341,493
Gross profit (a)..................... $ 31,339 $ 47,704 $ 57,073 $ 70,333 $ 63,178 $ 76,239
Operating income..................... $ 7,039 $ 15,917 $ 20,814 $ 24,727 $ 15,536 $ 30,023
Net income........................... $ 3,385 $ 8,418 $ 10,799 $ 12,411 $ 6,564 $ 14,645
Earnings per share:
Basic.............................. $ 0.12 $ 0.27 $ 0.32 $ 0.34 $ 0.17 $ 0.38
Diluted............................ $ 0.11 $ 0.26 $ 0.31 $ 0.33 $ 0.17 $ 0.37
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1999 1999
------------- ------------
<S> <C> <C>
Revenues............................. $ 374,815 $361,801
Gross profit (a)..................... $ 76,335 $ 76,954
Operating income..................... $ 27,559 $ 20,086
Net income........................... $ 12,868 $ 8,245
Earnings per share:
Basic.............................. $ 0.33 $ 0.22
Diluted............................ $ 0.33 $ 0.22
</TABLE>
- ------------
The sum of the individual quarterly earnings per share amounts do not agree with
year-to-date earnings per share as each quarter's computation is based on the
weighted average number of shares outstanding during the quarter, the weighted
average stock price during the quarter and the dilutive effects of the
convertible subordinated notes in each quarter.
(a) As discussed in Note 2, during 1999 the Company began presenting certain
costs in cost of services that related to activities that directly support
project or service work. These costs were previously presented in SG&A.
Management believes this revised presentation better aligns cost of services
and SG&A across all acquired operations. Exclusive of this change in
classification, gross profit for 1999 would have been $68.9 million for the
first quarter, $86.1 million for the second quarter, $85.9 million for the
third quarter and $89.0 million for the fourth quarter. Prior periods have
not been restated.
36
<PAGE>
COMFORT SYSTEMS USA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
ITEM 9. CHANGES AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
None.
PART III
ITEMS 10 TO 13 INCLUSIVE
These items have been omitted in accordance with the instructions to Form
10-K. The Company will file with the Commission a definitive proxy statement
including the information to be disclosed under the items in the 120 days
following December 31, 1999.
37
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) The following documents are filed as part of this report:
(1) Consolidated Financial Statements of the Company, which are
included at Item 8 of this report.
(2) None
(3) Exhibit Listing
<TABLE>
<CAPTION>
INCORPORATED BY REFERENCE TO
THE EXHIBIT INDICATED BELOW
AND TO THE FILING WITH THE
COMMISSION INDICATED BELOW
-------------------------------
EXHIBIT EXHIBIT FILING OR
NUMBER DESCRIPTION OF EXHIBITS NUMBER FILE NUMBER
- ------------------------ ----------------------------------------------------------------- ------- ------------------
<C> <S> <C> <C>
3.1 -- Second Amended and Restated Certificate of Incorporation of the 3.1 333-24021
Registrant.
3.2 -- Certificate of Amendment dated May 21, 1998 3.2 1998 Form 10-K
3.3 -- Bylaws of the Registrant, as amended 3.3 Filed Herewith
4.1 -- Form of certificate evidencing ownership of Common Stock of the 4.1 333-24021
Registrant.
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 10.2 333-24021
Plan.
10.3 -- Form of Employment Agreement between the Registrant and Fred M. 10.3 333-24021
Ferreira.
10.4 -- Form of Employment Agreement between the Registrant and J. Gordon 10.4 333-24021
Beittenmiller.
10.5 -- Form of Employment Agreement between the Registrant and William 10.5 333-24021
George, III.
10.6 -- Form of Employment Agreement between the Registrant and Reagan S. 10.6 333-24021
Busbee.
10.7 -- Form of Employment Agreement between the Registrant, Accurate Air 10.7 333-24021
Systems, Inc. and Thomas J. Beaty.
10.8 -- Form of Employment Agreement between the Registrant, Atlas 10.8 333-24021
Comfort Services USA, Inc. and Brian S. Atlas
10.9 -- Form of Employment Agreement between the Registrant, Contract 10.9 333-24021
Service, Inc. and John C. Phillips.
10.10 -- Form of Employment Agreement between the Registrant, Eastern 10.10 333-24021
Heating & Cooling, Inc. and Alfred J. Giardenelli, Jr.
10.11 -- Form of Employment Agreement between the Registrant, Quality Air 10.11 333-24021
Heating & Cooling, Inc. and Robert J. Powers
10.12 -- Form of Employment Agreement between the Registrant, S. M. 10.12 333-24021
Lawrence Company, Inc. and Samuel M. Lawrence III.
10.13 -- Form of Employment Agreement between the Registrant, Tech Heating 10.13 333-24021
and Air Conditioning, Inc. and Robert R. Cook
10.14 -- Form of Employment Agreement between the Registrant, Tri-City 10.14 333-24021
Mechanical, Inc. and Michael Nothum, Jr.
10.15 -- Form of Employment Agreement between the Registrant, Western 10.15 333-24021
Building Services, Inc. and Charles W. Klapperich.
10.16 -- Employment Agreement between the Registrant, F&G Mechanical February 1998
Corporation and Salvatore P. Giardina. Form 8-K
</TABLE>
38
<PAGE>
<TABLE>
<CAPTION>
INCORPORATED BY REFERENCE TO
THE EXHIBIT INDICATED BELOW
AND TO THE FILING WITH THE
COMMISSION INDICATED BELOW
-------------------------------
EXHIBIT EXHIBIT FILING OR
NUMBER DESCRIPTION OF EXHIBITS NUMBER FILE NUMBER
- ------------------------ ----------------------------------------------------------------- ------- ------------------
<C> <S> <C> <C>
10.17 -- Employment Agreement between the Registrant, Sham- 10.17 1998 Form 10-K
baugh & Son, Inc. and Mark P. Shambaugh.
10.18 -- Form of Agreement among certain stockholders. 10.16 333-24021
10.19 -- Lease between M & B Interests, Inc. and Atlas Air Conditioning 10.17 333-32595
Company, Inc. dated October 1, 1994.
10.20 -- Lease between Nothum Development, L.L.C. and Tri-City Mechanical, 10.20 333-32595
Inc. dated July 1, 1997.
10.21 -- Lease between Samuel Matthews Lawrence, Jr. and S.M. Lawrence 10.21 333-32595
Company, Incorporated dated November 1, 1996.
10.22 -- Lease between J&J Investments and Contract Service, Inc. dated 10.23 333-32595
March 1, 1997.
10.23 -- Lease by Tech Heating and Air Conditioning, Inc. dated April 2, 10.24 1998 Form 10-K
1995 as amended by Amendment between Cook Properties, Inc. and
Tech Heating and Air Conditioning, Inc. on March 13, 1997.
10.24 -- Third Amended and Restated Credit Agreement among the Company and 10.25 333-38009
its subsidiaries, Bank One, Texas, N.A., as agent and the banks
listed therein dated December 14, 1998.
10.25 -- Lease dated June 30, 1994, between Salpat Realty and F&G 10.27 1997 Form 10-K
Mechanical Corp., together with lease modification agreements
dated June 30, 1994 and February 12, 1998.
10.26 -- Lease dated October 31, 1998, between Mark Shambaugh and 10.28 1998 Form 10-K
Shambaugh & Sons, Inc. (Opportunity Drive).
10.27 -- Lease dated October 31, 1998, between Mark Shambaugh and 10.29 1998 Form 10-K
Shambaugh & Sons, Inc. (Di Salle Boulevard).
10.28 -- Lease dated October 31, 1998, between Mark Shambaugh and 10.30 1998 Form 10-K
Shambaugh & Sons, Inc. (Speedway Drive).
10.29 -- Lease dated October 31, 1998, between Mark Shambaugh and 10.31 1998 Form 10-K
Shambaugh & Sons, Inc. (South Bend).
10.30 -- Lease dated October 31, 1998, between Mark Shambaugh and 10.32 1998 Form 10-K
Shambaugh & Sons, Inc. (Lafayette).
10.31 -- Promissory Note dated February 12, 1998 by Sorce Properties LLC 10.28 1997 Form 10-K
in favor of F&G Mechanical Corporation.
10.32 -- Pledge Agreement dated February 12, 1998 by Salvatore Fichera and 10.29 1997 Form 10-K
Salvatore P. Giardina in favor of F&G Mechanical Corporation.
10.33 -- Form of Indemnity Agreement entered into by the Company with each 10.26 333-32595
of the 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 Mercadante, Jr. on June 27, 1997.
10.34 -- Indemnity Agreement between the Company and Notre 10.27 333-32595
Capital Ventures II, L.L.C.
10.35 -- Comfort Systems USA, Inc. 1998 Employee Stock Purchase Plan. 10.28 333-38009
10.36 -- Agreement Regarding Sale of Stock between Fred M. 10.1 Third Quarter 1997
Ferreira and the Registrant dated October 31, 1997. Form 10-Q
</TABLE>
39
<PAGE>
<TABLE>
<CAPTION>
INCORPORATED BY REFERENCE TO
THE EXHIBIT INDICATED BELOW
AND TO THE FILING WITH THE
COMMISSION INDICATED BELOW
-------------------------------
EXHIBIT EXHIBIT FILING OR
NUMBER DESCRIPTION OF EXHIBITS NUMBER FILE NUMBER
- ------------------------ ----------------------------------------------------------------- ------- ------------------
<C> <S> <C> <C>
10.37 -- Agreement Regarding Sale of Stock between Steve S. Harter and the 10.2 Third Quarter 1997
Registrant dated October 31, 1997. Form 10-Q
10.38 -- Agreement Regarding Sale of Stock between J. Gordon Beittenmiller 10.3 Third Quarter 1997
and the Registrant dated October 31, 1997. Form 10-Q
10.39 -- Agreement Regarding Sale of Stock between Thomas J. Beaty and the 10.4 Third Quarter 1997
Registrant dated October 31, 1997. Form 10-Q
10.40 -- Agreement Regarding Sale of Stock between Brian S. Atlas and the 10.5 Third Quarter 1997
Registrant dated October 31, 1997. Form 10-Q
10.41 -- Agreement Regarding Sale of Stock between John C. Phillips and 10.6 Third Quarter 1997
the Registrant dated October 31, 1997. Form 10-Q
10.42 -- Agreement Regarding Sale of Stock between Alfred J. Giardenelli, 10.7 Third Quarter 1997
Jr. and the Registrant dated October 31, 1997. Form 10-Q
10.43 -- Agreement Regarding Sale of Stock between Robert J. 10.8 Third Quarter 1997
Powers and the Registrant dated October 31, 1997. Form 10-Q
10.44 -- Agreement Regarding Sale of Stock between Samuel M. Lawrence and 10.9 Third Quarter 1997
the Registrant dated October 31, 1997. Form 10-Q
10.45 -- Agreement Regarding Sale of Stock between Michael Nothum, Jr. and 10.10 Third Quarter 1997
the Registrant dated October 31, 1997. Form 10-Q
10.46 -- Agreement Regarding Sale of Stock between Bob R. Cook and the 10.11 Third Quarter 1997
Registrant dated October 31, 1997. Form 10-Q
10.47 -- Agreement Regarding Sale of Stock between Charles W. Klapperich 10.12 Third Quarter 1997
and the Registrant dated October 31, 1997. Form 10-Q
10.48 -- Agreement Regarding Sale of Stock between Reagan S. Busbee and 10.13 Third Quarter 1997
the Registrant dated October 31, 1997. Form 10-Q
10.49 -- Agreement Regarding Sale of Stock between William George and the 10.14 Third Quarter 1997
Registrant dated October 31, 1997. Form 10-Q
10.50 -- Agreement and Plan of Merger dated November 15, 1998 by and among 2.1 November 1998
the Registrant, Shambaugh & Son, Inc. Form 8-K
10.51 -- First Amendment to Credit Agreement among the Company and its 10.63 1998 Form 10-K
subsidiaries, Bank One, Texas, N.A., as agent and the banks
listed therein dated January 14, 1999.
10.52 -- Form of Employment Agreement between the Registrant, Hess Filed Herewith
Mechanical Corporation and Gary E. Hess.
10.53 -- Lease dated April 1, 1998, between Gary E. and Susan B. Hess and Filed Herewith
Hess Mechanical Corporation.
21.1 -- List of subsidiaries of Comfort Systems USA, Inc. Filed Herewith
23.1 -- Consent of Arthur Andersen LLP Filed Herewith
27.1 -- Financial Data Schedule Filed Herewith
</TABLE>
(b)Reports on Form 8-K
-- None.
(c) Exhibits: See attached.
(d)The following financial statements are filed as part of this report: as set
forth in the Index to Financial Statements at Item 8 of this report.
40
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Company has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
COMFORT SYSTEMS USA, INC.
By: /s/ FRED M. FERREIRA
FRED M. FERREIRA
CHIEF EXECUTIVE OFFICER
Date: March 15, 2000
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, this report has been signed by the following persons in
the capacities and on the date indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- -------------------------------------------------------------------------------------------------------------
<C> <S> <C>
/s/FRED M. FERREIRA Chairman of the Board, Chief March 15, 2000
FRED M. FERREIRA Executive Officer and President
/s/J. GORDON BEITTENMILLER Executive Vice President, Chief March 15, 2000
J. GORDON BEITTENMILLER Financial Officer and Director
(PRINCIPAL ACCOUNTING OFFICER)
/s/GARY HESS Executive Vice President, Chief March 15, 2000
GARY HESS Operating Officer and Director
/s/BRIAN S. ATLAS Director March 15, 2000
BRIAN S. ATLAS
/s/THOMAS J. BEATY Director March 15, 2000
THOMAS J. BEATY
/s/ROBERT R. COOK Director March 15, 2000
ROBERT R. COOK
/s/ALFRED J. GIARDENELLI, JR. Director March 15, 2000
ALFRED J. GIARDENELLI, JR.
/s/SALVATORE P. GIARDINA Director March 15, 2000
SALVATORE P. GIARDINA
/s/STEVEN S. HARTER Director March 15, 2000
STEVEN S. HARTER
/s/CHARLES W. KLAPPERICH Director March 15, 2000
CHARLES W. KLAPPERICH
</TABLE>
41
<PAGE>
SIGNATURES -- (CONTINUED)
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ------------------------------------------------------------------------------------------- ---------------
<C> <S> <C>
/s/SAMUEL M. LAWRENCE III Director March 15, 2000
SAMUEL M. LAWRENCE III
/s/LARRY MARTIN Director March 15, 2000
LARRY MARTIN
/s/JOHN MERCADANTE, JR. Director March 15, 2000
JOHN MERCADANTE, JR.
/s/MICHAEL NOTHUM, JR. Director March 15, 2000
MICHAEL NOTHUM, JR.
/s/JOHN C. PHILLIPS Director March 15, 2000
JOHN C. PHILLIPS
/s/ROBERT J. POWERS Director March 15, 2000
ROBERT J. POWERS
/s/DIANE DAY SANDERS Director March 15, 2000
DIANE DAY SANDERS
/s/MARK P. SHAMBAUGH Director March 15, 2000
MARK P. SHAMBAUGH
</TABLE>
42
EXHIBIT 3.3
BYLAWS
OF
COMFORT SYSTEMS USA, INC.
AS AMENDED THROUGH MARCH 5, 1999
<PAGE>
BYLAWS
OF
COMFORT SYSTEMS USA, INC
ARTICLE I
STOCKHOLDERS
SECTION 1. ANNUAL MEETING. The annual meeting of the stockholders of the
Corporation shall be held on such date, at such time and at such place within or
without the State of Delaware as may be designated by the Board of Directors,
for the purpose of electing Directors and for the transaction of such other
business as may be properly brought before the meeting, which date shall be
within thirteen (13) months subsequent to the last annual meeting of
stockholders.
SECTION 2. SPECIAL MEETINGS. Unless otherwise provided in the Certificate
of Incorporation of the Corporation, special meetings of the stockholders for
any purpose or purposes may be called at any time by the Chief Executive
Officer, by a majority of the Board of Directors, or by a majority of the
executive committee (if any), at such time and at such place as may be stated in
the notice of the meeting. Business transacted at such meeting shall be confined
to the purpose(s) stated in the notice of such meeting.
SECTION 3. NOTICE OF STOCKHOLDER BUSINESS AND NOMINATIONS.
(A) ANNUAL MEETINGS OF STOCKHOLDERS.
(i) Nominations of persons for election to the Board of
Directors and the proposal of business to be considered by the
Stockholders may be made at an annual meeting of Stockholders
(A) pursuant to the Corporation's notice of meeting, (B) by or
at the direction of the Board of Directors or (C) by any
Stockholder who was a Stockholder of record at the time of
giving of notice provided for in this Section, who is entitled
to vote at the meeting and who complies with the notice
procedures set forth in this Section.
(ii) For nominations or other business to be properly brought
before an annual meeting by a Stockholder pursuant to section
1
<PAGE>
3(a)(i) of this ARTICLE 1, the Stockholder must have given
timely notice thereof in writing to the Secretary of the
Corporation and such other business must otherwise be a proper
matter for Stockholder action. To be timely, a Stockholder's
notice shall be delivered to the Secretary at the principal
offices of the Corporation not later than the close of
business on the sixtieth (60th) day nor earlier than the close
of business on the ninetieth (90th) day prior to the first
(1st) anniversary of the preceding year's annual meeting;
PROVIDED, HOWEVER, that in the event that the date of the
annual meeting is more than thirty (30) days before or more
than sixty (60) days after such anniversary date, notice by
the Stockholder to be timely must be so delivered not earlier
than the close of business on the ninetieth (90th) day prior
to such annual meeting and not later than the close of
business on the later of the sixtieth (60th) day prior to such
annual meeting or the tenth (10th) day following the day on
which public announcement of the date of such meeting is first
made by the Corporation. In no event shall the public
announcement of an adjournment of an annual meeting commence a
new time period for the giving of a Stockholders's notice as
described above. Such Stockholder's notice shall set forth:
(A) as to each person whom the Stockholder proposes to
nominate for election or reelection as a Director all
information relating to such person that is required to
be disclosed in solicitations of proxies for election of
Directors in an election contest, or is otherwise
required, in each case pursuant to Regulation 14A under
the Securities Exchange Act of 1934, as amended (the
"EXCHANGE Act") and Rule 14a-11 thereunder (including
such person's written consent to being named in the
proxy statement as a nominee and to serving as a
Director if elected);
(B) as to any other business that the Stockholder
proposes to bring before the meeting, a brief
description of the business desired to be brought before
the meeting, the reasons for conducting such business at
the meeting and any material interest in such business
of such Stockholder and the beneficial owner, if any, on
whose behalf the proposal is made; and
(C) as to the Stockholder giving the notice and the
beneficial owner, if any, on whose behalf the nomination
or proposal is made (1) the name and address of such
2
<PAGE>
Stockholder, as they appear on the Corporation's books,
and of such beneficial owner and (2) the class and
number of shares of the, Corporation which are owned
beneficially and of record by such Stockholder and such
beneficial owner.
(iii) Notwithstanding anything in the second sentence of
Section 3(a)(ii) of this ARTICLE I to the contrary, in the
event that the number of Directors to be elected to the Board
of Directors is increased and there is no public announcement
by the Corporation naming all of the nominees for Director or
specifying the size of the increased Board of Directors at
least seventy (70) days prior to the first (1st) anniversary
of the preceding year's annual meeting, a Stockholder's notice
required by this Section shall also be considered timely, but
only with respect to nominees for any new positions created by
such increase, if it shall be delivered to the Secretary at
the principal executive offices of the Corporation not later
than the close of business on the tenth (10th) day following
the day on which such public announcement is first made by the
Corporation.
(b) SPECIAL MEETINGS OF STOCKHOLDERS. Only such business shall be
conducted at a special meeting of Stockholders as shall have been
brought before the meeting pursuant to the Corporation's notice of
meeting. Nominations of persons for election to the Board of
Directors may be made at a special meeting of Stockholders at which
Directors are to be elected pursuant to the Corporation's notice of
meeting (a) by or at the direction of the Board of Directors or (b)
provided that the Board of Directors has determined that Directors
shall be elected at such meeting, by any Stockholder who is a
Stockholder of record at the time of giving of notice provided for
in this Section 3, who shall be entitled to vote at the meeting and
who complies with the notice procedures set forth in this Section 3.
In the event the Corporation calls a special meeting of Stockholders
for the purpose of electing one or more Directors to the Board of
Directors, any such Stockholder may nominate a person or persons (as
the case may be), for election to such positions(s) as specified in
the Corporation's notice of meeting, if the Stockholder's notice
required by Section 3(a)(ii) of this ARTICLE I shall be delivered to
the Secretary at the principal executive offices of the Corporation
not earlier than the close of business on the ninetieth (90th) day
prior to such special meeting and not later than the close of
business on the later of the sixtieth (60th) day prior to such
special meeting or the tenth (10th) day following the day on which
public announcement is first made of the date of the special meeting
and, of the nominees proposed by the Board
3
<PAGE>
of Directors to be elected at such meeting. In no event shall the
public announcement of an adjournment of a special meeting commence
a new time period for the giving of a Stockholder's notice as
described above.
(C) GENERAL.
(i) Only such persons who are nominated in accordance with the
procedures set forth in this Section 3 shall be eligible to
serve as Directors and only such business shall be conducted
at a meeting of Stockholders as shall have been brought before
the meeting in accordance with the procedures set forth in
this Section 3. Except as otherwise provided by applicable
law, the Chairman of the meeting shall have the power and duty
to determine whether a nomination or any business proposed to
be brought before the meeting was made or, proposed, as the
case may be, in accordance with the procedures set forth in
this Section 3 and, if any proposed nomination or business is
not in compliance with this Section 3, to declare that such
defective proposal or nomination shall be disregarded.
(ii) For purposes of this Section 3, "public announcement'
shall mean disclosure in a press release reported by the Dow
Jones News Service, Associate Press or comparable national
news service or in a document publicly filed by the
Corporation with the Securities and Exchange Commission
pursuant to Section 13, 14 or 15(d) of the Exchange Act.
(iii) Notwithstanding the foregoing provisions of this Section
3., a Stockholder shall also comply with all applicable
requirements of the Exchange Act and the rules and regulations
thereunder with respect to the matters set forth in this
Section 3. Nothing in this Section 3 shall be deemed to affect
any rights (A) of Stockholders to request inclusion of
proposals in the Corporation's proxy statement pursuant to
Rule 14a-8 under the Exchange Act; or (B) of the holders of
any series of Common Stock or Preferred Stock or any
outstanding voting indebtedness to elect Directors under
specified circumstances.
Notwithstanding any other provisions of the Certificate of Incorporation
of the Corporation and notwithstanding that a lesser percentage may be permitted
from time to time by. applicable law, no provision of this Section 3 of ARTICLE
I may be altered, amended or repealed in any respect, nor may any provision
inconsistent therewith be adopted, unless such alteration, amendment, repeal or
adoption is approved by the active
4
<PAGE>
vote of the holders of at least 80 percent of the combined voting power of the
then outstanding shares of the Corporation's stock entitled to vote generally at
elections of Directors voting together as a single class, and at least 80
percent of each class, series and issuance of combined voting power of the then
outstanding shares of the Corporation's stock entitled to vote generally at
elections of Directors voting separately as a class, series and issuance.
SECTION 4. QUORUM. At any meeting of the stockholders, the holders of a
majority in number of the total outstanding shares of stock of the Corporation
entitled to vote at such meeting, present in person or represented by proxy,
shall constitute a quorum of the stockholders for all purposes, unless the
representation of a larger number of shares shall be required by law, by the
Certificate of Incorporation or by these Bylaws, in which case the
representation of the number ofshares so required shall constitute a quorum;
provided that at any meeting.of the stockholders at which the holders of any
class of stock of the Corporation shall be entitled to vote separately as a
class, the holders of a majority in number of the total outstanding shares of
such class, present in person or represented by proxy, shall constitute a quorum
for purposes of such class vote unless the representation of a larger number of
shares of such class shall be required by law, by the Certificate of
Incorporation or by these Bylaws.
SECTION 5. ADJOURNED MEETINGS. Whether or not a quorum shall be present in
person or represented at any meeting of the stockholders, the holders of a
majority in number of the shares of stock of the Corporation present in person
or represented by proxy and entitled to vote at such meeting may adjourn from
time to time; provided, however, that if the holders of any class of stock of
the Corporation are entitled to vote separately as a class upon any matter at
such meeting, any adjournment of the meeting in respect of action by such class
upon such matter shall be determined by the holders of a majority of the shares
of such class present in person or represented by proxy and entitled to vote at
such meeting. When a meeting is adjourned to another time or place, notice need
not be given of the adjourned meeting if the time and place thereof are
announced at the meeting at which the adjournment is taken. At the adjourned
meeting the stockholders, or the holders of any class of stock entitled to vote
separately as a class, as the case may be, may transact any business which might
have been transacted by them at the original meeting. If the adjournment is for
more than thirty days, or if after the adjournment a new record date is fixed
for the adjourned meeting, a notice of the adjourned meeting shall be given to
each stockholder of record entitled to vote at the adjourned meeting.
SECTION 6. ORGANIZATION. Each annual and special meeting of Stockholders
held in person shall be presided over by a chairman, who shall have the
exclusive authority to, among other things, determine (a) whether business and
nominations have been properly brought before such meetings, and (b) the order
in which business and nominations properly brought before such meeting shall be
considered. The chairman of each annual and special meeting shall be the
Chairman of the Board of Directors, or such
5
<PAGE>
person as shall be appointed by the resolution approved by the majority of the
Board of Directors.
The Secretary of the Corporation shall act as Secretary of all meetings of
the stockholders; but in the absence of the Secretary, the Chairman may appoint
any person to act as Secretary of the meeting. It shall be the duty of the
Secretary to prepare and make, at least ten (10) days before every meeting of
stockholders, a complete list of stockholders entitled to vote at such meeting,
arranged in alphabetical order and showing the address of each stockholder and
the number of shares registered in the name of each stockholder. Such list shall
be open, either at a place within the city where the meeting is to be held,
which place shall be specified in the notice of the meeting or, if not so
specified, at the place where the meeting is to be held, for the ten (10) days
next preceding the meeting, to the examination of any stockholder, for any
purpose germane to the meeting, during ordinary business hours, and shall be
produced and kept at the time and place of the meeting during the whole time
thereof and subject to the inspection of any stockholder who may be present.
SECTION 7. VOTING. Except as otherwise provided in the Certificate of
Incorporation or by law, each stockholder shall be entitled to one vote for each
share of the capital stock of the Corporation registered in the name of such
stockholder upon the books of the Corporation. Each stockholder entitled to vote
at a meeting of stockholders or to express consent or dissent to corporate
action in writing without a meeting may authorize another person or persons to
act for him by proxy, but no such proxy shall be voted or acted upon after three
years from its date, unless the proxy provides for a longer period. When
directed by the presiding officer or upon the demand of any stockholder, the
vote upon any matter before a meeting of stockholders shall be by ballot. Except
as otherwise provided by law or by the Certificate of Incorporation, Directors
shall be elected by a plurality of the votes cast at a meeting of stockholders
by the stockholders entitled to vote in the election and, whenever any corporate
action, other than the election of Directors is to be taken, it shall be
authorized by a majority of the votes cast at a meeting of stockholders by the
stockholders entitled to vote thereon.
Shares of the capital stock of the Corporation belonging to the
Corporation or to another corporation, if a majority of the shares entitled to
vote in the election of directors of such other corporation is held, directly or
indirectly, by the Corporation, shall neither be entitled to vote nor be counted
for quorum purposes.
SECTION 8. INSPECTORS. When required by law or directed by the presiding
officer or upon the demand of any stockholder entitled to vote, but not
otherwise, the polls shall be opened and closed, the proxies and ballots shall
be received and taken in charge, and all questions touching the qualification of
voters, the validity of proxies and the acceptance or rejection of votes shall
be decided at any meeting of the stockholders by two or more Inspectors who may
be appointed by the Board of Directors before the meeting, or if not so
appointed, shall be appointed by the presiding officer at the
6
<PAGE>
meeting. If any person so appointed fails to appear or act, the vacancy may be
filled by appointment in like manner.
SECTION 9. ACTION WITHOUT MEETING. Unless otherwise provided in the
Certificate of Incorporation of the Corporation, prior to a firm commitment
underwritten public offering of the Corporation's Common Stock in which gross
proceeds equal or exceed $25 million before deducting underwriters' discounts
and other expenses of the offering (the "Offering"), any action permitted or
required by law, the Certificate of Incorporation of the Corporation or these
Bylaws to be taken at a meeting of stockholders, may be taken without a meeting,
without prior notice and without a vote, if a consent or consents in writing,
setting forth the action so taken, shall be signed by the holders of outstanding
stock having not less than the minimum number of votes that would be necessary
to authorize or take such action at a meeting at which all shares entitled to
vote thereon were present and voted and shall be delivered to the Corporation by
delivery to its registered office in the state of incorporation, its principal
place of business, or an officer or agent of the Corporation having custody of
the book in which proceedings of meetings of stockholders are recorded. Delivery
made to the Corporation's registered office shall be by hand or by certified or
registered mail, return receipt requested.
Every written consent shall bear the date of signature of each stockholder
who signs the consent, and no written consent shall be effective to take the
corporate action referred to therein unless, within sixty (60) days of the
earliest dated consent delivered in the manner required by this Section to the
Corporation, written consents signed by a sufficient number of holders to take
action are delivered to the Corporation by delivery to its registered office in
the state of incorporation, its principal place of business, or an officer or
agent of the Corporation having custody of the book in which proceedings of
meetings of stockholders are recorded. Delivery made to the Corporation's
registered office shall be by hand or by certified or registered mail, return
receipt requested.
Prompt notice of the taking of corporation action without a meeting by
less than a unanimous written consent shall be given by the Secretary to those
stockholders who have not consented in writing.
Subsequent to the Offering, any action required or permitted to be taken
by the Stockholders must be effected at a duly called annual or special meeting
of Stockholders and may not be effected without such a meeting by any consent in
writing by such holders.
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ARTICLE II
BOARD OF DIRECTORS
SECTION 1. NUMBER AND TERM OF OFFICE; CLASSES. The business and affairs of
the Corporation shall be managed by or under the direction of a Board of
Directors, none of whom need be stockholders of the Corporation. The number of
Directors constituting the Board of Directors shall be fixed from time to time
by resolution passed by a majority of the Board of Directors. The directors of
the Corporation shall be divided into three classes as nearly equal in size as
is practicable, hereby designated Class I, Class II and Class III. The term of
office of the initial Class I directors shall expire at the 1998 annual meeting
of the stockholders, the term of office of the initial Class II directors shall
expire at the 1999 annual meeting of the stockholders and the term of office of
the initial Class III directors shall expire at the 2000 annual meeting of the
stockholders. For the purposes thereof, the initial Class I, Class II and Class
III directors shall be those directors so designated by the Board of Directors
at its meeting held June 27, 1997. At each annual meeting of stockholders,
commencing with the 1998 meeting of stockholders, each of the successors elected
to replace the directors of a class whose term shall have expired at such annual
meeting shall be elected to hold office until the third annual meeting next
succeeding his or her election and until his or her respective successor shall
have been duly elected and qualified. If the number of directors is hereafter
changed, any newly created directorships or decrease in directorships shall be
so apportioned among the classes as to make all classes as nearly equal in
number as is practicable, provided that no decrease in the number of directors
constituting the Board of Directors shall shorten the term of any remaining
incumbent director.
SECTION 2. REMOVAL, VACANCIES AND ADDITIONAL DIRECTORS. Except as
otherwise provided in the Certificate of Incorporation, the stockholders may, at
any special meeting the notice of which shall state that it is called for that
purpose, remove, with or without cause, any Director and fill the vacancy;
provided that whenever any Director shall have been elected by the holders of
any class of stock of the Corporation voting separately as a class under the
provisions of the Certificate of Incorporation, such Director may be removed and
the vacancy filled only by the holders of that class of stock voting separately
as a class. Except as otherwise provided in the Certificate of Incorporation,
vacancies caused by any such removal and not filled by the stockholders at the
meeting at which such removal shall have been made, or any vacancy caused by the
death or resignation of any Director or for any other reason, and any newly
created directorship resulting from any increase in the authorized number of
Directors, may be filled by the affirmative vote of a majority of the Directors
then in office, although less than a quorum, and any Director so elected to fill
any such vacancy or newly created directorship shall hold office until his
successor is elected and qualified or until his earlier resignation or removal.
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When one or more Directors shall resign effective at a future date, a
majority of the Directors then in office, including those who have so resigned,
shall have power to fill such vacancy or vacancies, the vote thereon to take
effect when such resignation or resignations shall become effective, and each
Director so chosen shall hold office as herein provided in connection with the
filling of other vacancies
SECTION 3. PLACE OF MEETING. The Board of Directors may hold its meetings
in such place or places in the State of Delaware or outside the State of
Delaware as the Board from time to time shall determine.
SECTION 4. REGULAR MEETING. Regular meetings of the Board of Directors
shall be held at such times and places as the Board from time to time by
resolution shall determine. No notice shall be required for any regular meeting
of the Board of Directors, but a copy of every resolution fixing or changing the
time or place of regular meetings shall be mailed to every Director at least
five (5) days before the first meeting held in pursuance thereof.
SECTION 5. SPECIAL MEETING. Special meetings of the Board of Directors
shall be held whenever called by direction of the Chairman of the Board, the
Vice Chairman of the Board, the President or by any two of the Directors then in
office.
Notice of the day, hour and place of holding of each special meeting shall
be given by mailing the same at least two (2) days before the meeting or by
causing the same to be transmitted by telegraph, cable or wireless at least one
day bef6re the meeting to each Director. Unless otherwise indicated in the
notice thereof, any and all business other than an amendment of these Bylaws may
be transacted at any special meeting, and an amendment of these Bylaws may be
acted upon if the notice. of the meeting shall have stated that the amendment of
these Bylaws is one of the purposes of the meeting. At any meeting at which
every Director shall be present, even though without any notice, any business
may be transacted, including the amendment of these Bylaws.
SECTION 6. QUORUM. Subject to the provisions of Section 2 of this Article
II, a majority of the members of the Board of Directors in office (but, unless
the Board shall consist solely of one Director, in no case less than one-third
of the total number of Directors nor less than two Directors) shall constitute a
quorum for the transaction of business and the vote of the majority of the
Directors present at any meeting of the Board of Directors at which a quorum is
present shall be the act of the Board of Directors. If at any meeting of the
Board there is less than a quorum present, a majority of those present may
adjourn the meeting from time to time.
SECTION 7. ORGANIZATION. The Chairman of the Board, or in his absence, the
Vice Chairman of the Board, or in his absence, the President shall preside at
all meetings of the Board of Directors. In the absence of the Chairman of the
Board, the
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Vice Chairman of the Board and the President, a Chairman shall be elected from
the Directors present. The Secretary of the Corporation shall act as Secretary
of all meetings of the Directors; but in the absence of the Secretary, the
Chairman may appoint any person to act as Secretary of the meeting.
SECTION 8. COMMITTEE. The Board of Directors may, by resolution passed by
a majority of the whole Board, designate one or more committees, each committee
to consist of one or more of the Directors of the Corporation. The Board may
designate one or more Directors as alternate members of any committee, who may
replace any absent or disqualified member at any meeting of the committee. In
the absence or disqualification of a member of a committee, the member or
members thereof present at any meeting and not disqualified from voting, whether
or not he or they constitute a quorum, may unanimously appoint another member of
the Board of Directors to act at the meeting in the place of any such absent or
disqualified member. Any such committee, to the extent provided by resolution
passed by a majority of the whole Board, shall have and may exercise all the
powers and authority of the Board of Directors in the management of the business
and the affairs of the Corporation, and may authorize the seal of the
Corporation to be affixed to all papers which may require it; but no such
committee shall have the power or authority in reference to amending the
Certificate of Incorporation, adopting an agreement of merger or consolidation,
recommending to the stockholders the sale, lease or exchange of all or
substantially all of the Corporation's property and assets, recommending to the
stockholders a dissolution of the Corporation or a revocation of a dissolution,
or amending these Bylaws; and unless such resolution, these Bylaws, or the
Certificate of Incorporation expressly so provide, no such committee shall have
the power or authority to declare a dividend or to authorize the issuance of
stock.
SECTION 9. CONFERENCE TELEPHONE MEETINGS. Unless otherwise restricted by
the Certificate of Incorporation or by these Bylaws, the members of the Board of
Directors or any committee designated by the Board, may participate in a meeting
of the Board or such committee, as the case may be, by means of conference
telephone or similar communications equipment by means of which all persons
participating in the meeting can hear each other, and such participation shall
constitute presence in person at such meeting.
SECTION 10. CONSENT OF DIRECTORS OR COMMITTEE IN LIEU OF MEETING. Unless
otherwise restricted by the Certificate of Incorporation or by these Bylaws, any
action required or permitted to be taken at any meeting of the Board of
Directors, or of any committee thereto, may be taken without a meeting if all
members of the Board or committee, as the case may be, consent thereto in
writing and the writing or writings are filed with the minutes of proceedings of
the Board or committee, as the case may be.
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ARTICLE III
OFFICERS
SECTION 1. OFFICERS. The officers of the Corporation shall be a Chairman
of the Board, a Vice Chairman of the Board, a President, one or more Vice
Presidents, a Secretary and a Treasurer, and such additional officers, if any,
as shall be elected by the Board of Directors pursuant to the provisions of
Section 8 of this Article III. The Chairman of the Board, the Vice Chairman of
the Board, the President, one or more Vice Presidents, the Secretary and the
Treasurer shall be elected by the Board of Directors at its first meeting after
each annual meeting of the stockholders. The failure to hold such election shall
not of itself terminate the term of office of any officer. All officers shall
hold office at the pleasure of the Board of Directors. Any officer may resign at
any time upon written notice to the Corporation. Officers may, but need not, be
Directors. Any number of offices may be held by the same person.
All officers, agents and employees shall be subject to removal, with or
without cause, at any time by the Board of Directors. The removal of an officer
without cause shall be without prejudice to his contract rights, if any. The
election or appointment of an officer shall not of itself create contract
rights. All agents and employees other than officers elected by the Board of
Directors shall also be subject to removal, with or without cause, at any time
by the officers appointing them.
Any vacancy caused by the death of any officer, his resignation, his
removal, or otherwise, may be filled by the Board of Directors, and any officer
so elected shall hold office at the pleasure of the Board of Directors.
In addition to the powers and duties, of the officers of the Corporation
as set forth in these Bylaws, the officers shall have such authority and shall
perform such duties as from time to time may be determined by the Board of
Directors.
SECTION 2. POWERS AND DUTIES OF THE CHAIRMAN OF THE BOARD. The Chairman of
the Board shall be the chief executive officer of the Corporation and, subject
to the control of the Board of Directors, shall have general charge and control
of all its business and affairs and shall have all powers and shall perform all
duties incident to the office of Chairman of the Board. He shall preside at all
meetings of the stockholders and at all meetings of the Board of Directors and
shall have such other powers and perform such other duties as may from time to
time be assigned to him by these Bylaws or by the Board of Directors.
SECTION 3. POWERS AND DUTIES OF THE VICE CHAIRMAN OF THE BOARD. The Vice
Chairman of the Board, shall be the chief executive officer of the Corporation
and, subject to the control of the Board of Directors and the Chairman of the
Board, shall have general charge and control of all its business and affairs and
shall have all powers
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and shall perform all duties incident to the office of Vice Chairman of the
Board. In the absence of the Chairman of the Board, he shall preside at all
meetings of the stockholders and at all meetings of the Board of Directors and
shall have such other powers and perform such other duties as may from time to
time to be assigned to him by these Bylaws or by the Board of Directors or the
Chairman of the Board.
SECTION 4. POWERS AND DUTIES OF THE PRESIDENT. The President shall be the
chief operating officer of the Corporation and, subject to the control of the
Board of Directors, the Chairman of the Board and the Vice Chairman of the
Board, shall have general charge and control of all its operations and shall
have all powers and shall perform all duties incident to the office of
President. In the absence of the Chairman of the Board and the Vice Chairman of
the Board, he shall preside at all meetings of the stockholders and at all
meetings of the Board of Directors and shall have such other powers and perform
such other duties as may from time to time be assigned to him by these Bylaws or
by the Board of Directors, the Chairman of the Board or the Vice Chairman of the
Board.
SECTION 5. POWERS AND DUTIES OF THE VICE PRESIDENTS. Each Vice President
shall have all powers and shall perform all duties incident to the office of
Vice President and shall have such other powers and perform such other duties as
may from time to time be assigned to him by these By laws or by the Board of
Directors, the Chairman of the Board, the Vice Chairman of the Board or the
President.
SECTION 6. POWERS AND DUTIES OF THE SECRETARY. The Secretary shall keep
the minutes of all meetings of the Board of Directors and the minutes of all
meetings of the stockholders in books provided for that purpose; he shall attend
to the giving or serving of all notices of the Corporation; he shall have
custody of the corporate seal of the Corporation and shall affix the same to
such documents and other papers as the Board of Directors or the President shall
authorize and direct; he shall have charge of the stock certificate books,
transfer books and stock ledgers and such other books and papers as the Board of
Directors or the President shall direct, all of which shall at all reasonable
times be open to the examination of any Director, upon application, at the
office of the Corporation during business hours; and whenever required by the
Board of Directors, the Chairman of the Board, the Vice Chairman of the Board or
the President shall render statements of such accounts; and he shall have all
powers and shall perform all duties incident to the office of Secretary and
shall also have such other powers and shall perform such other duties as may
from time to time be assigned to him by these Bylaws or by the Board of
Directors, the Chairman of the Board., the Vice Chairman of the Board or the
President.
SECTION 7. POWERS AND DUTIES OF THE TREASURER. The Treasurer shall have
custody of, and when proper shall pay out, disburse or otherwise dispose of, all
funds and securities of the Corporation which may have come into his hands; he
may endorse on behalf of the Corporation for collection checks, notes and other
obligations and shall deposit the same to the credit of the Corporation in such
bank or banks or depositary or depositaries as the Board of Directors may
designate; he shall sign all receipts and vouchers for payments made to the
Corporation; he shall enter or cause to be entered
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regularly in the books of the Corporation kept for the purpose full and accurate
accounts of all moneys received or paid or otherwise disposed of by him and
whenever required by the Board of Directors, the Chairman of the Board, the Vice
Chairman of the Board or the President shall render statements of such accounts;
he shall, at all reasonable times, exhibit his books and accounts to any
Director of the Corporation upon application at the office of the Corporation
during business hours; and he shall have all powers and he shall perform all
duties incident to the office of Treasurer and shall also have such other powers
and shall perform such other duties as may from time to time be assigned to him
by these Bylaws or by the Board of Directors, the Chairman of the Board, the
Vice Chairman of the Board or the President.
SECTION 8. ADDITIONAL OFFICERS. The Board of Directors may from time to
time elect such other officers (who may but need not be Directors), including a
Controller, Assistant Treasurers, Assistant Secretaries and Assistant
Controllers, as the Board may deem advisable and such officers shall have such
authority and shall perform such duties as may from time to time be assigned to
them by the Board of Directors, the Chairman of the Board, the Vice Chairman of
the Board or the President.
The Board of Directors may from time to time by resolution delegate to any
Assistant Treasurer or Assistant Treasurers any of the powers or duties herein
assigned to the Treasurer; and may similarly delegate to any Assistant Secretary
or Assistant Secretaries any of the powers or duties assigned to the Secretary.
SECTION 9. GIVING OF BOND BY OFFICERS. All officers of the Corporation,
if required to do so by the Board of Directors, shall furnish bonds to the
Corporation for the faithful performance of their duties, in such penalties and
with such conditions and security as the Board shall require.
SECTION 10. VOTING UPON STOCKS. Unless otherwise ordered by the Board of
Directors, the Chairman of the Board, the Vice Chairman of the Board, the
President or any Vice President shall have full power and authority on behalf of
the Corporation to attend and to act and to vote, or in the name of the
Corporation to execute proxies to vote, at any meeting of stockholders of any
corporation in which the Corporation may hold stock, and at any such meeting
shall possess and may exercise, in person or by proxy, any and all rights,
powers and privileges incident to the ownership of such stock. The Board of
Directors may from time to time, by resolution, confer like powers upon any
other person or persons.
SECTION 11. COMPENSATION OF OFFICERS. The officers of the Corporation
shall be entitled to receive such compensation for their services as shall from
time to time be determined by the Board of Directors.
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ARTICLE IV
INDEMNIFICATION OF DIRECTORS AND OFFICERS
SECTION 1. NATURE OF INDEMNITY. The Corporation shall indemnify any person
who 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, by reason of the fact that he is or was or has
agreed to become a Director or officer of the Corporation, or is or was serving
or has agreed to serve at the request of the Corporation as a Director or
officer of another corporation, partnership, joint venture, trust or other
enterprise, or by reason of any action alleged to have been taken or omitted in
such capacity, and may indemnify any person who was or is a party or is
threatened to be made a party to such an action, suit or proceeding by reason of
the fact that he is or was or has agreed to become an employee or agent of the
Corporation, or is or was serving or has agreed to serve at the request of the
Corporation as an 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 him or on his behalf in connection with such action, suit or
proceeding and any appeal therefrom, if he acted in good faith and in a manner
he reasonably believed to be in or not opposed to the best interests of the
Corporation, and, with respect to any criminal action or proceeding, had no
reasonable cause to believe his conduct was unlawful; except that in the case of
an action or suit by or in the right of the Corporation to procure a judgment in
its favor (1) such indemnification shall be limited to expenses (including
attorneys' fees) actually and reasonably incurred by such person in the defense
or settlement of such action or suit, and (1) no indemnification shall be made
in respect of any claim, issue or matter as to which such person shall have been
adjudged to be liable to the Corporation unless and only to the extent that the
Delaware 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, such person is fairly and
reasonably entitled to indemnity for such expenses which the Delaware Court of
Chancery or such other court shall deem proper.
The termination of any action, suit or proceeding by judgment, order,
settlement, conviction, or upon a plea of nolo contendere or its equivalent,
shall not, of itself, create a presumption that the person did not act in good
faith and in a manner which he reasonably believed to be in or not opposed to
the best interests of the Corporation, and, with respect to any criminal action
or proceeding, had reasonable cause to believe that his conduct was unlawful.
SECTION 2. SUCCESSFUL DEFENSE. To the extent that a Director, officer,
employee or agent of the Corporation has been successful on the merits or
otherwise in defense of any action, suit or proceeding referred to in Section I
of this Article IV or in defense of any claim, issue or matter therein, he shall
be indemnified against expenses
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(including attorneys' fees) actually and reasonably incurred by him in
connection therewith.
SECTION 3. DETERMINATION THAT INDEMNIFICATION IS PROPER. Any
indemnification of a Director or Officer of the Corporation under Section I of
this Article IV (unless ordered by a court) shall be made by the Corporation
unless a determination is made that indemnification of the Director or officer
is not proper in the circumstances because he has not met the applicable
standard of conduct set forth in Section I. Any indemnification of an employee
or agent of the Corporation under Section I (unless ordered by a court) may be
made by the Corporation upon a determination that indemnification of the
employee or agent is proper in the circumstances because he has met the
applicable standard of conduct set forth in Section 1. Any such determination
shall be made (1) by the Board of Directors 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.
SECTION 4. ADVANCE PAYMENT OF EXPENSES. Unless the Board of Directors
otherwise determines in a specific case, expenses incurred by a Director or
officer in defending a civil or criminal action, suit or proceeding shall be
paid by the Corporation in advance of the final disposition of such action, suit
or proceeding upon receipt of an undertaking by or on behalf of the Director or
officer to repay such amount if it shall ultimately be determined that he is not
entitled to be indemnified by the Corporation as authorized in this Article IV.
Such expenses incurred by other employees and agents may be so paid upon such
terms and conditions, if any, as the Board of Directors deems appropriate. The
Board of Directors may authorize the Corporation's legal counsel to represent
such Director, officer, employee or agent in any action, suit or proceeding,
whether or not the Corporation is a party to such action, suit or proceeding.
SECTION 5. SURVIVAL: PRESERVATION OF OTHER RIGHTS. The foregoing
indemnification provisions shall be deemed to be a contract between the
Corporation and each Director, officer, employee and agent who serves in any
such capacity at any time while these provisions as well as the relevant
provisions of the Delaware General Corporation Law are in effect and any repeal
or modification thereof shall not affect any right or obligation then existing
with respect to any state of facts then or previously existing or any action,
suit, or proceeding previously or thereafter brought or threatened based in
whole or in part upon any such state of facts. Such a contract right may not be
modified retroactively without the consent of such Director, officer, employee
or agent.
The indemnification provided by this Article IV shall not be deemed
exclusive of any other rights to which those indemnified may be entitled under
any bylaw, agreement, vote of stockholders or disinterested Directors or
otherwise, both as to action in his official capacity and as to action in
another capacity while holding such office, and shall continue as to a person
who has ceased to be a Director, officer, employee or agent and
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shall inure to the benefit of the heirs, executors and administrators of such a
person. The Corporation may enter into an agreement with any of its Directors,
officers, employees or agents providing for indemnification and advancement of
expenses, including attorneys fees, that may change, enhance, qualify or limit
any right to indemnification or advancement of expenses created by this Article
IV.
SECTION 6. SEVERABILITY. If this Article IV or any portion hereof shall be
invalidated on any ground by any court of competent jurisdiction, then the
Corporation shall nevertheless indemnify each Director or officer and may
indemnify each employee or agent of the Corporation as to costs, charges and
expenses (including attorneys' fees), judgment, fines and amounts paid in
settlement with respect to any action, suit or proceeding, whether civil,
criminal, administrative or investigative, including an action by or in the
right of the Corporation, to the fullest extent permitted by any applicable
portion of this Article IV that shall not have been invalidated and to the
fullest extent permitted by applicable law.
SECTION 7. SUBROGATION. In the event of payment of indemnification to a
person described in Section I of this Article IV, the Corporation shall be
subrogated to the extent of such payment to any right of recovery such person
may have and such person, as a condition of receiving indemnification from the
Corporation, shall execute all documents and do all things that the Corporation
may deem necessary or desirable to perfect such right of recovery, including the
execution of such documents necessary to enable the Corporation effectively to
enforce any such recovery.
SECTION 8. NO DUPLICATION OF PAYMENTS. The Corporation shall not be liable
under this Article IV to make any payment in connection with any claim made
against a person described in Section I of this Article IV to the extent such
person has otherwise received payment (under any insurance policy, bylaw or
otherwise) of the amounts otherwise indemnifiable hereunder.
ARTICLE V
STOCK-SEAL-FISCAL YEAR
SECTION 1. CERTIFICATES FOR SHARES OF Stock. The certificates for shares
of stock of the Corporation shall be in such form, not inconsistent with the
Certificate of Incorporation, as shall be approved by the Board of Directors.
All certificates shall be signed by the Chairman of the Board, the Vice Chairman
of the Board, the President or a Vice President and by the Secretary or an
Assistant Secretary or the Treasurer or an Assistant Treasurer, and shall not be
valid unless so signed.
In case any officer or officers who shall have signed any such certificate
or certificates shall cease to be such officer or officers of the Corporation,
whether because
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of death, resignation or otherwise, before such certificate or certificates
shall have been delivered by the Corporation, such certificate or certificates
may nevertheless be issued and delivered as though the person or persons who
signed such certificate or certificates had not ceased to be such officer or
officers of the Corporation.
All certificates for shares of stock shall be consecutively numbered as
the same are issued. The name of the person owning the shares represented
thereby with the number of such shares and the date of issue thereof shall be
entered on the books of the Corporation.
Except as hereinafter provided, all certificates surrendered to the
Corporation for transfer shall be canceled, and no new certificates shall be
issued until former certificates for the same number of shares have been
surrendered and canceled.
SECTION 2. LOST, STOLEN OR DESTROYED CERTIFICATES. Whenever a person
owning a certificate for shares of stock of the Corporation alleges that it has
been lost, stolen or destroyed, he shall file in the office of the Corporation
an affidavit setting forth, to the best of his knowledge and belief, the time,
place and circumstances of the loss, theft or destruction, and, if required by
the Board of Directors, a bond of indemnity or other indemnification sufficient
in the opinion of the Board of Directors to indemnify the Corporation and its
agents against any claim that may be made against it or them on account of the
alleged loss, theft or destruction of any such certificate or the issuance of a
new certificate in replacement therefor. Thereupon the Corporation may cause to
be issued to such person a new certificate in replacement for the certificate
alleged to have been lost, stolen or destroyed. Upon the stub of every new
certificate so issued shall be noted the fact of such issue and the number, date
and the name of the registered owner of the lost, stolen or destroyed
certificate in lieu of which the new certificate is issued.
SECTION 3. TRANSFER OF SHARES. Shares of stock of the Corporation shall be
transferred on the books of the Corporation by the holder thereof, in person or
by his attorney duly authorized in writing, upon surrender and cancellation of
certificates for the number of shares of stock to be transferred, except as
provided in Section 2 of this Article IV.
SECTION 4. REGULATIONS. The Board of Directors shall have power and
authority to make such rules and regulations as it may deem expedient concerning
the issue, transfer and registration of certificates for shares of stock of the
Corporation.
SECTION 5. RECORD DATE. In order that the Corporation may determine the
stockholders entitled to notice of or to vote at any meeting of stockholders or
any adjournment thereof, or to express consent to corporate action in writing
without a meeting or to receive payment of any dividend or other distribution or
allotment of any rights, or to exercise any rights in respect of any change,
conversion or exchange of stock or for the purpose of any other lawful action,
as the case may be, the Board of
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Directors may fix, in advance, a record date, which shall not be (i) more than
sixty (60) nor less than ten (10) days before the date of such meeting, or (ii)
in the case of corporate action to be taken by consent in writing without a
meeting prior to, or more than ten (10) days after, the date upon which the
resolution fixing the record date is adopted by the Board of Directors, or (iii)
more than sixty (60) days prior to any other action.
If no record date is fixed, the record date for determining stockholders
entitled to notice of or to vote at a meeting of stockholders shall be at the
close of business on the day next preceding the day on which notice is given or,
if notice is waived, at the close of business on the day next preceding the day
on which the meeting is held; the record date for determining stockholders
entitled to express consent to corporate action in writing without a meeting,
when no prior action by the Board of Directors is necessary, shall be the day on
which the first written consent is delivered to the Corporation; and the record
date for determining stockholders for any other purpose shall be at the close of
business on the day on which the Board of Directors adopts the resolution
relating thereto. A determination of stockholders of record entitled to notice
of or to vote at a meeting of stockholders shall apply to any adjournment of the
meeting; provided, however, that the Board of Directors may fix a new record
date for the adjourned meeting.
SECTION 6. DIVIDENDS. Subject to the provisions of the Certificate of
Incorporation, the Board of Directors shall have power to declare and pay
dividends upon shares of stock of the Corporation, but only out of funds
available for the payment of dividends as provided by law.
Subject to the provisions of the Certificate of Incorporation, any
dividends declared upon the stock of the Corporation shall be payable on such
date or dates as the Board of Directors shall determine. If the date fixed for
the payment of any dividend shall in any year fall upon a legal holiday, then
the dividend payable on such date shall be paid on the next day not a legal
holiday.
SECTION 7. CORPORATE SEAL. The Board of Directors shall provide a suitable
seal, containing the name of the Corporation, which seal shall be kept in the
custody of the Secretary. A duplicate of the seal may be kept and be used by any
officer of the Corporation designated by the Board of Directors, the Chairman of
the Board, the Vice Chairman of the Board or the President.
SECTION 8. FISCAL YEAR. The fiscal year of the Corporation shall be such
fiscal year as the Board of Directors from time to time by resolution shall
determine.
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ARTICLE VI
MISCELLANEOUS PROVISIONS
SECTION 1. CHECKS, NOTES, ETC. All checks, drafts, bills of exchange,
acceptances, notes or other obligations or orders for the payment of money shall
be signed and, if so required by the Board of Directors, countersigned by such
officers of the Corporation and/or other persons as the Board of Directors from
time to time shall designate.
Checks, drafts, bills of exchange, acceptances, notes, obligations and
orders for the payment of money made payable to the Corporation may be endorsed
for deposit to the credit of the Corporation with a duly authorized depository
by the Treasurer and/or such other officers or persons as the Board of Directors
from time to time may designate.
SECTION 2. LOANS. No loans and no renewals of any loans shall be
contracted on behalf of the Corporation except as authorized by the Board of
Directors. When authorized so to do, any officer or agent of the Corporation may
effect loans and advances for the Corporation from any bank, trust company or
other institution or from any firm, corporation or individual, and for such
loans and advances may make, execute and deliver promissory notes, bonds or
other evidences of indebtedness of the Corporation. When authorized so to do,
any officer or agent of the Corporation may pledge, hypothecate or transfer, as
security for the payment of any and all loans, advances, indebtedness and
liabilities of the Corporation, any and all stocks, securities and other
personal property at any time held by the Corporation, and to that end may
endorse, assign and deliver the same. Such authority may be general or confined
to specific instances.
SECTION 3. CONTRACTS. Except as otherwise provided in these Bylaws or by
law or as otherwise directed by the Board of Directors, the Chairman of the
Board, the Vice Chairman of the Board, the President or any Vice President shall
be authorized to execute and deliver, in the name and on behalf of the
Corporation, all agreements, bonds, contracts, deeds, mortgages, and other
instruments, either for the Corporation's own account or in a fiduciary or other
capacity, and the seal of the Corporation, if appropriate, shall be affixed
thereto by any of such officers or the Secretary or an Assistant Secretary. The
Board of Directors, the Chairman of the Board, the Vice Chairman of the Board,
the President or any Vice President designated by the Board of Directors, the
Chairman of the Board, the Vice Chairman of the Board or the President may
authorize any other officer, employee or agent to execute and deliver, in the
name and on behalf of the Corporation, agreements, bonds, contracts, deeds,
mortgages, and other instruments, either for the Corporation's own account or in
a fiduciary or other capacity, and, if appropriate, to affix the seal of the
Corporation thereto. The grant of such authority by the Board or any such
officer may be general or confined to specific instances.
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SECTION 4. WAIVERS OF NOTICE. Whenever any notice whatever is required to
be given by law, by the Certificate of Incorporation or by these Bylaws to any
person or persons, a waiver thereof in writing, signed by the person or persons
entitled to the notice, whether before or after the time stated therein, shall
be deemed equivalent thereto.
SECTION 5. OFFICES OUTSIDE OF DELAWARE. Except as otherwise required by
the laws of the State of Delaware, the Corporation may have an office or offices
and keep its books, documents and papers outside of the State of Delaware at
such place or places as from time to time may be determined by the Board of
Directors, the Chairman of the Board or the Vice Chairman of the Board.
ARTICLE VII
AMENDMENTS
The Board of Directors shall have the power to adopt, amend and repeal
from time to time Bylaws of the Corporation, subject to the right of the
stockholders entitled to vote with respect thereto to amend or repeal such
Bylaws as adopted or amended by the Board of Directors; provided, however, that
unless a different percentage is called for in a particular provision hereof,
any amendment or repeal of the Bylaws of the Corporation by the stockholders
shall be by a vote of the holders of at least 66 2/3 percent of the total votes
eligible to be cast by holders of voting stock with respect to such amendment or
repeal.
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EXHIBIT 10.52
EXECUTION COUNTERPART
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT (the "Agreement") between CS12 Acquisition
Corp., a Delaware corporation (the "Company") and a wholly-owned subsidiary of
Comfort Systems USA, Inc., a Delaware corporation ("Comfort"), and Gary E. Hess
("Executive") is entered into and effective as of the 1st day of April, 1998.
This Agreement supersedes any other employment agreements or understandings,
written or oral, between the Company and Executive.
R E C I T A L S
The following statements are true and correct:
As of the date of this Agreement, the Company, Comfort and the other
subsidiaries and affiliates of each (collectively, the "Comfort Group") are
engaged primarily in the business of mechanical contracting services, including
heating, ventilation and air conditioning, plumbing, piping and electrical and
related services ("Services").
Executive is employed hereunder by the Company in a confidential
relationship wherein Executive, in the course of his employment with the
Company, has and will continue to become familiar with and aware of information
as to the Comfort Group's customers, specific manner of doing business,
including the processes, techniques and trade secrets utilized by the Comfort
Group, and future plans with respect thereto, all of which has been and will be
established and maintained at great expense to the Company and Comfort. This
information is a trade secret and constitutes the valuable goodwill of the
Company and Comfort.
NOW, THEREFORE, in consideration of the mutual promises, terms, covenants
and conditions set forth herein and the performance of each, the Company and
Executive hereby agree as follows:
A G R E E M E N T S
1. EMPLOYMENT AND DUTIES.
(a) The Company hereby employs Executive in an executive position
(initially with the title of President and responsibility for the
operations of the Company), and Executive hereby accepts this employment
upon the terms and conditions herein contained. Executive agrees to devote
substantially all of his business time, attention and efforts to promote
and further the business of the Company.
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(b) Executive shall faithfully adhere to, execute and fulfill all
lawful policies established by the Company and Comfort, including
Comfort's Corporate Compliance Policy.
(c) Executive shall not, during the term of Executive's employment
hereunder, be engaged in any other business activity pursued for gain,
profit or other pecuniary advantage if such activity interferes in any
material respect with Executive's duties and responsibilities hereunder.
The foregoing limitations shall not be construed as prohibiting Executive
from making personal investments in such form or manner as will neither
require Executive's services in the operation or affairs of the companies
or enterprises in which such investments are made nor violate the terms of
Section 4.
(d) Executive's place of employment shall be in Upper Marlboro,
Maryland or elsewhere in the Baltimore, Maryland area.
2. COMPENSATION. For all services rendered by Executive, the Company shall
compensate Executive as follows:
(a) BASE SALARY. Effective the date hereof, the base salary payable
to Executive shall be $150,000 per year, payable on a regular basis in
accordance with the Company's standard payroll procedures, but not less
often than monthly. On at least an annual basis, the Company will review
Executive's performance and may make increases to such base salary if, in
its discretion, any such increase is warranted.
(b) EXECUTIVE PERQUISITES, BENEFITS AND OTHER COMPENSATION.
Executive shall be entitled to receive additional benefits and
compensation from the Company in such form and to the extent specified
below:
(i) Coverage, subject to contributions required of employees
generally, for Executive and Executive's dependent family members
under health, hospitalization, disability, dental, life and other
insurance plans that the Company may have in effect from time to
time for the benefit of its employees.
(ii) Reimbursement for all business travel and other
out-of-pocket expenses reasonably incurred by Executive in the
performance of Executive's services pursuant to this Agreement.
Reimbursable expenses shall be appropriately documented in
reasonable detail by Executive, and shall be in a format consistent
with the Company's expense reporting policy.
(iii) Such other executive perquisites as may be made
available to, or deemed appropriate for, Executive by the Board of
Directors of the Company, and participation in all other
Company-wide employee benefits as are available from time to time.
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3. CONFIDENTIALITY.
(a) CONFIDENTIAL INFORMATION. As used herein, the term "Confidential
Information" means any information, technical data or know-how of the
Company and the other members of the Comfort Group, including, but not
limited to, that which relates to customers, business affairs, business
plans, financial matters, financial plans and projections, pending and
proposed acquisitions, operational and hiring matters, contracts and
agreements, marketing, sales and pricing, prospects of the Comfort Group,
and any information, technical data or know-how that contain or reflect
any of the foregoing, whether prepared by the Company, any other member of
the Comfort Group, Executive or any other person or entity; PROVIDED,
HOWEVER, that the term "Confidential Information" shall not include
information, technical data or know-how that Executive can demonstrate is
generally available to the public not as a result of any breach of this
Agreement by Executive.
(b) NO DISCLOSURE. Except in the performance of Executive's duties
as an executive of the Company, Executive will not, during or after the
Executive's engagement with the Company, disclose to any person or entity
or use, for any reason whatsoever, any Confidential Information.
4. NON-COMPETITION AGREEMENT.
(a) COMPETITION. Executive will not, during the period of
Executive's employment by or with the Company, and for a period of two (2)
years immediately following the termination of Executive's employment, for
any reason whatsoever, directly or indirectly, on behalf of Executive or
on behalf of or in conjunction with any other person, company,
partnership, corporation or business of whatever nature:
(i) engage, as an officer, director, shareholder, owner,
partner, joint venturer, or in a managerial capacity, whether as an
employee, independent contractor, consultant or advisor, or as a
sales representative, or make or guarantee loans or invest, in or
for any business engaged in Services in competition with the Company
or any other member of the Comfort Group within one hundred (100)
miles of where the Company conducts business during the Term (the
"Territory");
(ii) call upon any person who is, at that time, within the
Territory, an employee of the Company or any other member of the
Comfort Group in a technical, managerial or sales capacity for the
purpose or with the intent of enticing such employee away from or
out of the employ of the Company or such other member of the Comfort
Group;
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(iii) call upon any person or entity which is at that time, or
which has been within two (2) years prior to that time, a customer
of the Company or any other member of the Comfort Group for the
purpose of soliciting or selling Services; or
(iv) call upon any prospective acquisition candidate, on
Executive's own behalf or on behalf of any competitor, which
acquisition candidate either was called upon by Executive on behalf
of the Company or any other member of the Comfort Group or was the
subject of an acquisition analysis made by Executive on behalf of
the Company or any other member of the Comfort Group for the purpose
of acquiring such acquisition candidate.
Notwithstanding the above, the foregoing covenant shall not be deemed to
prohibit Executive from acquiring as an investment not more than the
lesser of three percent (3%) or five hundred thousand dollars ($500,000)
in value of any class of securities of a competing business whose
securities are traded on a national securities exchange or on an
over-the-counter or similar market.
(b) NO VIOLATION. It is specifically agreed that the period during
which the agreements and covenants of Executive made in this Section 4
shall be effective shall be computed by excluding from such computation
any time during which Executive is in violation of any provision of this
Section 4.
5. TERM; TERMINATION; RIGHTS ON TERMINATION. The initial term of this
Agreement shall begin on the date hereof and continue for three (3) years (the
"Initial Term"), unless Executive's employment has been terminated sooner as
herein provided. Commencing on April 1, 2001, a renewal term of this Agreement
shall begin on each anniversary of the date hereof and continue for one (1) year
(each a "Renewal Term" and, collectively with the Initial Term, the "Term"),
unless Executive's employment has been terminated sooner as herein provided.
This Agreement and Executive's employment may be terminated in any one of the
following ways:
(a) DEATH. The death of Executive shall immediately terminate this
Agreement with no severance compensation due to Executive's estate.
(b) DISABILITY. If, as a result of incapacity due to physical or
mental illness or injury, Executive shall have been absent from
Executive's full-time duties hereunder for four (4) consecutive months,
then thirty (30) days after receiving written notice (which notice may
occur before or after the end of such four (4) month period, but which
shall not be effective earlier than the last day of such four (4) month
period), the Company may terminate Executive's employment hereunder,
provided Executive is unable to resume his full-time duties at the
conclusion of such notice period. In the event this Agreement is
terminated as a result of Executive's disability, Executive shall receive
from the Company Executive's base salary at the rate then in effect for
the lesser of the time period remaining under the Term or one (1) year,
and such amount shall be payable during such period in
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a manner consistent with Company's standard pay practices. The amount
payable hereunder shall be decreased by the amount of benefits otherwise
actually paid by the Company to Executive or on Executive's behalf or
under any insurance procured by the Company.
(c) GOOD CAUSE. The Company may terminate this Agreement ten (10)
days after written notice to Executive for good cause, which shall be any
of the following: (i) Executive's willful or material breach of this
Agreement; (ii) Executive's gross negligence in the performance or
intentional nonperformance of any of Executive's material duties and
responsibilities hereunder; (iii) Executive's willful dishonesty, fraud or
misconduct with respect to the business or affairs of the Company or any
other member of the Comfort Group; (iv) Executive's conviction of a felony
crime; (v) Executive's confirmed positive illegal drug test result; (vi)
sexual harassment by Executive; or (vii) willful and material failure by
Executive to comply with Comfort's Corporate Compliance Policy. In the
event of a termination for good cause, as enumerated above, Executive
shall have no right to any severance compensation.
(d) WITHOUT CAUSE. At any time after the commencement of Executive's
employment, Executive or the Company may, without cause, terminate this
Agreement and Executive's employment, effective thirty (30) days after
receipt of written notice. Should Executive be terminated by the Company
without cause prior to the second anniversary of the date hereof,
Executive shall receive from the Company Executive's base salary at the
rate then in effect for two (2) years, and such amount shall be payable
during such period in a manner consistent with the Company's standard pay
practices. Should Executive be terminated by the Company without cause on
or after the second anniversary of the date hereof, Executive shall
receive from the Company Executive's base salary at the rate then in
effect for the lesser of (i) the time period remaining under the Initial
Term or the applicable Renewal Term, as the case may be, or (ii) one (1)
year, and such amount shall be payable during such period in a manner
consistent with the Company's standard pay practices. If Executive resigns
or otherwise terminates Executive's employment, Executive shall receive no
severance compensation.
(e) NON-RENEWAL. At any time during the Initial Term or any Renewal
Term, either party may, without cause and upon not less than thirty (30)
days' prior written notice to the other party, terminate this Agreement
and Executive's employment, effective at the end of the Initial Term or
such Renewal Term, as the case may be. If either party terminates
Executive's employment pursuant to this Section 5(e), Executive shall
receive no severance compensation.
6. RETURN OF COMPANY PROPERTY. All records, plans, manuals, "field
guides", memoranda, lists, documents, statements and other property delivered to
Executive by or on behalf of the Company or any other member of the Comfort
Group, by any customer of the Company or any other member of the Comfort Group
(including, but not limited to, any such customers obtained
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by Executive), by any acquisition candidate of the Company or any other member
of the Comfort Group, and all records compiled by Executive which pertain to the
business or activities of the Company or any other member of the Comfort Group
shall be and remain the property of the Company and shall be subject at all
times to its discretion and control. Likewise, all correspondence with
customers, representatives or acquisition candidates, reports, records, charts,
advertising materials, and any data collected by Executive or by or on behalf of
the Company or any other member of the Comfort Group or any representative of
any of them shall be delivered promptly to the Company without request by it
upon termination of Executive's employment with the Company.
7. INVENTIONS. Executive shall disclose promptly to the Company any and
all significant conceptions and ideas for inventions, improvements and valuable
discoveries, whether patentable or not, which are conceived or made by
Executive, solely or jointly with another, during the period of Executive's
employment with the Company or within one (1) year thereafter, and which are
directly related to the business or activities of the Company or which Executive
conceives as a result of his employment by the Company. Executive hereby assigns
and agrees to assign all Executive's interests therein to the Company or its
nominee. Whenever requested to do so by the Company, Executive shall execute any
and all applications, assignments or other instruments that the Company shall
deem necessary to apply for and obtain Letters Patent of the United States or
any foreign country or to otherwise protect the Company's interest therein.
8. TRADE SECRETS. Executive agrees that Executive will not, during or
after the Term, disclose the specific terms of the Company's or any other member
of the Comfort Group's relationships or agreements with significant vendors or
customers or any other significant and material trade secret of the Company or
any other member of the Comfort Group, whether in existence or proposed, to any
person, firm, partnership, corporation or business for any reason or purpose
whatsoever, unless: (a) such information is, or through no fault of Executive
becomes, published or otherwise available to others or the public under
circumstances such that such others or the public may utilize such information
without any direct or indirect obligation to the Company or any other member of
the Comfort Group; (b) such information is, or at any time may be, acquired by
Executive from any third party rightfully possessed of such information and
having no direct or indirect obligation to the Company or any other member of
the Comfort Group with respect thereto; or (c) disclosure is required by law or
the order of any governmental authority under color of law, provided, that prior
to disclosing any information pursuant to this clause (c), Executive shall, if
possible, give prior written notice thereof to the Company and Comfort and
provide the Company and Comfort with the opportunity to contest such disclosure.
9. NO PRIOR AGREEMENTS. Executive hereby represents and warrants to the
Company that the execution of this Agreement by Executive and Executive's
employment by the Company and the performance of Executive's duties hereunder
will not violate or be a breach of any agreement with a former employer, client
or any other person or entity. Further, Executive agrees to indemnify the
Company for any claim, including, but not limited to, attorneys' fees and
expenses of investigation, by any such third party that such third party may now
have or may hereafter
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come to have against the Company based upon or arising out of any
non-competition agreement, invention or secrecy agreement between Executive and
such third party which was in existence as of the date of this Agreement.
10. ASSIGNMENT; BINDING EFFECT. Executive understands that Executive has
been selected for employment by the Company on the basis of Executive's personal
qualifications, experience and skills. Executive agrees, therefore, that
Executive cannot assign all or any portion of Executive's performance under this
Agreement. Executive, Executive's spouse and the estate of each shall not have
any right to encumber or dispose of any right to receive payments hereunder, it
being understood that such payments and the right thereto are nonassignable and
nontransferable; PROVIDED, HOWEVER, that in the event of the death of Executive,
any payments that Executive is entitled to receive may be assigned to the
beneficiaries of Executive's estate. Subject to the preceding three (3)
sentences and the express provisions of Section 11, this Agreement shall be
binding upon, inure to the benefit of and be enforceable by the parties hereto
and their respective heirs, legal representatives, successors and assigns.
11. COMPLETE AGREEMENT. Executive has no oral representations,
understandings or agreements with the Company or any of its officers, directors
or representatives covering the same subject matter as this Agreement. This
Agreement is the final, complete and exclusive statement and expression of the
agreement between the Company and Executive and of all the terms of this
Agreement, and it cannot be varied, contradicted or supplemented by evidence of
any prior or contemporaneous oral or written agreements.
12. AMENDMENT; WAIVER. This Agreement may not be modified except in a
writing signed by the parties, and no term of this Agreement may be waived
except by a writing signed by the party waiving the benefit of such term.
13. NOTICES. All notices and communications required or permitted
hereunder shall be in writing and shall be deemed to be given if given in
writing (including, without limitation, telecopy) addressed as provided below
(or to the addressee at such other address as the addressee shall have specified
by notice actually received by the addressor), and if either (a) actually
delivered in fully legible form to such address (evidenced in the case of a
telecopy by a telecopy transmittal receipt to the correct telecopy number), or
(b) in the case of a letter, one business day shall have elapsed after the same
shall have been deposited with a nationally recognized overnight courier service
or five days shall have elapsed after the same shall have been deposited in the
United States mail, with first-class postage prepaid and registered or certified
with return receipt requested.
To the Company: CS12 Acquisition Corp.
9600 Fallard Court
Upper Marlboro, MD 20772-6703
Attention: President
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with a copy to: Comfort Systems USA, Inc.
Three Riverway, Suite 200
Houston, TX 77056
Attention: General Counsel
To Executive: Gary E. Hess
9460 Tobin Circle
Potomac, MD 20854
with a copy to: Tydings & Rosenberg LLP
100 East Pratt Street
Baltimore, Maryland 21202
Attention: A. Lee Lundy, Jr., Esq.
14. SEVERABILITY; ENFORCEABILITY. If any portion of this Agreement is held
invalid or inoperative, the other portions of this Agreement shall be deemed
valid and operative and, so far as is reasonable and possible, effect shall be
given to the intent manifested by the portion held invalid or inoperative.
Moreover, in the event any court of competent jurisdiction shall determine that
the scope, time or territorial restrictions set forth in any covenant contained
herein are unreasonable, then it is the intention of the parties that such
restrictions be enforced to the fullest extent which the court deems reasonable,
and this Agreement shall thereby be reformed. Each of the covenants contained in
this Agreement shall be construed as an agreement independent of any other
provision in this Agreement, and the existence of any claim or cause of action
of Executive against the Company, whether predicated on this Agreement or
otherwise, shall not constitute a defense to the enforcement by the Company of
such covenants.
15. SURVIVAL. The provisions of Sections 3, 4, 5, 6, 7 and 8 shall survive
the termination of this Agreement.
16. SPECIFIC PERFORMANCE. Because of the difficulty of measuring economic
losses to the Company as a result of a breach of the covenants contained in
Sections 3, 4, 5, 6, 7 and 8 hereof and because of the immediate and irreparable
damage that could be caused to the Company for which it would have no other
adequate remedy, Executive agrees that the Company shall be entitled to specific
performance and that such covenants may be enforced by the Company in the event
of any breach or threatened breach by Executive, by injunctions, restraining
orders and other appropriate equitable relief. Executive further agrees to waive
any requirement for the securing or posting of any bond in connection with the
obtaining of any such injunctive or other equitable relief.
17. ARBITRATION. With the exception of Sections 4 and 8, any unresolved
dispute or controversy arising under or in connection with this Agreement shall
be settled exclusively by arbitration, conducted by a single arbitrator in the
State of Maryland, in accordance with the National Rules for the Resolution of
Employment Disputes of the American Arbitration
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Association ("AAA") then in effect, provided that the parties may agree to use
an arbitrator other than those provided by the AAA. The arbitrator shall not
have the authority to add to, detract from, or modify any provision hereof nor
to award punitive damages to any injured party. The arbitrator shall have the
authority to order back-pay, severance compensation, reimbursement of costs,
including those incurred to enforce this Agreement, and interest thereon. A
decision by a the arbitrator shall be final and binding. Judgment may be entered
on the arbitrator's award in any court having jurisdiction. Responsibility for
bearing the cost of the arbitration shall be determined by the arbitrator and
shall, subject to other equitable considerations, be proportional to the
arbitrator's decision on the merits.
18. ATTORNEYS' FEES. If any litigation is instituted to enforce or
interpret the provisions of this Agreement or the transactions described herein,
the prevailing party in such action shall be entitled to recover such party's
reasonable attorneys' fees and other costs from the other party hereto.
19. GOVERNING LAW. This Agreement shall be governed by and construed in
accordance with the internal laws of the State of Maryland.
20. COUNTERPARTS. This Agreement may be executed in multiple counterparts,
each of which shall be deemed an original and all of which together shall
constitute one and the same instrument.
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IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the day and year first above written.
COMPANY:
CS12 ACQUISITION CORP.
By_________________________________
William George
Vice President
EXECUTIVE:
___________________________________
Gary E. Hess
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EXHIBIT 10.53
EXECUTION COUNTERPART
LEASE AGREEMENT
THIS LEASE AGREEMENT (this "Lease"), made and entered into as of April 1,
1998 by and among Gary E. Hess and Susan B. Hess, hereinafter referred to
collectively as "Landlord," and CS12 Acquisition Corp., a Delaware corporation,
hereinafter referred to as "Tenant";
W I T N E S S E T H:
1. PREMISES. Landlord hereby leases unto Tenant and Tenant hereby leases
from Landlord, subject to the terms, covenants and conditions of this Lease,
that certain tract of land (the "Land") located in Upper Marlboro, Prince
Georges County, Maryland, and more particularly described on EXHIBIT "A"
attached hereto, together with all buildings, improvements and fixtures located
thereon (the "Improvements") and the non-exclusive use of all rights, easements,
privileges and appurtenances thereto (said Land, Improvements and appurtenances
being hereinafter sometimes collectively referred to as the "Premises").
2. TERM. The term of this Lease shall commence April 1, 1998 (the
"Commencement Date") and end sixty (60) months thereafter on April 1, 2003 (the
"Initial Term"). Upon the expiration of the Initial Term, a second term shall
immediately commence and end sixty (60) months thereafter on April 1, 2008 (the
"Second Term"), unless Tenant shall give written notice to Landlord at least one
hundred twenty (120) days in advance of the expiration of the Initial Term of
Tenant's election not to renew the Lease. Upon the expiration of the Second
Term, a third term shall immediately commence and end sixty months thereafter on
April 1, 2013 (the "Third Term"), unless Tenant shall give written notice to
Landlord at least one hundred twenty (120) days in advance of the expiration of
the Second Term of Tenant's election not to renew the Lease. The period
beginning on the Commencement Date and ending on the termination of this Lease
is referred to herein as the "Term."
3. RENT. Commencing on the Commencement Date and continuing thereafter
throughout the Initial Term, Tenant agrees to pay to Landlord as base rental for
the Premises (the "Rent") a monthly amount equal to Sixteen Thousand Six Hundred
Sixty-Six and 67/100 Dollars ($16,666.67), which monthly Rent shall be due and
payable, without notice or demand and without abatement, deduction, counterclaim
or setoff, in advance on the Commencement Date and on or before the fifth (5th)
day of each calendar month during the Initial Term, except that all payments due
hereunder for any fractional month at the commencement or end of this Lease
shall be prorated based upon the number of days in such fractional month during
the Initial Term. Commencing on the first day of the Second Term (the "Second
Commencement Date") and continuing thereafter throughout the Second Term, the
monthly Rent shall be increased to Seventeen Thousand Five Hundred and No/100
Dollars ($17,500.00), which monthly Rent shall be due and payable, without
notice or demand and without abatement, deduction, counterclaim or setoff, in
advance on the
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Second Commencement Date and on or before the fifth (5th) day of each calendar
month during the Second Term, except that all payments due hereunder for any
fractional month at the commencement or end of this Lease shall be prorated
based upon the number of days in such fractional month during the Second Term.
Commencing on the first day of the Third Term (the "Third Commencement Date")
and continuing thereafter throughout the Third Term, the monthly Rent shall be
increased to Eighteen Thousand Three Hundred Seventy-Five and No/100 Dollars
($18,375.00), which monthly Rent shall be due and payable, without notice or
demand and without abatement, deduction, counterclaim or setoff, in advance on
the Third Commencement Date and on or before the fifth (5th) day of each
calendar month during the Third Term, except that all payments due hereunder for
any fractional month at the commencement or end of this Lease shall be prorated
based upon the number of days in such fractional month during the Third Term.
Any and all sums of money as shall become due from and payable by Tenant
under this Lease (other than base Rent as set forth in the immediately preceding
paragraph) shall be considered additional rent and Landlord shall have the same
remedies upon default by Tenant as it may have for base Rent upon a default by
Tenant.
4. USE. The Premises shall be used for executive and administrative
offices, parking and related facilities and for no other purpose. Except as
hereinafter provided, 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, Tenant's use of the
Premises. Tenant will not permit the Premises to be used for any purpose or in
any manner which would render the insurance thereon void.
5. REPRESENTATIONS OF LANDLORD. Landlord represents that as of the
Commencement Date, the Premises complies with all applicable laws, ordinances,
statutes, regulations, orders, rules and restrictions relating thereto (the
"Applicable Laws"), and that the Premises and the existing and prior uses
thereof (including any uses by its former tenants) has not prior to the
Commencement Date and does not currently violate the provisions of any
Applicable Laws relating thereto. If the Premises at any time fails to be in
compliance with the Applicable Laws, Tenant shall take all necessary measures to
bring the Premises into compliance with the Applicable Laws.
6. 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 Premises and Tenant shall reimburse Landlord, as
additional rent, for all such taxes, assessments and governmental charges which
pertain solely to the Premises. Tenant may contest the assessment of such taxes
by appropriate proceedings diligently conducted without being in default
hereunder. Landlord agrees to cooperate with any such tax contest conducted by
Tenant.
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7. MAINTENANCE AND REPAIRS.
a. TENANT'S OBLIGATIONS. From and after the Commencement Date and
during the Term, Tenant shall, at Tenant's cost and expense: (i) make
interior non-structural repairs, replacements and renewals necessary to
keep the Premises in as good condition, order and repair as the same is in
as of the Commencement Date, reasonable wear and tear and damage by fire
or other casualty or condemnation excepted; (ii) keep the lawns and
landscaped areas of the Premises watered, fertilized and trimmed; (iii)
keep all electrical, mechanical, heating, ventilating and air
conditioning, plumbing and any other systems serving the Premises in good
order and repair; and (iv) maintain and repair doorways and windows in the
Premises.
b. LANDLORD'S OBLIGATIONS. From and after the Commencement Date and
during the Term, Landlord shall, at Landlord's cost and expense, keep the
roofs of all Improvements free of leaks and maintain the foundation, floor
slabs, walls and all other structural supports of such Improvements in
good and sound condition.
c. REMEDY UPON FAILURE. In the event either party shall fail to
fulfill its obligations to repair and maintain the Premises, the other
party, notwithstanding anything herein to the contrary, shall have the
right, upon not less than ten (10) days' prior written notice to the
breaching party, to make such repairs and maintain the Premises at such
breaching party's expense; PROVIDED, HOWEVER, that this provision shall
not apply if the breaching party is proceeding with due diligence, in good
faith and without delay to take the actions necessary under this Paragraph
7.
8. ALTERATIONS. Tenant may, without the consent of Landlord, make any
alterations to the Premises as it may deem advisable, so long as such
alterations do not alter the basic character, structure or structural integrity
of the Improvements or overload their capacity, in each case complying with all
applicable governmental laws, ordinances, regulations and other requirements,
including obtaining and paying for all necessary permits. All alterations made
to the Premises pursuant to this Paragraph 8 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 or termination of this Lease or upon such shorter
notice as is reasonable under the circumstances upon the earlier expiration of
the term of this Lease, 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 personal property and trade fixtures shall remain property of Tenant
and, on or before the expiration or earlier termination of this Lease, 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
Paragraph 8 shall survive the expiration or earlier termination of this Lease.
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9. SIGNS. Tenant shall have the right to install signs upon the Premises,
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 Improvements, and Tenant shall repair any injury or
defacement 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. Notwithstanding anything stated herein to the contrary, Landlord
agrees not to interfere unreasonably with Tenant's use of the Premises or
operations of Tenant's business during the Term.
11. UTILITIES. Landlord agrees to provide, at its cost, water, electricity
and telephone service connections into the Premises; PROVIDED, HOWEVER, that
Tenant shall pay directly to the service provider for all water, gas, heat,
lights, power, 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. 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.
12. ASSIGNMENT AND SUBLETTING; NO MORTGAGE OR ENCUMBRANCE.
a. ASSIGNMENT AND SUBLETTING. Except upon a change of control or a
sale of substantially all of the assets and business of Tenant, Tenant
shall not (i) assign this Lease or (ii) sublet, or permit the subletting
of, the Premises or any part thereof, without the written consent of the
Landlord, which consent shall not be unreasonably withheld.
Notwithstanding the foregoing, Tenant may assign this Lease to entities
which are in common ownership with Tenant.
b. NO MORTGAGE OR ENCUMBRANCE. Tenant shall not mortgage or encumber
Tenant's interest in this Lease in whole or in part without the written
consent of Landlord, which consent may be unreasonably withheld.
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13. INSURANCE.
a. COVERAGE. Tenant agrees to maintain, at its sole cost and
expense, standard fire and extended coverage insurance covering the
Improvements for the joint benefit of Tenant, Landlord and Landlord's
lender, in an amount not less than 100% (or such greater percentage as may
be necessary to comply with the provisions of any co-insurance clauses of
the policy) of the replacement costs thereof, insuring against the perils
of fire, lighting, and other perils as now or hereafter may be included in
"All Risk" insurance 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. Such
insurance policy shall name Landlord as an additional insured party and
shall provide for reasonable advance notice to Landlord of any
cancellation of such policy.
b. DAMAGE TO PREMISES. If the Improvements should be damaged or
destroyed by fire, tornado or other casualty, Tenant shall give immediate
written notice thereof to Landlord.
c. IRREPARABLE OR TOTAL DAMAGE. If the Improvements should be
totally destroyed by fire, tornado or other casualty, or if they should be
so damaged thereby that restoration thereof cannot, in Tenant's reasonable
judgment, be completed within ninety (90) days after the date upon which
Landlord is notified by Tenant of such damage, this Lease shall, at
Tenant's option, 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. OBLIGATION TO REBUILD. If the Improvements should be damaged by
any casualty and this Lease is not terminated by Tenant pursuant to the
foregoing provisions of this Paragraph 13, Landlord shall either: (i) at
its sole cost and expense thereupon proceed with reasonable diligence to
rebuild and repair such Improvements to substantially the condition in
which they existed prior to such damage or (ii) give written notice to
Tenant of its intention not to complete such repairs and rebuilding. If
all or a part of the Premises are untenantable, Rent shall be reduced
based on the percentage of the Premises that is not usable. In the event
that Landlord should give written notice of its intention not complete
such repair and rebuilding of the Improvements or in the event that
Landlord shall fail to complete such repairs and rebuilding within ninety
(90) 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. PUBLIC LIABILITY COVERAGE. Tenant shall at all times during the
term of this Lease, or any extension or renewal thereof, maintain, at its
own expense, public liability insurance covering the Premises for the
joint benefit of Tenant and Landlord and Landlord's
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lender, with personal injury coverage, including death, with a combined
single limit of not less than Two Million Dollars ($2,000,000), which
policy names Landlord as an additional insured party. Said policy of
insurance may be in the form of a general coverage or a floater policy
covering these other premises. Tenant shall provide Landlord with
certificates or similar documentation evidencing such insurance policy.
f. WAIVER. Each party hereto waives all rights of recovery, claims,
actions or causes of actions arising in any manner in its (the "INJURED
PARTY'S") favor and against the other party for loss or damage to the
Injured Party's property located within or constituting a part or all of
the Premises, to the extent the loss or damage (i) is covered by the
Injured Party's insurance, or (ii) would have been covered by the
insurance the Injured Party is required to carry under this Lease,
whichever is greater, regardless of the cause or origin, including the
sole, contributory, partial, joint, comparative or concurrent negligence
of the other party. This waiver also applies to each party's directors,
officers, employees, shareholders, partners, representatives and agents.
All insurance carried by either Landlord or Tenant covering the losses and
damages described in this Paragraph 13.f shall provide for such waiver of
rights of subrogation by the Injured Party's insurance carrier to the
maximum extent that the same is permitted under the laws and regulations
governing the writing of insurance within the State of Maryland. Both
parties hereto are obligated to obtain such a waiver and provide evidence
to the other party of such waiver. The waiver set forth in this Paragraph
13.f shall be in addition to, and not in substitution for, any other
waivers, indemnities or exclusions of liability set forth in this Lease.
14. LIABILITY.
a. TENANT'S LIABILITY. Except for the claims, rights of recovery and
causes of action that Landlord has released and waived pursuant to
Paragraph 13.f hereof, Tenant shall be liable to Landlord for and shall
indemnify and hold harmless Landlord and Landlord's partners, venturers,
directors, officers, agents, employees, invitees, visitors and contractors
from all claims, losses, costs, damages or expenses (including but not
limited to attorney's fees) resulting or arising or alleged to result or
arise from any and all injuries to or death of any person or damage to or
loss of any property caused by any negligence or intentional misconduct of
Tenant or Tenant's partners, venturers, directors, officers, agents,
employees, or by any breach, violation or non-performance of any covenant
of Tenant under this Lease other than any injury or damage arising (or
alleged to arise) out of any negligence, intentional misconduct or breach
of the term of this Lease by Landlord or Landlord's partners, venturers,
directors, officers, agents, or employees. If any action or proceeding
should be brought by or against Landlord in connection with any such
liability or claim, Tenant, on notice from Landlord, shall defend such
action or proceeding, at Tenant's expense, by or through attorneys
reasonably satisfactory to Landlord.
b. LANDLORD'S LIABILITY. Except for the claims, rights of recovery
and causes of action that Tenant has released and waived pursuant to
Paragraph 13.f hereof, Landlord shall
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<PAGE>
be liable to Tenant for and shall indemnify and hold harmless Tenant and
Tenant's partners, venturers, directors, officers, agents, employees,
invitees, visitors and contractors from all claims, losses, costs, damages
or expenses (including but not limited to attorney's fees) resulting or
arising or alleged to result or arise from any and all injuries to or
death of any person or damage to or loss of any property caused by any
negligence or intentional misconduct of Landlord or Landlord's partners,
venturers, directors, officers, agents, or employees, or by any breach,
violation or non-performance of any covenant of Landlord under this Lease
other than any injury or damage arising (or alleged to arise) out of any
negligence, intentional misconduct or breach of the term of this Lease by
Tenant or Tenant's partners, venturers, directors, officers, agents, or
employees. If any action or proceeding should be brought by or against
Tenant in connection with any such liability or claim, Landlord, on notice
from Tenant, shall defend such action or proceeding, at Landlord's
expense, by or through attorneys reasonably satisfactory to Tenant.
c. PERSONAL PROPERTY INSURANCE. Tenant shall procure and maintain
throughout the Term of this Lease a policy or policies of insurance, at
its sole cost and expense covering Tenant's personal property and any
leasehold improvements, alterations and additions in excess of the
leasehold improvements existing on the Commencement Date.
15. CONDEMNATION.
a. SUBSTANTIAL TAKING. 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, 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, at Tenant's option, 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. PARTIAL TAKING. If part of the Premises shall be taken for any
public or quasi- public use under any governmental law, ordinance or
regulation, by right of eminent domain or by private purchase in lieu
thereof, and this Lease is not terminated as provided in Paragraph 15.a
hereof, this Lease shall not terminate but the Rent payable hereunder
during the unexpired portion of this Lease shall be reduced based on the
percentage of the Premises that is not usable.
c. ALLOCATION OF AWARDS. 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 that Tenant may hold over
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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 thirty (30) 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, including
Tenant's obligation to pay the rental 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 agreed.
17. QUIET ENJOYMENT. Landlord covenants that it now has good title to the
Premises, free and clear of all liens and encumbrances, excepting only any lien
for current taxes not yet due, zoning ordinances and other conditions of record
set forth on EXHIBIT "B". 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. TENANT'S DEFAULT. The following occurrences shall be deemed to be
"Events of Default" by Tenant under this Lease:
a. Tenant shall fail to pay any installment of the Rent when due, or
any other payment or reimbursement to Landlord required herein when due,
and such failure shall continue for a period of ten (10) days after notice
by Landlord; PROVIDED, HOWEVER, that Landlord shall not be required to
give Tenant such notice hereunder more than one (1) time during any
calendar year;
b. Tenant shall file a petition under any section or chapter of the
United States Bankruptcy Code, as presently constituted and hereinafter
amended, or Tenant shall be adjudged bankrupt or insolvent by final order
issued at the conclusion of proceedings filed against Tenant thereunder or
shall make an assignment for the benefit of all of its creditors;
c. A receiver or trustee shall be appointed for all or substantially
all of the assets of Tenant and not repealed within ninety (90) days;
d. 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 thirty (30) days after written notice thereof
to Tenant; PROVIDED, HOWEVER, if the nature of the default is such that it
cannot be cured with the exercise of Tenant's reasonable and good faith
efforts within the thirty (30) day period, Tenant shall have up to ninety
(90) days from the date of Landlord's notice to cure such default,
provided Tenant undertakes such curative action within the thirty (30) day
period and diligently and continuously proceeds with such curative action
using Tenant's reasonable and good faith efforts; and
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e. 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 Paragraph 12 hereof.
19. REMEDY. Upon the occurrence of any of such events of default described
in Paragraph 18 hereof, Landlord shall have the option to 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. Tenant agrees to pay all
costs and expenses incurred by Landlord, including reasonable attorneys fees, in
pursuing its remedies against Tenant in the event of a default by Tenant.
Pursuit of the foregoing remedy shall not preclude pursuit of any other remedies
provided by law, nor shall pursuit of the 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 to imply 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. Forbearance by Landlord to enforce the
remedy herein provided upon an Event of Default shall not be deemed or construed
to constitute a waiver of such Event of Default or of Landlord's right to
enforce its remedy with respect to any subsequent Event of Default.
20. 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. Upon the
attachment of a lien on Tenant's interest in the Premises, Tenant shall, within
ten (10) business days of such attachment, bond off or otherwise release such
lien against the Premises.
21. 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 or 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:
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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.
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 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: Gary E. Hess and Susan B. Hess
9460 Tobin Circle
Potomac, Maryland 20854
with a copy to: Tydings & Rosenberg LLP
100 East Pratt Street
Baltimore, Maryland 21202
Attn: A. Lee Lundy, Jr., Esq.
Tenant: CS12 Acquisition Corp.
9600 Fallard Court
Upper Marlboro, Maryland 20772-6703
Attention: President
with a copy to: Comfort Systems USA, Inc.
Three Riverway
Suite 200
Houston, Texas 77056
Attention: General Counsel
All parties included within the terms "Landlord" and "Tenant" respectively,
shall be bound by notices given in accordance with the provisions of this
Paragraph 22 to the same effect as if each had received such notice.
22. NON-DISTURBANCE AND ATTORNMENT. This Lease shall be subject to all
mortgages, deeds of trust and related security instruments which may now or
hereafter encumber the Premises and to all renewals, modifications,
consolidations, replacements and extensions thereof and to each
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advance made or hereafter to be made thereunder, in each case provided that such
mortgage, deed of trust or other instrument does not disturb Tenant's occupancy
and use of the Premises.
23. HAZARDOUS SUBSTANCES. Tenant shall indemnify, protect and hold
harmless Landlord and each of its respective subsidiaries from and against all
costs and damages incurred by Landlord in connection with the presence,
emanation, migration, disposal, release or threatened release of any oil or
other petroleum products or hazardous materials or substances on, within, or to
or from the Premises as a result of (a) the operations of the Tenant after the
Commencement Date and (b) the activities of invited or uninvited parties on the
Premises during the Term of the Lease. Landlord shall indemnify, protect and
hold harmless Tenant and each of its respective subsidiaries from and against
all costs and damages incurred by Tenant in connection with the presence,
emanation, migration, disposal, release or threatened release of any oil or
other petroleum products or hazardous materials or substances on, within, or to
or from the Premises as a result of (i) any activity or action by any party
prior to the Commencement Date, (ii) the condition of the Premises prior to the
Commencement Date, including any future manifestations of such conditions, or
(iii) the activities of Landlord or the activities of any third party not
affiliated with Tenant except for parties on the Premises during the Term of the
Lease. Each party agrees that such party will promptly give written notice to
the other party of any investigation, claim, demand, lawsuit or other action by
any governmental or regulatory agency or private party involving the Premises
and any hazardous substance or environmental law of which such party has actual
notice.
24. MISCELLANEOUS.
a. CONTEXT. Words in the singular number shall be held to include
the plural, unless the context otherwise requires.
b. BINDING EFFECT. The terms, provisions, 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.
c. HEADINGS. 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, and in no way affect the
interpretation of this Lease.
d. FURTHER ASSURANCES. Tenant agrees from time to time within thirty
(30) 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.
e. ENTIRE AGREEMENT; MODIFICATION. The parties acknowledge that all
prior written and oral agreements between them and all prior
representations made by either party to the other with respect to the
subject matter hereof have been incorporated herein or
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otherwise satisfied prior to the execution hereof and that this Lease
represents the entire agreement among the parties with respect to the
subject matter hereof. This Lease may not be altered, changed or amended
except by an instrument in writing signed by both parties hereto.
f. SEVERABILITY. 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
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.
g. NO BROKER. Each party represents and warrants to the other that
it has not dealt with any broker in connection with the Premises or this
Lease. Each party hereto indemnifies and holds the other harmless from and
against any liability for commissions due any broker or finder with whom
such party has dealt in connection with this Lease.
h. GOVERNING LAW. The terms of this Lease shall be governed by and
construed in accordance with the internal laws of the State of Maryland,
without giving effect to any choice or conflict of laws provisions.
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IN WITNESS WHEREOF, the parties hereto have caused this Lease to be
executed as of the date first above written.
LANDLORD:
_________________________________
Gary E. Hess
_________________________________
Susan B. Hess
Attest:
By: _______________________________
Name:______________________________
Title:_____________________________
(SEAL)
TENANT:
CS12 ACQUISITION CORP.,
a Delaware corporation
By:______________________________
Name:____________________________
Title:_____________________________
Attest:
By: ______________________________
Name:____________________________
Title:_____________________________
(SEAL)
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EXHIBIT 21.1
COMFORT SYSTEMS USA, INC.
LIST OF SUBSIDIARIES
ENTITY STATE OF
NUMBER NAME OF ENTITY ORGANIZATION
- ------ -------------- ------------
1. Aaron Mechanical, Inc. Michigan
2. ACI Mechanical, Inc. Delaware
3. A.C.I. Mechanical USA, Inc. Delaware
4. Accurate Air Systems, L.P. Texas
5. Accu-Temp GP, Inc. Delaware
6. Accu-Temp LP, Inc. Delaware
7. Accu-Temp, LLC Indiana
8. Air Masters of Tampa Bay, Inc. Delaware
9. Air Solutions USA, Inc. Delaware
10. Air Temp, Inc. Delaware
11. American Mechanical Inc. Michigan
12. American Refrigeration Contractors, Inc. Delaware
13. Armani Plumbing & Mechanical, Inc. New York
14. Atlas-Accurate Holdings, L.L.C. Delaware
15. Atlas Air Conditioning Company, L.P. Texas
16. Batchelor's Mechanical Contractors, Inc. Alabama
17. BCM Controls Corporation Massachusetts
18. Border Electric Co., L.P. Texas
19. Border Mechanical Co., L.P. Texas
20. Carmack Heating & Air, L.L.C. Utah
21. Carson Brothers, Inc. Montana
22. CEL, Inc. (Casey Electric) Delaware
23. Central Mechanical Construction Co. , Inc. Delaware
24. Central Mechanical, Inc. Delaware
25. Climate Control, Inc. Delaware
26. Comfort Systems USA (Florida), Inc.
(FORMERLY THE DRAKE CORPORATION--ALL TEMP
SERVICES, INC. MERGED INTO IT) Florida
27. Comfort Systems USA G.P., Inc. Delaware
28. Comfort Systems USA (Texas), L.P. Texas
29. Contract Service, Inc.
[C.S.I./Bonneville] Utah
30. CS44 Acquisition Corp. [Edmonds/Service
Refrigeration] Delaware
31. Design Mechanical Incorporated Delaware
32. Eastern Heating & Cooling, Inc. New York
33. Eastern Refrigeration Co., Inc. New York
34. EDS, Inc. [Energy Development Services] Minnesota
35. E.L. Pruitt Company Delaware
36. ESS Engineering, Inc. Delaware
37. F&G Mechanical Corporation Delaware
38. FIX Reinsurance Corporation Vermont
39. Fred Hayes Mechanical Contractors, Inc. Delaware
40. Freeway Heating & Air Conditioning, Inc. Utah
41. GMS Air Conditioning, Inc. Delaware
Page 1 of 3
<PAGE>
COMFORT SYSTEMS USA, INC.
LIST OF SUBSIDIARIES
ENTITY STATE OF
NUMBER NAME OF ENTITY ORGANIZATION
- ------ -------------- ------------
42. Gotham Air Conditioning Service, Inc. Delaware
43. Gulfside Mechanical, Inc. Delaware
44. H & H Plumbing & Heating, Inc. Delaware
45. H & M Mechanical, Inc. Delaware
46. Harris General & Mechanical Contractors, Inc. Delaware
47. Helm Corporation Colorado
48. Helm Corporation San Diego California
49. Hess Mechanical Corporation Delaware
50. Hillcrest Sheet Metal, Inc. Delaware
51. Industrial Cooling Inc. Delaware
52. J & J Mechanical, Inc. Kentucky
53. James Air Conditioning Enterprise Inc. Puerto Rico
54. Kilgust Mechanical, Inc. Delaware
55. Kuempel Service, Inc. Ohio
56. Lawrence Service, Inc. Tennessee
57. Lower Bucks Cooling and Heating Corporation Pennsylvania
58. Lowrie Electric Company, Inc. Tennessee
59. MDC Service Corporation California
60. Mandell Mechanical Corporation New York
61. Martin Heating, Inc. Delaware
62. Maximum Refrigeration & Air Conditioning Corp. Delaware
63. Meadowlands Fire Protection Corp. New Jersey
64. Mechanical Service Group, Inc. [Page] Delaware
65. Mechanical Technical Services, L.P. Texas
66. MJ Mechanical Services, Inc. Delaware
67. Neel Mechanical Contractors, Inc. Delaware
68. Nogle & Black Mechanical, Inc. Delaware
69. North American Mechanical, Inc. Delaware
70. North Jersey Mechanical Contractors, Inc. New Jersey
71. OK Sheet Metal and Air Conditioning, Inc. Delaware
72. Orbit Systems, Inc. New Hampshire
73. Outbound Services, Inc. Delaware
74. Plant Services Incorporated Iowa
75. Quality Air Heating & Cooling, Inc. Michigan
76. Radney Plumbing, Inc. Delaware
77. River City Mechanical, Inc. Michigan
78. River City Mechanical, Incorporated Delaware
79. RMC2 Mechanical Systems, Inc. California
80. Ross & Associates, Inc. Delaware
81. S&K Air Conditioning Co., Inc. Georgia
82. S. I. Goldman Company, Inc. Delaware
83. S.M. Lawrence Company, Inc. Tennessee
Page 2 of 3
<PAGE>
COMFORT SYSTEMS USA, INC.
LIST OF SUBSIDIARIES
ENTITY STATE OF
NUMBER NAME OF ENTITY ORGANIZATION
- ------ -------------- ------------
84. SA Associates, Inc. (fka Salmon & Alder, Inc.) Utah
85. Salmon & Alder, LLC Utah
86. Seasonair, Inc. Maryland
87. Shambaugh & Son, L.P. Texas
88. Sheren Plumbing & Heating, Inc. Delaware
89. Southern Bluegrass Mechanical, Inc. Delaware
90. Standard Heating & Air Conditioning Company Alabama
91. Superior Heating and Sheet Metal Company Delaware
92. Target Construction, Inc. Delaware
93. Tech Heating and Air Conditioning, Inc. Ohio
94. Tech Mechanical Inc. Ohio
95. Temp-Right Service, Inc. Delaware
96. Temprite Air Conditioning and Refrigeration, Inc. Delaware
97. The Capital Refrigeration Company Delaware
98. The Fagan Company Kansas
99. The Harvey Robbin Company Delaware
100. Tri-City Mechanical, Inc. Arizona
101. Troost Service Co. Michigan
102. United Environmental Services, L.P. Texas
103. Walker-J-Walker, Inc. Tennessee
104. Weather Engineering, Inc. Delaware
105. Western Building Services, Inc. Colorado
Page 3 of 3
EXHIBIT 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation
of our reports included in this Form 10-K, into the Company's previously filed
Registration Statement on Form S-8 on October 16, 1997 File No. 333-38011 and
the Company's previously filed Registration Statement on Form S-4 on April 2,
1999 File No. 333-75595.
ARTHUR ANDERSEN LLP
Houston, Texas
March 15, 2000
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