- -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- UNITED STATES SECURITIES AND EXCHANGE COMMISSION FORM 10-Q/A
This Amendment No. 1 to Form 10-Q for the period ended June 30, 2002 is being filed to correct an error that occurred in two places in the initial filing of the Form 10-Q after the market closed on August 13, 2002. The initial filing incorrectly indicated that the covenant under the Company's principal long-term revolving credit facility relating to minimum earnings before interest, taxes, depreciation and amortization ("EBITDA") for the third quarter of 2003 is $9.2 million. This amount appeared in two places in the initial filing -- Footnote No. 6 "Long-Term Debt Obligations" in Item 1 -- Financial Statements -- "Condensed Notes to Consolidated Financial Statements June 30, 2002" and in "Liquidity and Capital Resources" in Item 2 -- "Management's Discussion and Analysis of Financial Condition and Results of Operations." The correct amount for the covenant under the Company's Credit Facility relating to minimum EBITDA for the third quarter of 2003 is $11.2 million. All other disclosure is unchanged. COMFORT SYSTEMS USA, INC. INDEX TO FORM 10-Q FOR THE QUARTER ENDED JUNE 30, 2002
COMFORT SYSTEMS USA, INC. CONSOLIDATED BALANCE SHEETS (IN THOUSANDS, EXCEPT SHARE AMOUNTS)
COMFORT SYSTEMS USA, INC. CONSOLIDATED STATEMENTS OF OPERATIONS (IN THOUSANDS, EXCEPT PER SHARE DATA) (UNAUDITED)
COMFORT SYSTEMS USA, INC. CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (IN THOUSANDS, EXCEPT SHARE AMOUNTS)
COMFORT SYSTEMS USA, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS) (UNAUDITED)
COMFORT SYSTEMS USA, INC. CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 2002 (UNAUDITED) 1. BUSINESS AND ORGANIZATION Comfort Systems USA, Inc., a Delaware corporation ("Comfort Systems" and collectively with its subsidiaries, the "Company"), is a national provider of comprehensive heating, ventilation and air conditioning ("HVAC") installation, maintenance, repair and replacement services within the mechanical services industry. The Company operates primarily in the commercial and industrial HVAC markets, and performs most of its services within office buildings, retail centers, apartment complexes, manufacturing plants, and healthcare, education and government facilities. In addition to standard HVAC services, the Company provides specialized applications such as building automation control systems, fire protection, process cooling, electronic monitoring and process piping. Certain locations also perform related services such as electrical and plumbing. Approximately 55% of the Company's consolidated 2002 revenues were attributable to installation of systems in newly constructed facilities, with the remaining 45% attributable to maintenance, repair and replacement services. The Company's consolidated 2002 revenues related to the following service activities: HVAC-73%, plumbing-12%, building automation control systems-5%, electrical-2%, fire protection-1% and other-7%. These service activities are within the mechanical services industry which is the single industry segment served by Comfort Systems. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES BASIS OF PRESENTATION These interim statements should be read in conjunction with the historical Consolidated Financial Statements and related notes of Comfort Systems included in the Annual Report on Form 10-K as filed with the Securities and Exchange Commission for the year ended December 31, 2001 (the "Form 10-K"). The Company adopted Statement of Financial Accounting Standards ("SFAS") No. 142, "Goodwill and Other Intangible Assets," which is discussed in Note 4 and SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets," which is discussed in Note 3 during the first quarter of 2002. There were no other significant changes in the accounting policies of the Company during the period. For a description of the significant accounting policies of the Company, refer to Note 2 of Notes to Consolidated Financial Statements of Comfort Systems included in the Form 10-K. The accompanying unaudited consolidated financial statements were prepared using generally accepted accounting principles for interim financial information and the instructions to Form 10-Q and applicable rules of Regulation S-X. Accordingly, these financial statements do not include all information or footnotes required by generally accepted accounting principles for complete financial statements and should be read in conjunction with the Form 10-K. The Company believes all adjustments necessary for a fair presentation of these interim statements have been included and are of a normal and recurring nature. The results of operations for interim periods are not necessarily indicative of the results for the fiscal year. The preparation of financial statements in conformity with generally accepted accounting principles requires the use of estimates and assumptions by management in determining the reported amounts of assets and liabilities, disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. The most significant estimates used in the Company's financial statements include revenue and cost recognition for construction contracts, allowance for doubtful accounts and self-insurance accruals. 6
COMFORT SYSTEMS USA, INC. CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) CASH FLOW INFORMATION Cash paid for interest for the six months ended June 30, 2001 and 2002 was approximately $11.6 million and $3.7 million, respectively. Cash paid for income taxes for the six months ended June 30, 2001 and 2002 was approximately $2.1 million and $7.6 million, respectively. NEW ACCOUNTING PRONOUNCEMENTS In July 2001, the Financial Accounting Standards Board ("FASB") issued SFAS No. 142, "Goodwill and Other Intangible Assets." SFAS No. 142 establishes new accounting and reporting requirements for goodwill and other intangible assets. The Company adopted this new standard effective January 1, 2002. See Note 4 for further discussion. In August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets." The Company adopted SFAS No. 144 effective January 1, 2002. Under SFAS No. 144, the operating results of companies sold or held for sale meeting certain criteria, as well as any gain or loss on the sale of these operations, are presented as discontinued operations in the Company's statements of operations. See Note 3 for a discussion of the Company's discontinued operations. The operating results for companies which were sold or shut down during 2001 are presented as continuing operations through the date of disposition. The adoption of SFAS No. 144 did affect the presentation of discontinued operations in the consolidated financial statements; however, it did not have a material financial impact on the Company's results of operations, financial position or cash flows. SEGMENT DISCLOSURE Comfort Systems' activities are within the mechanical services industry which is the single industry segment served by the Company. Under SFAS No. 131, "Disclosures About Segments of an Enterprise and Related Information," each operating subsidiary represents an operating segment and these segments have been aggregated, as no individual operating unit is material and the operating units meet a majority of SFAS No. 131's aggregation criteria. RECLASSIFICATIONS Certain reclassifications have been made in prior period financial statements to conform to current period presentation. These reclassifications have not resulted in any changes to previously reported net income for any periods. 3. DISCONTINUED OPERATIONS On February 11, 2002, the Company entered into an agreement with Emcor Group, Inc. ("Emcor") to sell 19 operations. This transaction closed on March 1, 2002. Under the terms of the agreement, the total purchase price was $186.25 million, including the assumption by Emcor of approximately $22.1 million of subordinated notes to former owners of certain of the divested companies. The transaction with Emcor provided for a post-closing adjustment based on a final accounting, done after the closing of the transaction, of the net assets of the operations that were sold to Emcor. That accounting indicated that the net assets transferred to Emcor were approximately $7 million greater than a target amount that had been agreed to with Emcor. In accordance with the transaction agreement, Emcor paid the Company that amount, and released $2.5 million that had been escrowed in connection with this element of the transaction. The total of these two amounts, $9.5 million, was reflected as a receivable in the Company's March 31, 2002 financial statements. The Company received this payment during the second quarter. 7
COMFORT SYSTEMS USA, INC. CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) An additional $5 million of Emcor's purchase price was deposited into an escrow account to secure potential obligations on the Company's part to indemnify Emcor for future claims and contingencies arising from events and circumstances prior to closing, all as specified in the transaction documents. Because these escrow funds secure future claims and contingencies, the Company does not know whether it will ultimately receive any of such funds, and if it does, how much it will receive. Therefore, the Company has not recognized a receivable for this escrowed portion of the Emcor transaction purchase price. If the Company ultimately receives any of these escrowed funds, a corresponding gain will be recorded as a component of discontinued operations when received. The net cash proceeds of approximately $164 million received to date from the Emcor transaction have been used to reduce debt outstanding under the Company's credit facility. An estimated tax liability of $16 million related to this transaction was recorded at March 31, 2002 and is due in March 2003. Under SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets," which took effect for the Company on January 1, 2002, the operating results of the companies sold to Emcor as well as the loss on the sale of these operations have been presented as discontinued operations in the Company's statements of operations. The Company realized a loss of $10.6 million including related tax expense related to the sale of these operations. As a result of the adoption of SFAS No. 142, "Goodwill and Other Intangible Assets," the Company also recognized a goodwill impairment charge related to these operations of $32.4 million, net of taxes, as of January 1, 2002. The reporting of the Company's aggregate goodwill impairment charge in connection with adopting SFAS No. 142 is discussed further in Note 4. In March 2002, the Company also decided to divest of an additional operating company. This unit's operating loss for the first two quarters of 2002 of $0.1 million, net of taxes, has been reported in discontinued operations under "Operating income (loss), net of applicable income taxes" in the Company's statement of operations. In addition, an estimate of the loss the Company will realize upon divestiture of this operation of $0.6 million has been included in "Estimated loss on disposition, including income taxes" during the first quarter of 2002 in the Company's statement of operations. During the second quarter of 2002, the Company sold a division of one of its operations. The operating loss for this division for the first two quarters of 2002 of $0.3 million, net of taxes, has been reported in discontinued operations under "Operating income (loss), net of applicable income taxes" in the Company's statement of operations. The Company realized a loss of $0.3 million on the sale of this division which is included in "Estimated loss on disposition, including income taxes" during the second quarter of 2002 in the Company's statement of operations. 8
COMFORT SYSTEMS USA, INC. CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Assets and liabilities related to discontinued operations were as follows (in thousands):
COMFORT SYSTEMS USA, INC. CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The changes in the carrying amount of goodwill for the six months ended June 30, 2002 are as follows (in thousands):
COMFORT SYSTEMS USA, INC. CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 5. RESTRUCTURING CHARGES During the first quarter of 2002, the Company recorded restructuring charges of approximately $1.9 million. These charges included approximately $0.8 million for severance costs primarily associated with the reduction in corporate overhead in light of the Company's smaller size following the Emcor transaction. The severance costs related to the termination of 33 employees, all of whom were terminated as of March 31, 2002. In addition, these charges include approximately $0.7 million for costs associated with decisions to merge or close three smaller divisions and realign regional operating management. These restructuring charges are primarily cash obligations but did include approximately $0.3 million of non-cash writedowns associated with long-lived assets. During the first quarter of 2001, the Company recorded restructuring charges of approximately $0.2 million, primarily related to contractual severance obligations of two operating presidents in connection with the Company's significant restructuring program in the second half of 2000. These restructuring charges are net of a gain of approximately $0.1 million related to management's decision to sell a small operation during the first quarter of 2001. During the second half of 2000, the Company recorded restructuring charges of approximately $25.3 million primarily associated with restructuring efforts at certain underperforming operations. Management performed an extensive review of its operations during the second half of 2000 and as part of this review management decided to cease operating at three locations, sell four operations (including two smaller satellite operations), and merge two companies into other operations. The restructuring charges were primarily non-cash and included goodwill impairments of approximately $11.5 million and the writedown of other long-lived assets of approximately $8.5 million. The remaining items in these restructuring charges primarily included severance and lease termination costs. Aggregated financial information for 2001 related to the operations addressed by the 2000 and 2001 restructuring charges is as follows (in thousands):
COMFORT SYSTEMS USA, INC. CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 6. LONG-TERM DEBT OBLIGATIONS Long-term debt obligations consist of the following (in thousands):
COMFORT SYSTEMS USA, INC. CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) As a result of its substantial reduction in debt following the Emcor transaction, the Company currently complies with the Facility's debt to EBITDA and EBITDA to interest expense covenants by comfortable margins. The Bank Group agreed to adjust the Facility's minimum EBITDA covenants to reflect the Company's reduced size following the Emcor transaction. While the Company expects to be in compliance with the Facility's EBITDA requirements in the third and fourth quarters, these covenants allow less room for variance than the Facility's other financial covenants. If the Company violates the Facility's minimum EBITDA covenants or any other of the Facility's covenants in the future, it may have to negotiate new borrowing terms under the Facility or obtain new financing. While the Company believes that its improved creditworthiness following the Emcor transaction would enable it to negotiate new terms under the Facility or obtain new financing from other sources if necessary, there can be no absolute assurance that the Company would be successful in doing so. The financial covenants to which the Company is subject under the Facility are as follows:
COMFORT SYSTEMS USA, INC. CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) As of August 12, 2002, $8.9 million in borrowings and $1.5 million in letters of credit were outstanding under the Facility, and $61.5 million in unused capacity was available as measured by the Facility's most restrictive covenant. NOTES TO AFFILIATES AND FORMER OWNERS Subordinated notes were issued to former owners of certain purchased companies as part of the consideration used to acquire their companies. These notes had an outstanding balance of $16.3 million as of June 30, 2002, and bear interest, payable quarterly, at a weighted average interest rate of 9.81%. As of August 12, 2002, there had been no change in the outstanding balance of these notes. Substantially all of this debt is due on April 10, 2003, but is subject to standstill terms that do not allow the debt to be accelerated until at least one year after its current due date. OTHER LONG-TERM OBLIGATION DISCLOSURES As of June 30, 2002, the Company had total debt outstanding of $29.7 million, and total letters of credit outstanding of $1.6 million. Of these amounts, $12.9 million was bank debt under the Credit Facility and $16.3 million was subordinate debt. As of August 12, 2002, the Company had total debt outstanding of approximately $25.7 million, and total letters of credit outstanding of $1.5 million. Of these amounts, $8.9 million was bank debt under the Credit Facility and $16.3 million was subordinate debt. As of August 12, 2002, $61.5 million in unused borrowing capacity was available under the Credit Facility as measured by the Facility's most restrictive covenant. Bank debt under the Credit Facility is due January 1, 2003. Substantially all of the subordinate debt is due April 10, 2003, but is subject to standstill terms that do not allow this debt to be accelerated until at least one year after its current due date. The Company expects that free cash flow over upcoming quarters will result in a minimal level of debt under the Credit Facility as of yearend. However, the Company has a $16 million tax payment due in March 2003. In addition, the Company may be called upon at any time under certain insurance arrangements to post letters of credit totaling as much as $5.1 million as security for entities that fund insurance costs on behalf of the Company. This insurance-related letter of credit requirement will increase by $1.3 million per quarter through the second quarter of 2003, for a cumulative total of $10.3 million that could be required to be posted as of July 1, 2003. As a result, the Company expects that, even if it succeeds in retiring all of its bank debt, it will continue to need financing as of and subsequent to the January 1, 2003 maturity of its current Credit Facility and the April 10, 2003 maturity of substantially all of its subordinate debt. In view of the impending maturities of its debt and in view of the importance of being able to offer long-term bonds on certain kinds of project work, the Company is negotiating refinancing options both with its existing bank group and with new financial institutions. Based on these negotiations as well as on the Company's significantly improved financial position following the Emcor transaction, management believes that it will be able to refinance a significant portion of its debt in the current year, even though general conditions in the financing markets are challenging. Accordingly, there can be no absolute assurance that the Company will be able to complete this refinancing when needed or on terms the Company deems acceptable. As noted above, the Company has agreed to relatively tight restrictions under the Credit Facility. If the Company violates any of these restrictions, it will be required to negotiate new terms with its banks. There can be no absolute assurance that in that event, the Company will receive satisfactory new terms from its banks, or that if the Company needs additional financing, that such financing can be secured when needed or on terms the Company deems acceptable. 14
COMFORT SYSTEMS USA, INC. CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 7. COMMITMENTS AND CONTINGENCIES CLAIMS AND LAWSUITS The Company is party to litigation in the ordinary course of business. The Company has estimated and provided accruals for probable losses and related legal fees associated with certain of these actions in the accompanying consolidated financial statements. 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. SELF-INSURANCE The Company retains the risk of worker's compensation, employer's liability, auto liability, general liability and employee group health claims resulting from uninsured deductibles per accident or occurrence. Losses up to the deductible amounts are estimated and accrued based upon the Company's known claims incurred and an estimate of claims incurred but not reported. The accruals are based upon known facts and historical trends, and management believes such accruals to be adequate. 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 that these instruments will have a material effect on the Company's consolidated financial statements. 8. STOCKHOLDERS' EQUITY RESTRICTED STOCK GRANT The Company awarded 200,000 shares of restricted stock to its Chief Executive Officer on March 22, 2002 under its 2000 Equity Incentive Plan. The shares are subject to forfeiture if the Company does not meet certain performance measures for the twelve-month period ending March 31, 2003 or if the executive leaves voluntarily or is terminated for cause. Such forfeiture provisions lapse upon achievement of the performance measures and pro rata over a four-year period. Compensation expense relating to this grant will be charged to earnings over the four-year period. The initial value of the award was established based on the market price on the date of grant. The unearned compensation is shown as a reduction of stockholders' equity in the accompanying consolidated balance sheet and is being amortized against earnings based upon the market value of the stock until the achievement of performance measures for the twelve-month period ending March 31, 2003 is determined. The value of the stock grant remaining after this determination will be amortized ratably over the remaining three years of the restricted period. RESTRICTED COMMON STOCK In March 1997, Notre Capital Ventures II, L.L.C. exchanged 2,742,912 shares of Common Stock for an equal number of shares of restricted voting common stock ("Restricted Voting Common Stock"). The holders of Restricted Voting Common Stock are entitled to elect one member of the Company's Board of Directors and 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 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 15
COMFORT SYSTEMS USA, INC. CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 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 80% or more of the originally outstanding shares of Restricted Voting Common Stock have been previously converted into shares of Common Stock. As of June 30, 2002, there were 1,171,112 shares of Restricted Voting Common Stock remaining. 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 2.7 million shares of the Company's Common Stock ("Common Stock") at prices ranging from $6.00 to $21.44 per share were outstanding for the three months and six months ended June 30, 2002 but were not included in the computation of diluted EPS because the options' exercise prices were greater than the average market price of the Common Stock. Options to purchase 4.2 million shares of Common Stock at prices ranging from $3.63 to $21.44 per share were outstanding for the three months ended June 30, 2001, but were not included in the computation of diluted EPS because the options' exercise prices were greater than the average market price of the Common Stock. Options to purchase 7.1 million shares of Common Stock at prices ranging from $2.14 to $21.44 per share were outstanding for the six months ended June 30, 2001, but were not included in the computation of diluted EPS because the options had an anti-dilutive effect since the Company reported a loss from continuing operations during the period. 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 convertible subordinated notes had an anti-dilutive effect during the three months ended June 30, 2001 and the six months ended June 30, 2001 and 2002, and therefore, are not included in the diluted EPS calculations. The convertibility provisions of the remaining convertible subordinated notes expired during the first quarter of 2002. The following table reconciles the number of shares outstanding with the number of shares used in computing basic and diluted earnings per share for each of the periods presented (in thousands):
COMFORT SYSTEMS USA, INC. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS INTRODUCTION The following discussion should be read in conjunction with the historical Consolidated Financial Statements of Comfort Systems USA, Inc. ("Comfort Systems" and collectively with its subsidiaries, the "Company") and related notes thereto included elsewhere in this Form 10-Q and the Annual Report on Form 10-K as filed with the Securities and Exchange Commission for the year ended December 31, 2001 (the "Form 10-K"). This discussion contains forward-looking statements regarding the business and industry of Comfort Systems USA 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 uncertainties 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 include risks set forth in "Factors Which May Affect Future Results," included in the Form 10-K. The Company is a national provider of comprehensive heating, ventilation and air conditioning ("HVAC") installation, maintenance, repair and replacement services within the mechanical services industry. The Company operates primarily in the commercial and industrial HVAC markets, and performs most of its services within office buildings, retail centers, apartment complexes, manufacturing plants, and healthcare, education and government facilities. In addition to standard HVAC services, the Company provides specialized applications such as building automation control systems, fire protection, process cooling, electronic monitoring and process piping. Certain locations also perform related services such as electrical and plumbing. Approximately 55% of the Company's consolidated 2002 revenues were attributable to installation of systems in newly constructed facilities, with the remaining 45% attributable to maintenance, repair and replacement services. The Company's consolidated 2002 revenues related to the following service activities: HVAC-73%, plumbing-12%, building automation control systems-5%, electrical-2%, fire protection-1% and other-7%. These service activities are within the mechanical services industry which is the single industry segment served by Comfort Systems. In response to the Securities and Exchange Commission's Release No. 33-8040, "Cautionary Advice Regarding Disclosure About Critical Accounting Policies," the Company identified its critical accounting policies based upon the significance of the accounting policy to the Company's overall financial statement presentation, as well as the complexity of the accounting policy and its use of estimates and subjective assessments. The Company concluded that its critical accounting policy is its revenue recognition policy. This accounting policy, as well as others, are described in Note 2 to the Consolidated Financial Statements included in the Form 10-K. The Company enters into construction contracts with general contractors or end-use customers based upon negotiated contracts and competitive bids. As part of the negotiation and bidding processes, the Company estimates its contract costs, which include all direct materials (net of estimated rebates), labor and subcontract costs and indirect costs related to contract performance such as indirect labor, supplies, tools, repairs and depreciation costs. Revenues from construction contracts are recognized on the percentage-of-completion method in accordance with the American Institute of Certified Public Accountants Statement of Position 81-1, "Accounting for Performance of Construction-Type and Certain Production-Type Contracts." Under this method, the amount of total contract revenue recognizable at any given time during a contract is determined by multiplying total contract revenue by the percentage of contract costs incurred at any given time to total estimated contract costs. Accordingly, contract revenues recognized in the statements of operations can and usually do differ from amounts that can be billed or invoiced to the customer at any given point during the contract. Changes in job performance, job conditions, estimated profitability and final contract settlements may result in revisions to estimated costs and, therefore, revenues. Such revisions are frequently based on estimates and subjective assessments. The effects of these revisions are recognized in the period in which the revisions are determined. When such revisions lead to a conclusion that a loss will be recognized on a contract, the full 17
amount of the estimated ultimate loss is recognized in the period such a conclusion is reached, regardless of what stage of completion the contract has reached. Depending on the size of a particular project, variations from estimated project costs could have a significant impact on the Company's operating results. Revenues associated with maintenance, repair and monitoring services and related contracts are recognized as services are performed. Approximately 55% of the Company's consolidated 2002 revenues were attributable to installation of systems in newly constructed facilities. As a result, if general economic activity in the U.S. slows significantly from current levels, and leads to a corresponding decrease in new nonresidential building construction, the Company's operating results could suffer. Effective January 1, 2002, the Company adopted Statement of Financial Accounting Standards ("SFAS") No. 142, "Goodwill and Other Intangible Assets." Under this new standard, which is discussed in "Results of Operations" and "New Accounting Pronouncements" below, new requirements for assessing whether goodwill assets have been impaired involve market-based information. This information, and its use in assessing goodwill, entails some degree of subjective assessments. Additionally, amortization of goodwill has been discontinued in 2002 operating results as a result of this standard. Effective January 1, 2002, the Company adopted SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets." Under this new standard, the operating results of companies which were sold or held for sale as of June 30, 2002, have been reported as discontinued operations in the accompanying consolidated statements of operations. However, the operating results for companies which were sold or shut down during 2001 are presented as continuing operations through the date of disposition. RESULTS OF OPERATIONS
periods in 2001. The 6.9% decline in revenue for the quarter was comprised of a 6.1% decline in revenues at ongoing operations and a 0.8% decline in revenues related to operations that were sold or shut down during 2001. The 6.8% decline in revenues for the first six months of 2002 was comprised of a 5.7% decline in revenues at ongoing operations and a 1.1% decline in revenues related to operations that were sold or shut down during 2001. The Company's decline in revenues at ongoing operations for the first six months of 2002 resulted primarily from the lagged effect of the general economic slowdown that began last year which slowed decisions to proceed on both new and retrofit projects. This general economic slowdown has also led to a more competitive pricing environment. The Company's decline in revenue is also consistent with management's decreased emphasis on revenue growth in favor of improvement in profit margins, operating efficiency, and cash flow. In view of these factors, the Company may continue to experience only modest revenue growth or revenue declines in upcoming periods. There can be no assurance, however, that this strategy will lead to improved profit margins in the near term. In addition, if general economic activity in the U.S. slows significantly from current levels, the Company may realize further decreases in revenue and lower operating margins. Backlog primarily contains installation, retrofit project work and service and maintenance agreements. These projects generally last less than a year. Service work and short duration projects are generally billed as performed and therefore do not flow through backlog. Accordingly, backlog represents only a portion of the Company's revenues in any given future period, and it represents revenues that should be reflected in the Company's operating results over the next six to twelve months. As a result, the Company believes the predictive value of backlog information is limited to indications of general revenue direction over the near term, and should not be interpreted as indicative of ongoing revenue performance over several quarters. The Company's backlog associated with continuing operations as of June 30, 2002 was $466.5 million, a 13.0% increase as compared to December 31, 2001 backlog of $412.8 million and a 1.0% decrease from June 30, 2001 backlog of $471.0 million. Gross Profit -- Gross profit decreased $4.4 million, or 10.2%, to $38.7 million for the second quarter of 2002 and decreased $10.3 million, or 13.0%, to $69.2 million for the first six months of 2002 compared to the same periods in 2001. As a percentage of revenues, gross profit decreased from 19.0% for the three months ended June 30, 2001 to 18.3% for the three months ended June 30, 2002 and decreased from 18.5% for the six months ended June 30, 2001 to 17.2% for the six months ended June 30, 2002. The decline in gross profit was primarily due to market-driven project delays at a number of the Company's operations. These project delays affected the Company's revenue volume and profitability throughout the first quarter of 2002, and continued to affect operations during the first part of the second quarter. In addition, the Company recorded lower margins on certain of its projects that were completed at one of its operating locations in the West during the first quarter of 2002 as a result of execution shortfalls. Selling, General and Administrative Expenses ("SG&A") -- SG&A decreased $5.0 million, or 14.1%, to $30.6 million for the second quarter of 2002 and decreased $7.9 million, or 11.2%, to $63.0 million for the first six months of 2002 compared to the same periods in 2001. As a percentage of revenues, SG&A decreased from 15.6% for the three months ended June 30, 2001 to 14.4% for the three months ended June 30, 2002 and decreased from 16.5% for the six months ended June 30, 2001 to 15.7% for the six months ended June 30, 2002. The decrease in SG&A is primarily due to a concerted effort to reduce SG&A throughout the Company. In response to the smaller size of the Company following the sale of 19 units to Emcor as discussed further below under "Discontinued Operations," the Company reduced corporate overhead at the end of the first quarter of 2002. The cost of this workforce reduction is included in restructuring charges recorded in March 2002. The Company realized lower corporate overhead costs during the second quarter of 2002 as a result of these steps. In addition, during the second quarter of 2002, the Company reversed $0.8 million of bad debt reserves that were established in the fourth quarter of 2001 related to the Company's receivables with Kmart based upon a post-bankruptcy petition settlement agreement which was recently executed with Kmart. 19
SG&A as a percentage of revenues for periods prior to the Emcor transaction is higher than historical levels because the financial statements do not allocate any corporate overhead to the discontinued operations. As a result, SG&A for continuing operations reflects substantially the full amount of corporate office overhead that was in place to support the Company's operations prior to the sale of these operations. Goodwill Amortization -- Effective January 1, 2002, the Company adopted SFAS No. 142, "Goodwill and Other Intangible Assets." This pronouncement discontinued goodwill amortization. See "Cumulative Effect of Change in Accounting Principle" for further discussion. Restructuring Charges -- During the first quarter of 2002, the Company recorded restructuring charges of approximately $1.9 million. These charges included approximately $0.8 million for severance costs primarily associated with the reduction in corporate overhead in light of the Company's smaller size following the Emcor transaction. The severance costs related to the termination of 33 employees, all of whom were terminated as of March 31, 2002. In addition, these charges include approximately $0.7 million for costs associated with decisions to merge or close three smaller divisions and realign regional operating management. These restructuring charges are primarily cash obligations but did include approximately $0.3 million of non-cash writedowns associated with long-lived assets. During the first quarter of 2001, the Company recorded restructuring charges of approximately $0.2 million, primarily related to contractual severance obligations of two operating presidents in connection with the Company's significant restructuring program in the second half of 2000. These restructuring charges are net of a gain of approximately $0.1 million related to management's decision to sell a small operation during the first quarter of 2001. Other Expense, Net -- Other expense, net, primarily includes interest expense, and decreased $2.0 million, or 87.3%, to $0.3 million for the second quarter of 2002 and decreased $2.8 million, or 59.8%, to $1.8 million for the first six months of 2002. A portion of the Company's actual interest expense in both years has been allocated to the discontinued operations caption based upon the Company's net investment in these operations. Therefore, interest expense relating to continuing operations does not reflect the pro forma reduction of interest expense from applying the proceeds from the sale of these operations to reduce debt in any earlier period. Interest expense allocated to the discontinued operations for the three months ended June 30, 2001 was $3.9 million and for the six months ended June 30, 2001 and 2002 was $7.7 million and $1.5 million, respectively. In addition, first quarter 2002 interest expense in continuing operations includes a non-cash writedown of $0.6 million, before taxes, of loan arrangement costs in connection with the reduction in the Company's borrowing capacity following the Emcor transaction, as discussed further below under "Liquidity and Capital Resources." Other expense, net, for the second quarter of 2002 also includes a gain of $0.6 million on the sale of the residential portion of one of the Company's operations. Income Tax Expense -- The Company's effective tax rates associated with results from continuing operations for the six months ended June 30, 2001 and 2002 were (185.9)% and 47.4%, respectively. As a result of the discontinuation of goodwill amortization as a result of the adoption of SFAS No. 142 effective January 1, 2002, there is no longer a permanent difference related to the non-deductible goodwill amortization in the 2002 effective tax rate. Discontinued Operations -- On February 11, 2002, the Company entered into an agreement with Emcor Group, Inc. ("Emcor") to sell 19 operations. This transaction closed on March 1, 2002. Under the terms of the agreement, the total purchase price was $186.25 million, including the assumption by Emcor of approximately $22.1 million of subordinated notes to former owners of certain of the divested companies. The transaction with Emcor provided for a post-closing adjustment based on a final accounting, done after the closing of the transaction, of the net assets of the operations that were sold to Emcor. That accounting indicated that the net assets transferred to Emcor were approximately $7 million greater than a target amount that had been agreed to with Emcor. In accordance with the transaction agreement, Emcor paid the Company that amount, and released $2.5 million that had been escrowed in connection with this element of the transaction. The total of these two amounts, $9.5 million, was reflected as a receivable in the Company's March 31, 2002 financial statements. The Company received this payment during the second quarter. 20
An additional $5 million of Emcor's purchase price was deposited into an escrow account to secure potential obligations on the Company's part to indemnify Emcor for future claims and contingencies arising from events and circumstances prior to closing, all as specified in the transaction documents. Because these escrow funds secure future claims and contingencies, the Company does not know whether it will ultimately receive any of such funds, and if it does, how much it will receive. Therefore, the Company has not recognized a receivable for this escrowed portion of the Emcor transaction purchase price. If the Company ultimately receives any of these escrowed funds, a corresponding gain will be recorded as a component of discontinued operations when received. The net cash proceeds of approximately $164 million received to date from the Emcor transaction have been used to reduce debt outstanding under the Company's credit facility. An estimated tax liability of $16 million related to this transaction was recorded at March 31, 2002 and is due in March 2003. Under SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets," which took effect for the Company on January 1, 2002, the operating results of the companies sold to Emcor as well as the loss on the sale of these operations have been presented as discontinued operations in the Company's statements of operations. The Company realized a loss of $10.6 million including related tax expense related to the sale of these operations. As a result of the adoption of SFAS No. 142 "Goodwill and Other Intangible Assets," the Company also recognized a goodwill impairment charge related to these operations of $32.4 million, net of taxes, as of January 1, 2002. The reporting of the Company's aggregate goodwill impairment charge in connection with adopting SFAS No. 142 is discussed further below under "Cumulative Effect of Change in Accounting Principle." In March 2002, the Company also decided to divest of an additional operating company. This unit's operating loss for the first two quarters of 2002 of $0.1 million, net of taxes, has been reported in discontinued operations under "Operating results, net of tax" in the Company's results of operations. In addition, an estimate of the loss the Company will realize upon divestiture of this operation of $0.6 million has been included in "Estimated loss on disposition, net of tax" during the first quarter of 2002 in the Company's results of operations. During the second quarter of 2002, the Company sold a division of one of its operations. The operating loss for this division for the first two quarters of 2002 of $0.3 million, net of taxes, has been reported in discontinued operations under "Operating results, net of tax" in the Company's results of operations. The Company realized a loss of $0.3 million on the sale of this division which is included in "Estimated loss on disposition, net of tax" during the second quarter of 2002 in the Company's results of operations. Cumulative Effect of Change in Accounting Principle -- Effective January 1, 2002, the Company adopted SFAS No. 142, "Goodwill and Other Intangible Assets." SFAS No. 142 requires companies to assess goodwill asset amounts for impairment each year, and more frequently if circumstances suggest an impairment may have occurred. In addition to discontinuing the regular charge, or amortization, of goodwill against income, the new standard also introduces more rigorous criteria for determining how much goodwill should be reflected as an asset in a company's balance sheet. To perform the transitional impairment testing required by SFAS No. 142 under its new, more rigorous impairment criteria, the Company broke its operations into "reporting units", as prescribed by the new standard, and tested each of these reporting units for impairment by comparing the unit's fair value to its carrying value. The fair value of each reporting unit was estimated using a discounted cash flow model combined with market valuation approaches. Significant estimates and assumptions were used in assessing the fair value of reporting units. These estimates and assumptions involved future cash flows, growth rates, discount rates, weighted average cost of capital and estimates of market valuations for each of the reporting units. As provided by SFAS No. 142, the transitional impairment loss identified by applying the standard's new, more rigorous valuation methodology upon initial adoption of the standard was reflected as a cumulative effect of a change in accounting principle in the Company's statement of operations. The resulting non-cash charge 21
was $202.5 million, net of taxes. Impairment charges recognized after the initial adoption, if any, generally are to be reported as a component of operating income. LIQUIDITY AND CAPITAL RESOURCES Cash Flow -- Cash provided by operating activities less customary capital expenditures plus the proceeds from asset sales is generally called free cash flow and, if positive, represents funds available to invest in significant operating initiatives, to acquire other companies or to reduce a company's outstanding debt or equity. If free cash flow is negative, additional debt or equity is generally required to fund the outflow of cash. For the three months ended June 30, 2002, the Company had positive free cash flow of $11.0 million as compared to $23.7 million for the same period in 2001. For the six months ended June 30, 2002, the Company had negative free cash flow of $0.2 million as compared to positive free cash flow of $29.2 million for the same period in 2001. The 2001 cash flow amounts include the 19 operations the Company sold to Emcor in 2002. This primarily accounts for the lower amounts in 2002. The transaction with Emcor provided for a post-closing adjustment based on a final accounting, done after the closing of the transaction, of the net assets of the operations that were sold to Emcor. That accounting indicated that the net assets transferred to Emcor were approximately $7 million greater than a target amount that had been agreed to with Emcor. In accordance with the transaction agreement, Emcor paid the Company that amount, and released $2.5 million that had been escrowed in connection with this element of the transaction. The total of these two amounts, $9.5 million, was reflected as a receivable in the Company's March 31, 2002 financial statements. This payment was received by the Company during the second quarter and is included in "Proceeds from businesses sold, net of cash sold and transaction costs" in the Company's statement of cash flows. The proceeds received at the closing of the Emcor transaction, the post-closing adjustment and related escrow received from Emcor, and free cash flow from the Company's operations were all used to reduce the Company's debt. Revolving Credit Facility -- The Company's principal current debt financing and operating liquidity is provided by a revolving credit facility (the "Credit Facility" or the "Facility") with Bank One, Texas, N.A. ("Bank One") and other banks (including Bank One, the "Bank Group"). The Facility's general terms allow for the Company to borrow up to the lesser of $100 million or 80% of accounts receivable, net of reserves ("Net Receivables"). Borrowings under the Facility are also effectively limited by a requirement that they not result in the Company's ratios of earnings before interest, taxes, depreciation and amortization ("EBITDA") to interest expense and debt to EBITDA exceeding certain levels. Based on the most restrictive of these ratio-related limits, effective borrowing capacity under the Facility is currently $70.4 million. Borrowings under the Facility are secured by accounts receivable, inventory, fixed assets other than real estate, and the shares of capital stock of the Company's subsidiaries. The Credit Facility expires on January 1, 2003, at which time all amounts outstanding are due. The Company has a choice of two interest rate options under the Facility. Under one option, the interest rate is determined based on the higher of the Federal Funds Rate plus 0.5% or Bank One's prime rate. An additional margin of 1% to 2% 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 London Interbank Offered Rates or "LIBOR") plus 2.5% to 3.5%. The additional margin for both options depends on the ratio of the Company's debt to EBITDA, as defined. Commitment fees of 0.375% 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 payment of dividends and the repurchase of shares by the Company, limits certain non-Bank Group debt, and restricts outlays of cash by the Company relating to certain investments, capital expenditures, vehicle leases, acquisitions and subordinate debt. The Credit Facility also contains covenants providing for the maintenance of certain levels of shareholder equity and EBITDA, and for the maintenance of certain ratios of the Company's EBITDA to interest expense and debt to EBITDA. 22
In the fourth quarter of 2001, the Company estimated and recorded an allowance of $3.5 million against its receivables with the Kmart Corporation based on Kmart's bankruptcy filing in January 2002. Including this reserve, the Company's fourth quarter 2001 EBITDA did not meet the Facility's minimum EBITDA covenant. The Bank Group agreed to exclude the Kmart reserve from covenant calculations. In addition, the Company's first quarter 2002 EBITDA did not meet the Facility's minimum EBITDA covenant. The Bank Group waived that covenant violation. As a result, the Company has no unresolved covenant violations under the Facility. As a result of its substantial reduction in debt following the Emcor transaction, the Company currently complies with the Facility's debt to EBITDA and EBITDA to interest expense covenants by comfortable margins. The Bank Group agreed to adjust the Facility's minimum EBITDA covenants to reflect the Company's reduced size following the Emcor transaction. While the Company expects to be in compliance with the Facility's EBITDA requirements in the third and fourth quarters, these covenants allow less room for variance than the Facility's other financial covenants. If the Company violates the Facility's minimum EBITDA covenants or any other of the Facility's covenants in the future, it may have to negotiate new borrowing terms under the Facility or obtain new financing. While the Company believes that its improved creditworthiness following the Emcor transaction would enable it to negotiate new terms under the Facility or obtain new financing from other sources if necessary, there can be no absolute assurance that the Company would be successful in doing so. The financial covenants to which the Company is subject under the Facility are as follows:
measured by the most restrictive covenant in the Facility, was $57.4 million as of June 30, 2002. The Facility's interest rate terms as summarized above currently result in a floating interest rate under the Facility of approximately 4.3%. In addition, $0.6 million of remaining deferred Facility arrangement costs will be amortized to interest expense over the remainder of this year up to the Facility's maturity on January 1, 2003. As of August 12, 2002, $8.9 million in borrowings and $1.5 million in letters of credit were outstanding under the Facility, and $61.5 million in unused capacity was available as measured by the Facility's most restrictive covenant. Notes to Affiliates and Former Owners -- Subordinated notes were issued to former owners of certain purchased companies as part of the consideration used to acquire their companies. These notes had an outstanding balance of $16.3 million as of June 30, 2002, and bear interest, payable quarterly, at a weighted average interest rate of 9.81%. As of August 12, 2002, there had been no change in the outstanding balance of these notes. Substantially all of this debt is due on April 10, 2003, but is subject to standstill terms that do not allow the debt to be accelerated until at least one year after its current due date. Other Commitments -- As is common in the Company's industry, the Company has entered into certain off-balance sheet arrangements in the ordinary course of business that result in obligations not directly reflected in the Company's balance sheets. The Company's most significant off-balance sheet obligations are noncancelable operating leases for facilities and vehicles. The Company also has other off-balance sheet obligations involving letters of credit and surety guarantees. The Company enters into noncancelable operating leases for many of its facility, vehicle and equipment needs. These leases allow the Company to conserve cash by paying a monthly lease rental fee for use of facilities, vehicles and equipment rather than purchasing them. At the end of the lease, the Company has no further obligation to the lessor. The Company may decide to cancel or terminate a lease before the end of its term. If the Company does so, it typically would owe the lessor the remaining lease payments as of the termination of the lease. Certain of the Company's vendors require letters of credit to ensure reimbursement for amounts they are disbursing on behalf of the Company, such as to beneficiaries under the Company's self-funded insurance programs. In addition, some customers require the Company to post letters of credit to guarantee performance under the Company's contracts and to ensure payment to the Company's subcontractors and vendors under those contracts. Such letters of credit are generally issued by a bank or similar financial institution. The letter of credit commits the issuer to pay specified amounts to the holder of the letter of credit if the holder demonstrates that the Company has failed to perform specified actions. If this were to occur, the Company would be required to reimburse the issuer of the letter of credit. Depending on the circumstances of such a reimbursement, the Company may also have to record a charge to earnings for the reimbursement. To date the Company has not had a claim made against a letter of credit that resulted in payments by the issuer of the letter of credit or by the Company. The Company believes that it is unlikely that it will have to fund claims under a letter of credit in the foreseeable future. Many customers, particularly in connection with new construction, require the Company to post performance and payment bonds issued by a financial institution known as a surety. These bonds provide a guarantee to the customer that the Company will perform under the terms of a contract and that the Company will pay subcontractors and vendors. If the Company fails to perform under a contract or to pay subcontractors and vendors, the customer may demand that the surety make payments or provide services under the bond. The Company must reimburse the surety for any expenses or outlays it incurs. To date, the Company has not had any significant reimbursements to its surety for bond-related costs. The Company believes that it is unlikely that it will have to fund claims under its surety arrangements in the foreseeable future. The Company's future contractual obligations include (in thousands):
The Company's current letter of credit commitments expire as follows (in thousands):
NEW ACCOUNTING PRONOUNCEMENTS In July 2001, the Financial Accounting Standards Board ("FASB") issued SFAS No. 142, "Goodwill and Other Intangible Assets." SFAS No. 142 establishes new accounting and reporting requirements for goodwill and other intangible assets. The Company adopted this new standard effective January 1, 2002. See Note 4 of the Consolidated Financial Statements for further discussion. In August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets." The Company adopted SFAS No. 144 effective January 1, 2002. Under SFAS No. 144, the operating results of companies sold or held for sale meeting certain criteria, as well as any gain or loss on the sale of these operations, are presented as discontinued operations in the Company's statements of operations. See Note 3 of the Consolidated Financial Statements for a discussion of the Company's discontinued operations. The operating results for companies which were sold or shut down during 2001 are presented as continuing operations through the date of disposition. The adoption of SFAS No. 144 did affect the presentation of discontinued operations in the consolidated financial statements; however, it did not have a material financial impact on the Company's results of operations, financial position or cash flows. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The Company is exposed to market risk primarily related to potential adverse changes in interest rates. Management is actively involved in monitoring exposure to market risk and continues to develop and utilize appropriate risk management techniques. 26
COMFORT SYSTEMS USA, INC. PART II -- OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS 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 estimated and 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. ITEM 2. RECENT SALES OF UNREGISTERED SECURITIES During the six month period ended June 30, 2002, the Company did not issue any unregistered shares of its common stock. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS The Company held its annual meeting of stockholders in Houston, Texas on May 23, 2002. The following sets forth matters submitted to a vote of stockholders: (a) The following individuals were elected to the Board of Directors as stated in the Company's Proxy Statement dated April 15, 2002, for terms expiring at the 2005 annual stockholders' meeting or until their successors have been elected and qualified -- Class II: directors are J. Gordon Beittenmiller, Robert D. Wagner, Jr., and Steven S. Harter. Every director was elected by a majority of the outstanding shares of Common Stock of the Company, except for Mr. Harter who was elected by a majority of the outstanding shares of Restricted Voting Common. Out of a potential 36,560,253 shares of Common Stock outstanding, Mr. Beittenmiller had 25,127,749 shares voted in favor, with 374,600 shares withheld, Mr. Wagner had 25,127,749 shares voted in favor, with 374,600 shares withheld. Out of a potential 1,191,112 shares of Restricted Voting Common, Mr. Harter had 934,548 shares voted in favor, and no shares were withheld. (b) A majority of the outstanding shares of Common Stock of the Company approved the amendment of the 1997 Non-employee Directors' Stock Plan to (i) increase the number of shares issuable by 250,000 shares and (ii) change the amount of the automatic annual option grant to non-employee directors from 5,000 to 10,000 shares. Shares voted in favor 21,926,630, with 4,207,292 shares withheld, and 65,783 shares abstained. (c) A stockholder, the Sheet Metal Worker's International Association, mailed to certain stockholders a proxy solicitation "requesting policy against repricing or replacing stock options without prior shareholder approval". With respect to proxies and ballots received, 5,097,421 shares voted for the proposal, 4,432,270 shares voted against the proposal and 5,000 shares abstained. 27
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits
SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. COMFORT SYSTEMS USA, INC. August 14, 2002 /s/ WILLIAM F. MURDY -------------------------------------- William F. Murdy Chairman of the Board and Chief Executive Officer August 14, 2002 /s/ J. GORDON BEITTENMILLER -------------------------------------- J. Gordon Beittenmiller Executive Vice President, Chief Financial Officer and Director 29
INDEX TO EXHIBITS
EXHIBIT 10.1 EMPLOYMENT AGREEMENT THIS EMPLOYMENT AGREEMENT (this "Agreement") between COMFORT SYSTEMS USA, INC., a Delaware corporation (referred to herein individually as "Comfort" and collectively with its subsidiaries and affiliates as the "Company"), and David Lanphar ("Executive") is entered into and effective as of the 1st day of September, 2001. 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 is engaged in the business of mechanical contracting services, including heating, ventilation and air conditioning, plumbing, piping, electrical and related services ("Services"). Executive is employed hereunder by the Company in a confidential relationship wherein Executive, in the course of Executive's employment with the Company, has and will continue to become familiar with and aware of information as to the Company's and its customers' specific manner of doing business, including the processes, techniques and trade secrets utilized by the Company, and future plans with respect thereto, all of which has been and will be established and maintained at great expense to the Company. This information is a trade secret and constitutes the valuable goodwill of the Company. 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 and Executive hereby accepts this employment upon the terms and conditions herein contained. Executive agrees to devote substantially all of Executive's business time, attention and efforts to promote and further the business of the Company. (b) Executive shall faithfully adhere to, execute and fulfill all lawful policies established by the Company, including the Company'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 1
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 hereof. 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 $175,000 per year, payable on a regular basis in accordance with the Company's standard payroll procedures, but not less often than monthly. (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. (c ) Relocation. Employee has agreed that he will relocate his primary residence to the Houston, Texas area within six months of the date of this agreement. Company has agreed in consideration of such relocation that it will (i) reimburse employee up to an aggregate maximum of $35,000 for costs actually incurred in connection with such relocation (employee may apply up to one half of such amount to procure temporary accommodations in Houston prior to such relocation), and (ii) Company will pay to Executive a bonus equal to one year of base salary within twenty business days of the definitive and final closing of any change of control of Comfort Systems USA, Inc. (a transaction that results in the sale of a majority of the Comfort's voting capital stock or substantially all of Comfort's assets). 3. Confidentiality. (a) Confidential Information. As used herein, the term "Confidential Information" means any information, technical data or know-how of the Company, 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 2
and pricing, prospects of the Company, and any information, technical data or know-how that contain or reflect any of the foregoing, whether prepared by the Company, 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 employee of the Company, Executive will not, during or after the term of 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 twelve months 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 within 100 miles of where the Company conducts or has conducted business during the Term (the "Territory"); (ii) call upon any person who is, at that time, within the Territory, an employee of the Company 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; (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 for the purpose of soliciting or selling Services; (iv) call upon any prospective acquisition candidate, on Executive's own behalf or on behalf of any competitor, which candidate was either called upon by the Executive on behalf of the Company or for which the Executive made an acquisition analysis on behalf of the Company for the purpose of acquiring such entity. Notwithstanding the above, the foregoing covenants shall not be deemed to prohibit Executive from acquiring as an investment not more than one percent (1%) of the capital 3
stock of a competing business whose stock is 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 term of this Agreement shall begin on the date hereof and continue for two (2) (the "Term"), unless terminated sooner as herein provided. Beginning on the second anniversary and thereafter on each anniversary this Agreement shall renew for consecutive one-year terms unless either party shall give the other notice at least 30 days prior to such anniversary. 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 Executive's 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 of this Agreement or for one (1) year, and such amount shall be payable during such period in 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 include any of the following: (i) Executive's willful or material breach of this Agreement; (ii) Executive's failure to perform any of his material duties following notice by the Company to Executive of such improper performance and Executive's failure to correct the improper performance to the satisfaction of the Company within a reasonable time; (iii) Executive's gross negligence in the performance or intentional nonperformance of any of Executive's material duties and responsibilities hereunder; (iv) 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; (v) Executive's conviction of a felony crime; (vi) Executive's confirmed positive illegal drug test result; (vii) sexual harassment by Executive; or (viii) willful or material failure by Executive to comply with Comfort's Corporate Compliance Policy or 4
other Company policies. 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, Executive shall receive from the Company Executive's base salary at the rate then in effect for one (1) year, and such amount shall be payable during such period in a manner consistent with the Company's standard pay practices. 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, by any customer of the Company (including but not limited to, any such customers obtained by Executive), by any acquisition candidate of the Company, and all records compiled by Executive which pertain to the business or activities of the Company 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 representative of the Company shall be delivered promptly to the Company without request by it upon termination of Executive's engagement 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 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 Executive's 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 relationships or agreements with significant vendors or customers or any other significant and material trade secret of the Company, whether in existence or proposed, to any person, firm, partnership, corporation or business for any reason or purpose whatsoever. 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 5
expenses of investigation, by any such third party that such third party may now have or may hereafter 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 estates 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 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 below, 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 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 terms. No waiver by the parties hereto of any default or breach of any term, condition or covenant of this Agreement shall be deemed to be a waiver of any subsequent default or breach of the same or any other term, condition or covenant contained herein. 13. Notice. Whenever any notice is required hereunder, it shall be given in writing addressed as follows: To the Company: Comfort Systems USA, Inc. Three Riverway, Suite 200 Houston, TX 77056 Attention: General Counsel To Executive: David Lanphar 99 N. Post Oak Lane #7203 Houston, TX 77024 6
Notice shall be deemed given and effective on the earlier of five (5) days after the deposit in the U.S. mail of a writing addressed as above and sent first class mail, certified, return receipt requested, or when actually received. Either party may change the address for notice by notifying the other party of such change in accordance with this Section 13. 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 and covenants of Sections 3, 4, 6, 7 and 8 shall survive 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, 6, 7 and 8 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 excess of $50,000 in connection with the obtaining of any such injunctive or any 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 Houston, Texas, in accordance with the National Rules for the Resolution of Employment Disputes of the American Arbitration Association ("AAA") then in effect, provided that the parties may agree to use arbitrators other than those provided by the AAA. The arbitrators 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 arbitrators 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 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 be proportional to the arbitrator's decision on the merits. 18. Attorney's 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 7
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 Texas. 20. Counterparts. This Agreement may be executed in multiple counterparts, each of which shall be deemed to be an original and all of which together shall constitute one and the same instrument. IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the day and year first above written. EXECUTIVE: COMPANY: COMFORT SYSTEMS USA, INC. /s/ David Lanphar /s/ William Murdy - ----------------- ----------------- David Lanphar William Murdy President 8
EXHIBIT 10.2 WAIVER This Waiver dated as of May 10, 2002 ("Waiver") is among Comfort Systems USA, Inc., a Delaware corporation (the "Company"), the Subsidiaries of the Company listed on the signature pages hereto as Guarantors, the banks and other financial institutions listed on the signature pages attached hereto (the "Banks"), BANK ONE, N.A., individually as a Bank ("BOT") and as Administrative Agent for the other Banks (in such capacity, the "Administrative Agent"), BANKERS TRUST COMPANY, individually as a Bank and as Syndication Agent for the other Banks, BANK OF AMERICA, N.A., individually as a Bank and as Documentation Agent for the other Banks, CREDIT LYONNAIS NEW YORK BRANCH, individually as a Bank and as Co-agent, NATIONAL CITY BANK, individually as a Bank and as Co-Agent, and THE BANK OF NOVA SCOTIA, individually as a Bank and as Co-Agent. Capitalized terms not defined herein shall have the meaning assigned to such terms in the Credit Agreement. INTRODUCTION A. The Company, the Guarantors, the Administrative Agent, the Co-Agents and the Banks are parties to that certain Fourth Amended and Restated Credit Agreement dated as of March 22, 2001 as amended by that certain First Amendment thereto dated as of February 8, 2002 (the "Credit Agreement"). B. Section 8.15 of the Credit Agreement requires the Company's EBITDA for the fiscal quarter ending March 31, 2002 to equal or exceed the amount of $3,332,850.00. The Company has informed the Administrative Agent, Co-Agents and the Banks that its EBITDA for such fiscal quarter will not equal or exceed such amount; accordingly, there has occurred an Event of Default under Section 8.15 of the Credit Agreement. C. The Company has requested a one time waiver of the Event of Default described in paragraph B above. D. The Administrative Agent, Co-Agents and the Banks are agreeable to such requests upon the terms and conditions herein stated. THEREFORE, the Company, the Guarantors, the Administrative Agent, the Co-Agents and the Banks hereby agree as follows: 1. The Banks hereby waive the Event of Default arising under Section 8.15 of the Credit Agreement solely by virtue of the Company's failure to achieve EBITDA for the fiscal quarter ending March 31, 2002 of at least $3,332,850.00. 2. This Waiver shall be effective as of March 31, 2002 when the Administrative Agent shall have received duly executed counterparts hereof signed by the Company, the Guarantor and the Majority Banks (or, in the case of any party as to which an executed counterpart shall not have been received, the Administrative Agent shall have received telegraphic, telex or other written confirmation from such party of execution of a counterpart hereof by such party). -1-
3. This Waiver is limited solely to the purposes and to the extent provided herein and shall have no applicability to any obligation of the Company except those described in Section 8.15 of the Credit Agreement which relate solely to the fiscal quarter ending March 31, 2002. This Waiver shall not be construed to be a waiver, except as specifically provided in paragraph 1 of this Waiver, (i) of any term, condition or provision of the Credit Agreement or (ii) of any Event of Default or Default that has or may have occurred or occurs other than as specified in paragraph 1. Except as specifically provided herein, the Credit Agreement will continue in full force and effect. 4. This Waiver (i) shall be binding on the parties hereto and their respective successors and assigns and shall inure to the benefit of the parties hereto and their respective successors and assigns, (ii) may not be amended, terminated or otherwise modified except by written consent of each party hereof, (iii) may be executed in multiple counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument and (iv) constitutes the entire agreement among the parties hereto with respect to the matters addressed herein. 5. Choice of Law. THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF TEXAS, EXCEPT TO THE EXTENT THAT THE LAWS OF THE UNITED STATES OF AMERICA AND ANY RULES, REGULATIONS OR ORDERS ISSUED OR PROMULGATED THEREUNDER APPLICABLE TO THE AFFAIRS AND TRANSACTIONS OF THE BANKS OTHERWISE PREEMPT TEXAS LAW, IN WHICH EVENT SUCH FEDERAL LAW SHALL CONTROL. 6. Final Agreement of the Parties. THIS AGREEMENT, THE CREDIT AGREEMENT AS AMENDED HEREBY AND THE OTHER LOAN DOCUMENTS CONSTITUTE A "LOAN AGREEMENT" AS DEFINED IN SECTION 26.02(A) OF THE TEXAS BUSINESS AND COMMERCE CODE, AND REPRESENT THE FINAL AGREEMENT AMONG THE PARTIES AND MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS OR SUBSEQUENT ORAL AGREEMENTS OF THE PARTIES. THERE ARE NO UNWRITTEN ORAL AGREEMENTS BETWEEN THE PARTIES. -2-
EXECUTED effective as of May 10, 2002. COMPANY: COMFORT SYSTEMS USA, INC. By: /s/ William George ----------------------------------- William George Senior Vice President By their execution of this Waiver below, the Guarantors acknowledge and agree that their respective Guaranteed Obligations under the Credit Agreement remain in full force and effect, unchanged by this Waiver. -3-
GUARANTORS: ACI MECHANICAL, INC. ACCU-TEMP GP, INC. ACCU-TEMP LP, INC. ACCU-TEMP, LLC, by Accu-Temp LP, Inc., managing member AIR SOLUTIONS USA, INC. ARC COMFORT SYSTEMS USA, INC. (fka American Refrigeration Contractors, Inc.) BATCHELOR'S MECHANICAL CONTRACTORS, INC. BCM CONTROLS CORPORATION CARSON BROTHERS, INC. CEL, INC. (Casey Electric) CENTRAL MECHANICAL, INC. COMFORT SYSTEMS USA G.P., INC. COMFORT SYSTEMS USA (ARKANSAS), INC. (fka River City Mechanical, Incorporated) COMFORT SYSTEMS USA (BRISTOL), INC. (fka Fred Hayes Mechanical Contractors, Inc.) COMFORT SYSTEMS USA (CLEVELAND), INC. (fka Tech Heating and Air Conditioning, Inc.) COMFORT SYSTEMS USA (HARTFORD), INC. (fka The Harvey Robbin Company) COMFORT SYSTEMS USA (INTERMOUNTAIN), INC. (fka Contract Service, Inc.) COMFORT SYSTEMS USA (OREGON), INC. (fka A.C.I. Mechanical USA, Inc.) COMFORT SYSTEMS USA (PHILADELPHIA), INC. (fka Lower Bucks Cooling and Heating Corporation) COMFORT SYSTEMS USA (SOUTH BOSTON), INC. (fka Climate Control, Inc.) COMFORT SYSTEMS USA (SYRACUSE), INC. (fka Armani Plumbing & Mechanical, Inc.) COMFORT SYSTEMS USA (TEXAS), L.P., by Comfort Systems USA G.P., Inc., sole general partner COMFORT SYSTEMS USA (TWIN CITIES), INC. (fka EDS, Inc.) COMFORT SYSTEMS USA (WESTERN MICHIGAN), Inc. (restructure River City Mechanical, Inc. and H&H Plumbing & Heating, Inc.) -4-
DESIGN MECHANICAL INCORPORATED EASTERN HEATING & COOLING, INC. EASTERN REFRIGERATION CO., INC. ESS ENGINEERING, INC. GULFSIDE MECHANICAL, INC. H & M MECHANICAL, INC. HELM CORPORATION HELM CORPORATION SAN DIEGO HESS MECHANICAL CORPORATION INDUSTRIAL COOLING INC. J & J MECHANICAL, INC. JAMES AIR CONDITIONING ENTERPRISE INC. MARTIN HEATING, INC. MECHANICAL SERVICE GROUP, INC. (Page) MJ MECHANICAL SERVICES, INC. NEEL MECHANICAL CONTRACTORS, INC. NORTH AMERICAN MECHANICAL, INC. OK SHEET METAL AND AIR CONDITIONING, INC. PLANT SERVICES INCORPORATED QUALITY AIR HEATING & COOLING, INC. ROSS & ASSOCIATES, INC. S&K AIR CONDITIONING CO., INC. S.I. GOLDMAN COMPANY, INC. S.M. LAWRENCE COMPANY, INC. SA ASSOCIATES, INC. (formerly Salmon & Alder, Inc.) SALMON & ALDER, LLC, by SA Associates, Inc., sole member SEASONAIR, INC. SOUTHERN BLUEGRASS MECHANICAL, INC. STANDARD HEATING & AIR CONDITIONING COMPANY SUPERIOR MECHANICAL SYSTEMS TARGET CONSTRUCTION, INC. TEMP-RIGHT SERVICE, INC. THE CAPITAL REFRIGERATION COMPANY TRI-CITY MECHANICAL, INC. TROOST SERVICE CO. WEATHER ENGINEERING, INC. WESTERN BUILDING SERVICES, INC. By: /s/ William George -------------------------- William George Vice President -5-
ATLAS-ACCURATE HOLDINGS, L.L.C. ATLAS-ACCURATE HOLDINGS, L.L.C., as the sole general partner of Accurate Air Systems, L.P. (restructure of Accurate Air Systems, Inc.) Atlas Air Conditioning Company, L.P. (restructure of Atlas Air Conditioning Company and Atlas Comfort Services USA, Inc.) Mechanical Technical, L.P. United Environmental Services, L.P. (restructure of United Environmental Services, Inc./UES Conversion Corporation) By: COMFORT SYSTEMS USA, INC., sole member By: /s/ William George -------------------------- William George Vice President -6-
ADMINISTRATIVE AGENT/BANK: BANK ONE, NA, as Administrative Agent and Individually as a Bank By: /s/ John A. Horst ---------------------------- Name: John Horst Title: Director -7-
SYNDICATION AGENT/BANK: BANKERS TRUST COMPANY, as Syndication Agent and Individually as a Bank By: /s/ Alexander Bici ----------------------------- Name: Alexander Bici Title: Vice President -8-
DOCUMENTATION AGENT/BANK: BANK OF AMERICA, N.A. (formerly known as NationsBank, N.A.), as Documentation Agent and Individually, as a Bank By: /s/ Michael W. Colon ----------------------------- Name: Michael W. Colon Title: Principal -9-
CO-AGENT/BANK: CREDIT LYONNAIS NEW YORK BRANCH, as Co-Agent and Individually as a Bank By: /s/ Attila Koc Name: Attila Koc ----------------------------- Title: Senior Vice President -10-
CO-AGENT/BANK: NATIONAL CITY BANK, as Co-Agent and Individually, as a Bank By: ------------------------------------- Name: ----------------------------------- Title: ---------------------------------- -11-
CO-AGENT/BANK: THE BANK OF NOVA SCOTIA, as Co-Agent and Individually, as a Bank By: ------------------------------------- Name: ----------------------------------- Title: ---------------------------------- -12-
BANK: UNION BANK OF CALIFORNIA, N.A. By: /s/ J. Scott Jessup ----------------------------- Name: J. Scott Jessup Title: Vice President -13-
BANK: COMERICA BANK By: /s/ William S. Rogers ----------------------------- Name: William S. Rogers Title: Vice President -14-
BANK: BANK POLSKA, KASA OPIEKI S.A., PEKOA S.A. GROUP, New York Branch By: /s/ Barry W. Henry ----------------------------- Name: Barry W. Henry Title: Vice President -15-
BANK: FIRSTAR BANK, NATIONAL ASSOCIATION By: /s/ William J. Hronek ----------------------------- Name: William J. Hronek Title: Senior Vice President -16-
BANK: LASALLE BANK NATIONAL ASSOCIATION By: ------------------------------------- Name: ----------------------------------- Title: ---------------------------------- -17-
BANK: GENERAL ELECTRIC CAPITAL CORPORATION By: ------------------------------------- Name: ----------------------------------- Title: ---------------------------------- -18-
EXHIBIT 10.3 COMFORT SYSTEMS USA, INC. 1997 NON-EMPLOYEE DIRECTORS' STOCK PLAN Amendment Pursuant to Section 9 of the Comfort Systems USA, Inc. 1997 Non-Employee Directors' Stock Plan (the "Plan") and pursuant to a vote of the Board of Directors of Comfort Systems USA, Inc. (the "Company") and, in the case of the amendments described at paragraphs 1 and 2 below, subsequent stockholder approval, the Plan has been amended as follows, effective as set forth in paragraph 4 below: 1. The first sentence of Section 3 of the Plan is amended to read as follows: "Subject to adjustment as provided in Section 8, the total number of Shares reserved and available for issuance under the Plan is 500,000." 2. The second and third sentences of Section 6 of the Plan are amended to read as follows: "In addition, an Option to purchase 10,000 Shares, subject to adjustment as provided in Section 8, will be automatically granted, at the close of business of each annual meeting of stockholders of the Company, to each member of the Board of Directors who is eligible under Section 5 at the close of business of such annual meeting. Notwithstanding the foregoing, any person who was automatically granted an Option to purchase 10,000 Shares at the effective date of the initial election to the Board of Directors shall not be automatically granted an Option to purchase 10,000 Shares at the first annual meeting of stockholders following such initial election if such annual meeting takes place within three months of the effective date of such persons' initial election to the Board of Directors." 3. Section 7(f) of the Plan is deleted in its entirety. 4. The amendment made by paragraph 3 above shall take effect as of March 22, 2002. The amendments made by paragraphs 1 and 2 above shall take effect as of May 23, 2002 and shall be deemed to have been in effect at the close of the annual meeting of stockholders held on that date.
IN WITNESS WHEREOF, Comfort Systems USA, Inc. has caused this instrument to be executed by its duly authorized officer this 23rd day of May, 2002. COMFORT SYSTEMS USA, INC. By: /s/ William F. Murdy ------------------------ William F. Murdy Chairman of the Board, and Chief Executive Officer -2-
EXHIBIT 99.1 CERTIFICATION PURSUANT TO SECTION 1350, CHAPTER 63 OF TITLE 18, UNITED STATES CODE, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 Pursuant to Section 1350, Chapter 63 of Title 18, United States Code, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, the undersigned, as chief executive officer of Comfort Systems USA, Inc. (the "Company"), does hereby certify that: 1) the Company's Quarterly Report pursuant to Section 13 or 15 (D) of the Securities Exchange Act Of 1934 (Form 10-Q) for the quarter ended June 30, 2002 fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and 2) the information contained in the Company's Form 10-Q fairly presents, in all material respects, the financial condition and results of operations of the Company. By: /s/ William F. Murdy ------------------------ William F. Murdy Chairman of the Board and Chief Executive Officer Dated: August 13, 2002
EXHIBIT 99.2 CERTIFICATION PURSUANT TO SECTION 1350, CHAPTER 63 OF TITLE 18, UNITED STATES CODE, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 Pursuant to Section 1350, Chapter 63 of Title 18, United States Code, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, the undersigned, as chief financial officer of Comfort Systems USA, Inc. (the "Company"), does hereby certify that: 1) the Company's Quarterly Report pursuant to Section 13 or 15 (D) of the Securities Exchange Act Of 1934 (Form 10-Q) for the quarter ended June 30, 2002 fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and 2) the information contained in the Company's Form 10-Q fairly presents, in all material respects, the financial condition and results of operations of the Company. By: /s/ J. Gordon Beitteniller --------------------------- J. Gordon Beittenmiller Executive Vice President and Chief Financial Officer Dated: August 13, 2002