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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR
15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1999
Commission file number: 1-13011
COMFORT SYSTEMS USA, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 76-0526487
(STATE OR OTHER JURISDICTION (I.R.S. EMPLOYER
OF INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
777 POST OAK BLVD.
SUITE 500
HOUSTON, TEXAS 77056
(713) 830-9600
(ADDRESS AND TELEPHONE NUMBER OF PRINCIPAL EXECUTIVE OFFICES)
Securities registered pursuant to Section 12(b) of the Act:
NAME OF EACH EXCHANGE ON
TITLE OF EACH CLASS WHICH REGISTERED
- ------------------------------------- -----------------------------------------
Common Stock, $.01 par value New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the registrant (1) has filed all reports to
be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
As of March 13, 2000, the aggregate market value of the 28,777,072 shares
of the registrant's common stock held by non-affiliates of the registrant was
$226,619,442 based on the $7.875 last sale price of the registrant's common
stock on the New York Stock Exchange on that date.
As of March 13, 2000, 37,450,576 shares of the registrant's common stock
were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE: The information required by Part III
(other than the required information regarding executive officers) is
incorporated by reference from the registrant's definitive proxy statement,
which will be filed with the Commission not later than 120 days following
December 31, 1999.
================================================================================
FORWARD-LOOKING STATEMENTS
This report contains "forward-looking statements" within the meaning of
Section 27A of the Securities Act of 1933, as amended ("Securities Act") and
Section 21E of the Exchange Act. Such forward-looking statements are made only
as of the date of this report and involve known and unknown risks, uncertainties
and other important factors that could cause the actual results, performance or
achievements of the Company, or industry results, to differ materially from any
future results, performance or achievements expressed or implied by such
forward-looking statements. Such risks, uncertainties and other important
factors include, among others, risks associated with fluctuations in operating
results because of acquisitions and changes in economic factors that reduce
demand for Company services, difficulty in maintaining key personnel, changes in
government regulations, competition, and risks entailed in the operations and
growth of the newly acquired businesses. Important factors that could cause
actual results to differ are discussed under "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Factors Which May
Affect Future Results."
PART I
ITEM 1. BUSINESS
Comfort Systems USA(Registered Trademark), Inc., a Delaware corporation
("Comfort Systems" and collectively with its subsidiaries, the "Company"), is a
leading national provider of comprehensive heating, ventilation and air
conditioning ("HVAC") installation, maintenance, repair and replacement
services. Founded in December 1996, the Company is composed of companies within
the commercial and industrial HVAC markets, and performs most of its services
within manufacturing plants, office buildings, retail centers, apartment
complexes, and healthcare, education and government facilities. In addition to
standard HVAC services, the Company also provides specialized applications such
as process cooling, control systems, electronic monitoring and process piping.
Certain locations also perform related services such as electrical and plumbing.
Approximately 97% of the Company's consolidated 1999 revenues were derived from
commercial and industrial customers with approximately 60% of the revenues
attributable to installation services and 40% attributable to maintenance,
repair and replacement services.
On July 2, 1997, Comfort Systems completed the initial public offering (the
"IPO") of its common stock (the "Common Stock") and simultaneously acquired
12 companies (collectively referred to as the "Founding Companies") engaged in
providing HVAC services. The Founding Companies had 18 operating locations in 10
states. Subsequent to the IPO, and through December 31, 1999, the Company
acquired 107 HVAC and complementary businesses (collectively with the Founding
Companies, the "Acquired Companies"). The companies acquired subsequent to the
IPO added 108 operating locations in 21 additional states. These acquisitions
included 26 "tuck-in" operations that have been or are currently being
integrated with existing Company operations.
INDUSTRY OVERVIEW
The HVAC industry as a whole is estimated to generate annual revenues in
excess of $75 billion, over $40 billion of which is in the commercial and
industrial markets. HVAC systems are a necessity in virtually all commercial and
industrial buildings as well as homes. Because most commercial buildings are
sealed, HVAC systems provide the primary method of circulating fresh air in such
buildings. Older commercial and industrial facilities often have poor air
quality as well as inadequate air conditioning, and older HVAC systems result in
significantly higher energy costs than do modern systems. In many instances, the
replacement of an aging system with a modern, energy-efficient system will
significantly reduce a building's operating costs while also improving air
quality and the effectiveness of the HVAC system. These factors cause many
facility owners to consider early replacement of older systems.
Growth in the HVAC industry is positively affected by a number of factors,
particularly (i) the aging of the installed base, (ii) the increasing
efficiency, sophistication and complexity of HVAC systems, (iii) the increasing
opportunities associated with utility deregulation and (iv) the increasing
standards relating to indoor air quality, and the reduction or elimination of
the refrigerants commonly used in older HVAC
1
systems. These factors are expected to increase demand for the reconfiguration
or replacement of existing HVAC systems. The Company believes that these factors
may also mitigate to some extent the effect on the HVAC industry of the
cyclicality inherent in the traditional construction industry.
The HVAC industry can be broadly divided into installation services and
maintenance, repair and replacement services.
INSTALLATION SERVICES. Installation services consist of "design and
build" and "plan and spec" projects. In "design and build" projects, the
commercial HVAC firm is responsible for designing, engineering and installing a
cost-effective, energy-efficient system customized to the specific needs of the
building owner. Costs and other project terms are normally negotiated between
the building owner or its representative and the HVAC firm. Firms which
specialize in "design and build" projects generally have specially-trained
HVAC engineers, CAD/CAM design systems and in-house sheet metal and
prefabrication capabilities. These firms utilize a consultative approach with
customers and tend to develop long-term relationships with building owners and
developers, general contractors, architects and property managers. "Plan and
spec" installation refers to projects where a third party architect or
consulting engineer designs the HVAC systems and the installation project is
"put out for bid." The Company believes that "plan and spec" projects
usually take longer to complete than "design and build" projects because the
preparation of the system design by a third party and resulting bid process may
often take months to complete. Furthermore, in "plan and spec" projects, the
HVAC firm is not responsible for project design and any changes must be approved
by other parties, thereby increasing overall project time and cost.
Approximately 60% of the Company's consolidated 1999 revenues related to
installation services and the majority of the revenues from installation
projects was performed on a "design and build/negotiated" basis.
MAINTENANCE, REPAIR AND REPLACEMENT SERVICES. These services include the
maintenance, repair, replacement, reconfiguration and monitoring of previously
installed HVAC systems and controls. The growth and aging of the installed base
of HVAC systems and the increasing demand for more efficient, sophisticated and
complex systems and controls have fueled growth in this service line. The
increasing sophistication and complexity of these HVAC systems is leading many
commercial and industrial building owners and property managers to increase
attention to maintenance and to outsource maintenance and repair, often through
service agreements with HVAC service providers. In addition, increasing
restrictions are being placed on the use of certain types of refrigerants used
in HVAC systems, which, along with indoor air quality concerns, may increase
demand for the reconfiguration and replacement of existing HVAC systems.
State-of-the-art control and monitoring systems feature electronic sensors and
microprocessors. These systems require specialized training to install, maintain
and repair, and the typical building engineer has not received this training.
Increasingly, HVAC systems in commercial and industrial buildings are being
remotely monitored through PC-based communications systems to improve energy
efficiency and expedite problem diagnosis and correction. Approximately 40% of
the Company's consolidated 1999 revenues related to maintenance, repair and
replacement services.
STRATEGY
The Company has implemented an operating strategy that emphasizes
strengthening operating competencies and continued internal growth.
OPERATING STRATEGY. The key elements of the Company's operating strategy
are:
FOCUS ON COMMERCIAL AND INDUSTRIAL MARKETS. The Company primarily
focuses on the commercial and industrial markets with particular emphasis
on "design and build" installation services and maintenance, repair and
replacement services. The Company believes that the commercial and
industrial HVAC markets are attractive because of their growth
opportunities, diverse customer base, reduced weather exposure as compared
to residential markets, attractive margins and potential for long-term
relationships with building owners, property managers, general contractors
and architects. Approximately 97% of the Company's consolidated 1999
revenues were derived from commercial and industrial customers.
2
ACHIEVE EXCELLENCE IN CORE COMPETENCIES. The Company has identified
six core competencies, which it believes are critical to attracting and
retaining customers, increasing revenue and creating additional employment
opportunities. The six core competencies are: (i) customer cultivation and
intimacy, (ii) design and build expertise, (iii) estimating, (iv) job
costing and job measurements, (v) safety and (vi) service capability.
ACHIEVE OPERATING EFFICIENCIES. The Company believes there are
opportunities to achieve operating efficiencies and cost savings through
purchasing economies, the adoption of "best practices" operating programs
and a focus on job management to deliver services in a cost-effective and
efficient manner. The Company has begun and will continue to use its
growing purchasing power to gain volume discounts on products and services
such as HVAC components, raw materials, service vehicles, advertising,
bonding, insurance and benefits.
ATTRACT AND RETAIN QUALITY EMPLOYEES. The Company seeks to attract
and retain quality employees by providing them (i) an enhanced career path
from working for a larger public company, (ii) additional training,
education and apprenticeships to allow talented employees to advance to
higher-paying positions, (iii) the opportunity to realize a more stable
income and (iv) attractive benefits packages.
GROWTH. A key component of the Company's strategy is to nurture growth at
the Company's subsidiaries. The key elements of the Company's internal
growth strategy are:
EXPAND NATIONAL SERVICE CAPABILITIES. The Company believes that
significant demand exists from large regional and national companies to
utilize the services of a single HVAC service company capable of providing
commercial and industrial services on a regional or national basis. The
Company has significantly increased its ability to handle multi-location
service opportunities by internally developing a National Service
Organization to facilitate these activities and through the acquisition of
Outbound Services in November 1999. Outbound Services is an Internet based
technology platform and call center designed to manage HVAC and related
service along with the information needs of multi-location customers
including asset data management, warranty tracking capability, real-time
status of services performed and automated invoicing.
EXPAND ALLIANCES WITH ENERGY PROVIDERS. The Company believes that
there is significant potential for mutually beneficial relationships with
companies that market energy and energy services. The Company is currently
working with several companies in the utility industry through cooperative
marketing of the Company's services and is seeking to provide utilities the
opportunity to profit and to benefit from the Company's own customer
relationships. The Company believes it can expand these relationships as it
gains experience with successful programs and as its geographic presence
increases.
CAPITALIZE ON SPECIALIZED TECHNICAL AND MARKETING STRENGTHS. The
Company believes it will be able to continue to expand the services it
offers in its markets by leveraging the specialized technical and marketing
strengths of individual companies. The Company also believes its
geographical coverage will enable it to serve existing customers' needs in
new regions that may have been beyond the service area of the Company's
operations that originated the existing customer relationship.
ENTER NEW GEOGRAPHIC MARKETS. From time to time, the Company expects
to opportunistically target leading local or regional companies providing
HVAC and related services with a solid customer base, technical skills and
infrastructure. The Company seeks businesses that are located in attractive
markets, have a significant service and replacement component, are
financially stable, are experienced in the industry and have a strong
management team. The Company also enters new markets from time to time by
opening new or branch offices, particularly where the Company has
established customer opportunities.
OPERATIONS SERVICES PROVIDED
The Company provides a wide range of installation, maintenance, repair and
replacement services for HVAC and related systems in commercial and industrial
properties. The Company manages its locations on
3
a decentralized basis, with local management maintaining responsibility for
day-to-day operating decisions. In addition to senior management, local
personnel generally include design engineers, sales personnel, customer service
personnel, installation service technicians, sheet metal and prefabrication
technicians, estimators and administrative personnel. The Company has
centralized certain administrative functions such as insurance, employee
benefits, safety programs and cash management to enable the management of its
locations to focus on pursuing new business opportunities and improving
operating efficiencies. The Company is centralizing training programs, project
financing programs, national sales and purchasing programs and joint marketing
programs.
INSTALLATION SERVICES. The Company's installation business, which
comprised approximately 60% of the Company's 1999 consolidated revenues,
involves the design, engineering, integration, installation and start-up of HVAC
and related systems. The commercial and industrial installation services
performed by the Company consist of "design and build" and under some
circumstances, "plan and spec" services for manufacturing plants, office
buildings, retail centers, apartment complexes, health care, education and
government facilities and other commercial and industrial facilities. In a
"design and build" project, the customer typically has an overall design for
the facility prepared by an architect or a consulting engineer who then enlists
the Company's engineering personnel to prepare a specific design for the HVAC
system. The Company determines the needed capacity, energy efficiency and type
of controls that best suit the proposed facility. The Company's engineer then
estimates the amount of time, labor, materials and equipment needed to build the
specified system. The final design, terms, price and timing of the project are
then negotiated with the customer or its representatives, after which any
necessary modifications are made to the system. In "plan and spec"
installation the Company participates in a bid process to provide labor,
materials and installation based on plans and engineering provided by a customer
or a general contractor.
Once an agreement has been reached, the Company orders the necessary
materials and equipment for delivery to meet the project schedule. In most
instances, the Company fabricates in its own facilities, the ductwork and piping
and assembles certain components for the system based on the mechanical drawing
specifications, eliminating the need to subcontract ductwork or piping
fabrication. The Company installs the system at the project site, working
closely with the general contractor. Most commercial and industrial installation
projects last from two weeks to one year and generate revenues from $50,000 to
$3,000,000 per project. These projects are generally billed periodically as
costs are incurred and, in most cases, with retainage of up to 10% held back
until completion and successful start-up of the HVAC system.
The Company also installs process cooling systems, building automation
controls and monitoring systems and industrial process piping. Process cooling
systems are utilized primarily in industrial facilities to provide heating
and/or cooling to precise temperature and climate standards for products being
manufactured and for the manufacturing equipment. Control systems are used in
HVAC and process cooling systems to maintain pre-established temperature or
climate standards for commercial or industrial facilities. Building automation
control systems are capable not only of controlling a facility's entire HVAC
system, often on a room-by-room basis, but can be programmed to integrate energy
management, security, fire, card key access, lighting and overall facility
monitoring. This monitoring can be performed on-site or remotely through a
PC-based communications system. The monitoring system will communicate an
exception when an operating system is operating outside pre-established
parameters. Diagnosis of potential problems can be performed from the computer
terminal which often can remotely adjust the control system. Industrial process
piping is utilized in manufacturing facilities to convey required raw material,
support utilities and finished products.
MAINTENANCE, REPAIR AND REPLACEMENT SERVICES. The Company's maintenance,
repair and replacement services comprised approximately 40% of the Company's
1999 consolidated revenues, and include the maintenance, repair, replacement,
reconfiguration and monitoring of HVAC systems and industrial process piping.
Over two-thirds of the Company's maintenance, repair and replacement revenues
were derived from reconfiguring existing HVAC systems for commercial and
industrial customers. Reconfiguration often utilizes consultative expertise
similar to that provided in the "design and build" installation market. The
Company believes that the reconfiguration of an existing system results in a
more cost-effective, energy-
4
efficient system that better meets the specific needs of the building owner. The
reconfiguration also enables the Company to utilize its design and engineering
personnel as well as its sheet metal and pre-fabrication facilities.
Maintenance and repair services are provided either in response to service
calls or pursuant to a service agreement. Service calls are coordinated by
customer service representatives or dispatchers that use computer and
communication technology to process orders, arrange service calls, communicate
with customers, dispatch technicians and invoice customers. Service technicians
work from service vehicles equipped with commonly used parts, supplies and tools
to complete a variety of jobs.
Commercial and industrial service agreements usually have terms of one to
three years, with automatic annual renewals. The Company also provides remote
monitoring of temperature, pressure, humidity and air flow for HVAC systems. If
the system is not operating within the specifications set forth by the customer
and cannot be remotely adjusted, a service crew is dispatched to analyze and
repair the system.
SOURCES OF SUPPLY
The raw materials and components used by the Company include HVAC system
components, ductwork, steel, sheet metal and copper tubing and piping. These raw
materials and components are generally available from a variety of domestic or
foreign suppliers at competitive prices. Delivery times are typically short for
most raw materials and standard components, but during periods of peak demand,
may extend to a month or more. Chillers for large units typically have the
longest delivery time and generally have lead times of up to six months. The
major components of commercial HVAC systems are compressors and chillers that
are manufactured primarily by York Heating and Air Conditioning Corporation
("York"), Carrier Corporation and Trane Air Conditioning Company. The major
suppliers of building automation control systems are Honeywell Inc., Johnson
Controls Inc., York, Automated Logic, Novar and Andover Control Corporation. The
Company does not have any significant contracts guaranteeing the Company a
supply of raw materials or components.
SALES AND MARKETING
The Company has a diverse customer base, with no single customer accounting
for more than 2% of consolidated 1999 revenues. Management and a dedicated sales
force have been responsible for developing and maintaining successful long-term
relationships with key customers. Customers generally include building owners
and developers and property managers, as well as general contractors, architects
and consulting engineers. The Company intends to continue its emphasis on
developing and maintaining long-term relationships with its customers by
providing superior, high-quality service in a professional manner. Moreover, the
dedicated sales force receives technical and sales training to enhance the
comprehensive selling skills necessary to serve the HVAC needs of their
customers.
The Company has a national sales team to capitalize on cross-marketing and
business development opportunities that management believes are available to the
Company as a regional or national provider of comprehensive commercial and
industrial HVAC and related services. Management believes that it can
increasingly leverage the diverse technical and marketing strengths at
individual locations to expand the services offered in other local markets.
EMPLOYEES
As of December 31, 1999, the Company had 10,853 employees, including 593
management personnel, 8,829 engineers, service and installation technicians, 313
sales personnel and 1,118 administrative personnel. As it executes its growth
strategy, the Company expects the number of employees to increase. Certain of
the Company's subsidiaries have collective bargaining agreements that cover, in
the aggregate, approximately 2,690 employees. The Company has not experienced
any significant strikes or work stoppages and believes its relations with
employees covered by collective bargaining agreements are good.
5
RECRUITING, TRAINING AND SAFETY
The Company's continued future success will depend, in part, on its ability
to continue to attract, retain and motivate qualified service technicians, field
supervisors and project managers. The Company believes that its success in
retaining qualified employees will be based on the quality of its recruiting,
training, compensation, employee benefits programs and opportunities for
advancement. The Company has a national recruiting network and also recruits via
the internet and at local technical schools and community colleges where
students focus on learning basic industry skills. Additionally, Comfort Systems
provides on-the-job training, technical training, apprenticeship programs,
attractive benefit packages, steady employment and career advancement
opportunities within the Company.
The Company is working to establish "best practices" safety programs
throughout its operations to ensure that all technicians comply with safety
standards established by the Company and federal, state and local laws and
regulations. Additionally, the Company has implemented a "best practices"
safety program throughout its operations, which provides employees with
incentives to improve safety performance and decrease workplace accidents.
Regional safety directors establish safety programs and benchmarking to improve
safety within their region. The Company's employment screening process seeks to
determine that prospective employees have the requisite skills, sufficient
background references and acceptable driving records, if applicable.
RISK MANAGEMENT, INSURANCE AND LITIGATION
The primary risks in the Company's operations are bodily injury, property
damage and injured workers' compensation. The Company maintains liability
insurance for bodily injury, third party property damage and workers'
compensation which it considers sufficient to insure against these risks,
subject to self-insured amounts.
The Company is subject to certain claims and lawsuits arising in the normal
course of business and maintains various insurance coverages to minimize
financial risk associated with these claims. The Company has provided accruals
for probable losses and legal fees associated with certain of these actions in
its consolidated financial statements. In the opinion of management, uninsured
losses, if any, resulting from the ultimate resolution of these matters will not
have a material adverse effect on the Company's financial position or results of
operations.
The Company's subsidiaries typically warrant labor for the first year after
installation on new HVAC systems and pass through to the customer manufacturers'
warranties on equipment. The Company's subsidiaries generally warrant labor for
30 days after servicing of existing HVAC systems. The Company does not expect
warranty claims to have a material adverse effect on its financial position or
results of operations.
COMPETITION
The HVAC industry is highly competitive. The Company believes that
purchasing decisions in the commercial and industrial markets are based on (i)
long-term customer relationships, (ii) quality, timeliness and reliability of
services provided, (iii) competitive price, (iv) range of services provided and
(v) scale of operation. The Company's strategy of focusing on both the highly
consultative "design and build" installation market and the maintenance,
repair and replacement market promotes the development and strengthening of
long-term customer relationships. In addition, the Company's ability to provide
multi-location coverage, project financing and specialized technical skills for
facilities owners gives it a strategic advantage over smaller competitors who
may be unable to provide these services to customers at a competitive price.
Many of the Company's competitors are small, owner-operated companies that
typically operate in a limited geographic area. There are also public companies,
divisions of utility companies and equipment manufacturers that are focused on
providing HVAC services in some of the same service lines provided by the
Company. Certain of the Company's competitors and potential competitors may have
greater financial
6
resources than the Company to finance acquisition and development opportunities,
to pay higher prices for the same opportunities or to develop and support their
own operations.
FACILITIES AND VEHICLES
The Company leases the majority of its facilities. In most instances these
leases are with the former owners who are now employed by the Company. Leased
premises range in size from 1,500 square feet to over 100,000 square feet. The
Company believes that its facilities are sufficient for its current needs.
The Company operates a fleet of various owned or leased service trucks,
vans and support vehicles. The Company believes that these vehicles generally
are well-maintained and adequate for its current operations.
GOVERNMENTAL REGULATION AND ENVIRONMENTAL MATTERS
The Company's operations are subject to various federal, state and local
laws and regulations, including: (i) licensing requirements applicable to
service technicians, (ii) building and HVAC codes and zoning ordinances, (iii)
regulations relating to consumer protection, including those governing
residential service agreements and (iv) regulations relating to worker safety
and protection of the environment. The Company believes it has all required
licenses to conduct its operations and is in substantial compliance with
applicable regulatory requirements. Failure of the Company to comply with
applicable regulations could result in substantial fines or revocation of the
Company's operating licenses.
Many state and local regulations governing the HVAC services trades require
permits and licenses to be held by individuals. In some cases, a required permit
or license held by a single individual may be sufficient to authorize specified
activities for all of the Company's service technicians who work in the state or
county that issued the permit or license. The Company is implementing a policy
to ensure that, where possible, any such permits or licenses that may be
material to the Company's operations in a particular geographic region are held
by at least two Company employees within that region.
The Company's operations are subject to the federal Clean Air Act, as
amended (the "Clean Air Act"), which governs air emissions and imposes
specific requirements on the use and handling of chlorofluorocarbons ("CFCs")
and certain other refrigerants. Clean Air Act regulations require the
certification of service technicians involved in the service or repair of
equipment containing these refrigerants and also regulate the containment and
recycling of these refrigerants. These requirements have increased the Company's
training expenses and expenditures for containment and recycling equipment. The
Clean Air Act is intended ultimately to eliminate the use of CFCs in the United
States and to require alternative refrigerants to be used in replacement HVAC
systems.
EXECUTIVE OFFICERS
The Company has five executive officers.
Fred M. Ferreira, age 57, has served as Chairman of the Board, Chief
Executive Officer and President of Comfort Systems since January 1997. Mr.
Ferreira was responsible for introducing the consolidation opportunity in the
commercial and industrial HVAC industry to Notre Capital Ventures II, L.L.C.
("Notre") and was primarily responsible for the organization of the Company.
From 1995 through 1996, Mr. Ferreira was a private investor. He served as Chief
Operating Officer and a director of Allwaste, Inc., a publicly-traded
environmental services company ("Allwaste"), from 1994 to 1995, and was
President of Allwaste Environmental Services, Inc., the largest division of
Allwaste, from 1991 to 1994. From 1989 to 1990, Mr. Ferreira served as President
of Allied Waste Industries, Inc., an environmental services company. Prior to
that time, Mr. Ferreira served as Vice President -- Southern District and in
various other positions with Waste Management, Inc., an environmental services
company.
J. Gordon Beittenmiller, age 41, has served as Executive Vice President,
Chief Financial Officer and a director of Comfort Systems since May 1998, and
was Senior Vice President, Chief Financial Officer and a director of Comfort
Systems from February 1997 to April 1998. From 1994 to February 1997, Mr.
Beittenmiller was Corporate Controller of Keystone International, Inc.
("Keystone"), a publicly-traded
7
manufacturer of industrial valves and actuators, and served Keystone in other
financial positions from 1991 to 1994. From 1987 to 1991, he was Vice
President -- Finance of Critical Industries, Inc., a publicly-traded
manufacturer and distributor of specialized safety equipment. From 1982 to 1987,
he held various positions with Arthur Andersen LLP. Mr. Beittenmiller is a
Certified Public Accountant.
Gary E. Hess, age 52, has served as Chief Operating Officer and Executive
Vice President of Comfort Systems since June 1999 and prior to this he was the
Senior Vice President -- Operations from February 1999 to May 1999. In March
2000, the Board of Directors unanimously elected Mr. Hess as a director of
Comfort Systems. He served Comfort Systems as director of its Northeast region
from August 1998 to January 1999. Prior to that, he was employed by Hess
Mechanical Corporation, a wholly owned subsidiary of the Company, since 1980,
serving as Chairman and Chief Executive Officer. Mr. Hess was President of
Associated Builders and Contractors during 1996 and was selected as their 1997
Contractor of the Year. He is a decorated Vietnam veteran.
Reagan S. Busbee, age 36, has served as Senior Vice President of Comfort
Systems since January 1997. From 1992 through 1996, Mr. Busbee served as Vice
President of Chas. P. Young Co., a financial printer and a wholly-owned
subsidiary of Consolidated Graphics Inc., a publicly-traded consolidator of the
printing industry. From August 1986 to May 1992, he held various positions and
was a Certified Public Accountant with Arthur Andersen LLP.
William George, III, age 35, has served as Senior Vice President, General
Counsel and Secretary of Comfort Systems since May 1998, and was Vice President,
General Counsel and Secretary of Comfort Systems from March 1997 to April 1998.
From October 1995 to February 1997, Mr. George was Vice President and General
Counsel of American Medical Response, Inc., a publicly traded consolidator of
the healthcare transportation industry. From September 1992 to September 1995,
Mr. George practiced corporate and antitrust law at Ropes & Gray, a Boston,
Massachusetts law firm.
ITEM 2. PROPERTIES
Most of the Company's subsidiaries lease the real property and buildings
from which they operate. The Company's facilities consist of offices, shops,
maintenance and warehouse facilities. Generally, leases range from five to ten
years and are on terms the Company believes to be commercially reasonable.
Certain of these facilities are leased from related parties. In order to
maximize available capital, the Company generally intends to continue to lease
the majority of its properties. The Company believes that its facilities are
adequate for its current needs.
The Company leases its executive and administrative offices in Houston,
Texas.
ITEM 3. LEGAL PROCEEDINGS
The Company is party to litigation in the ordinary course of business.
There are currently no pending legal proceedings that, in management's opinion,
will have a material adverse effect on the Company's consolidated operating
results or financial condition.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
8
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The following table sets forth the reported high and low sales prices of
the Common Stock for the quarters indicated as traded at the New York Stock
Exchange. The Common Stock is traded under the symbol FIX.
HIGH LOW
---------- ----------
First Quarter, 1998.................. $ 22.25 $ 18.125
Second Quarter, 1998................. $ 24.75 $ 19.125
Third Quarter, 1998.................. $ 26.625 $ 15.25
Fourth Quarter, 1998................. $ 20.50 $ 14.1875
First Quarter, 1999.................. $ 18.50 $ 11.375
Second Quarter, 1999................. $ 18.5625 $ 13.125
Third Quarter, 1999.................. $ 18.625 $ 11.25
Fourth Quarter, 1999................. $ 12.00 $ 6.4375
January 1 - March 13, 2000........... $ 9.375 $ 6.75
As of March 13, 2000, there were approximately 1,458 stockholders of record
of the Company's Common Stock, and the last reported sale price on that date was
$7.875 per share.
The Company has never declared or paid a dividend on its Common Stock. The
Company currently expects to retain future earnings in order to repay debt,
repurchase shares of the Company's Common Stock and finance growth and,
consequently, does not intend to declare any dividend on the Common Stock for
the foreseeable future. In addition, the Company's revolving credit agreement
restricts the ability of the Company to pay dividends without the lenders'
consent. The Company's Restricted Voting Common Stock converts to Common Stock
upon sale and under certain other conditions.
RECENT SALES OF UNREGISTERED SECURITIES
During 1999, the Company issued a total of 256,363 unregistered shares of
its Common Stock in connection with the acquisition of four HVAC businesses,
none of which was material. In each case, the shares were issued without
registration under the Securities Act in reliance on the exemption provided by
Section 4(2), no public offering being involved.
ITEM 6. SELECTED FINANCIAL DATA
Comfort Systems acquired the 12 Founding Companies in connection with the
IPO on July 2, 1997. Subsequent to the IPO and through December 31, 1999, the
Company completed 107 acquisitions, 17 of which were accounted for as
poolings-of-interests (the "Pooled Companies") and 90 of which were accounted
for as purchases (the "Purchased Companies"). The following selected
historical financial data has been derived from the audited financial statements
of the Company for each of the four years ended December 31, 1996, 1997, 1998,
and 1999. The remaining selected historical financial data of the Company has
been derived from unaudited financial statements of the Company. These unaudited
financial statements have been prepared on the same basis as the audited
financial statements of the Company, and in the opinion of the Company, reflect
all adjustments necessary for a fair presentation of that historical
information. The historical financial statement data reflects the acquisitions
of the Founding Companies and Purchased Companies as of their respective
acquisition dates and reflects 15 of the Pooled Companies (the "Restated
Companies") for all periods presented. Two of the Pooled Companies are
considered immaterial poolings based upon criteria set forth by the Securities
and Exchange Commission and have not been
9
restated for all periods presented. The selected historical financial data below
should be read in conjunction with the historical Consolidated Financial
Statements and related notes.
YEAR ENDED DECEMBER 31,
------------------------------------------------------------
1995 1996 1997 1998 1999
---------- ---------- ---------- ---------- ------------
(IN THOUSANDS)
STATEMENT OF OPERATIONS DATA:
Revenues........................ $ 126,794 $ 161,419 $ 297,646 $ 853,961 $ 1,370,035
Operating income................ $ 4,011 $ 6,575 $ 5,699 $ 68,497 $ 93,204
Net income (loss)............... $ 3,137 $ 4,589 $ (2,064) $ 35,013 $ 42,322
BALANCE SHEET DATA:
Working capital................. $ 10,110 $ 13,971 $ 63,137 $ 133,390 $ 172,566
Total assets.................... $ 42,035 $ 50,366 $ 308,779 $ 789,293 $ 943,272
Total debt, including current
portion....................... $ 9,076 $ 8,376 $ 24,726 $ 236,446 $ 305,833
Stockholders' equity............ $ 10,731 $ 15,429 $ 217,635 $ 379,932 $ 418,965
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
INTRODUCTION
The following discussion should be read in conjunction with the
consolidated historical financial statements of the Company and related notes
thereto. This discussion contains forward-looking statements regarding the
business and industry of Comfort Systems within the meaning of the Private
Securities Litigation Reform Act of 1995. These statements are based on the
current plans and expectations of the Company and involve risks and uncertanties
that could cause actual future activities and results of operations to be
materially different from those set forth in the forward-looking statements.
Important factors that could cause actual results to differ are discussed under
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Factors Which May Affect Future Results."
Comfort Systems was founded in December 1996 to become a leading national
provider of HVAC services, primarily focusing on commercial and industrial
markets. On July 2, 1997, Comfort Systems completed the IPO and simultaneously
acquired the 12 Founding Companies, which are engaged in providing HVAC
services. Subsequent to the IPO, and through December 31, 1999, the Company
acquired 107 additional HVAC and complementary businesses. Of these additional
acquisitions, 17 acquisitions were accounted for as poolings-of-interests and
are referred to herein as the Pooled Companies, and the remaining 90
acquisitions were accounted for as purchases and are referred to herein as the
Purchased Companies. The consolidated historical financial statements of the
Company have been retroactively restated to give effect to the operations of 15
of the Pooled Companies. Two of the Pooled Companies are considered immaterial
poolings based upon criteria set forth by the Securities and Exchange Commission
and have not been restated for all periods presented.
Historical results are not necessarily indicative of future results of the
Company because, among other things, the Acquired Companies were not under
common control or management prior to their acquisition. The results of the
Company have historically been subject to seasonal fluctuations. The timing and
magnitude of acquisitions, assimilation costs and the seasonal nature of the
HVAC industry may materially affect operating results. Accordingly, the
operating results for any period are not necessarily indicative of the results
that may be achieved for any subsequent period. These historical statements of
operations should be read in conjunction with the historical Consolidated
Financial Statements and related notes of Comfort Systems, filed herewith.
RESULTS OF OPERATIONS -- HISTORICAL
The following historical consolidated financial information represents the
operations of the Restated Companies for all periods presented and the Founding
Companies and Purchased Companies from their respective dates of acquisition.
Historical selling, general, and administrative expenses for the periods
presented in the consolidated financial statements of the Company reflect
compensation and related benefits
10
the owners of those businesses received prior to acquisition. The following
historical financial information for 1997 includes the non-recurring, non-cash
compensation charge of $11.6 million recorded by Comfort Systems in the first
quarter of 1997, non-recurring acquisition-related costs and reflects normal
recurring corporate costs of Comfort Systems subsequent to the IPO. This
compensation charge is not deductible for federal and state income taxes. This
historical consolidated information has been derived from the audited
consolidated financial statements of the Company.
YEAR ENDED DECEMBER 31,
---------------------------------------------------------------------
1997 1998 1999
--------------------- --------------------- -----------------------
(IN THOUSANDS)
Revenues............................. $ 297,646 100.0% $ 853,961 100.0% $ 1,370,035 100.0%
Cost of services..................... 220,419 74.1 647,512 75.8 1,077,329 78.6
---------- --------- ---------- --------- ------------ ---------
Gross profit......................... 77,227 25.9 206,449 24.2 292,706 21.4
Selling, general and administrative
expenses........................... 69,677 23.4 130,820 15.3 187,771 13.7
Goodwill amortization................ 1,851 0.6 7,132 0.8 11,731 0.9
---------- --------- ---------- --------- ------------ ---------
Operating income..................... 5,699 1.9 68,497 8.1 93,204 6.8
Other income (expense)............... (161) -- (6,435) (0.8) (19,144) (1.4)
---------- --------- ---------- --------- ------------ ---------
Income before taxes.................. 5,538 1.9 62,062 7.3 74,060 5.4
Provision for income taxes........... 7,602 -- 27,049 -- 31,738 --
---------- --------- ---------- --------- ------------ ---------
Net income (loss).................... $ (2,064) (0.7)% $ 35,013 4.1% $ 42,322 3.1%
========== ========= ========== ========= ============ =========
1999 COMPARED TO 1998
REVENUES -- Revenues increased $516.1 million, or 60.4%, to $1.4 billion in
1999 compared to 1998. The increase in revenues over the prior year is primarily
due to the acquisition of Purchased Companies in 1998 and 1999, however, the
Company has experienced lower internal revenue growth in the latter part of
fiscal 1999 as compared to previous periods. The Company believes that this is
primarily attributable to a slowing in the growth of the construction industry
due to shortages in both labor and specialty building materials, which in turn
impacted HVAC installations.
GROSS PROFIT -- Gross profit increased $86.3 million, or 41.8%, to $292.7
million in 1999 compared to 1998. The increase in gross profit is primarily due
to the acquisitions described above. As a percentage of revenues, gross profit
decreased from 24.2% in 1998 to 21.4% in 1999. This decrease primarily resulted
from the change in classification of certain costs from selling, general and
administrative expenses to cost of services. These costs relate to activities
that directly support project or service work. Management believes this revised
presentation better aligns the presentation of cost of services and selling,
general and administrative expenses across all of our acquired operations.
Excluding the effect of this change in classification for 1999 of approximately
$37.2 million, gross profit as a percentage of revenues remained relatively
unchanged at 24.1% in 1999 versus 24.2% in 1998. During 1999, the Company
experienced increased gross profit margins from strong performances in
commercial and industrial markets in the Northeast, Phoenix and Orlando as well
as operating synergies achieved between its western Michigan companies. However,
in the latter part of fiscal 1999 the Company has experienced lower internal
revenue growth as a result of construction industry capacity issues as discussed
above. In addition, there has been a shift in the mix of installation projects
to higher labor-intensive projects with lower gross profit percentages, pricing
competition in certain markets and execution shortfalls and inefficiencies as
the Company sought stronger revenue growth levels.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES -- SG&A increased $57.0
million, or 43.5%, to $187.8 million in 1999 compared to 1998. Most of this
increase was related to Purchased Companies along with an increase in corporate
personnel and corporate office expenses commensurate with the increase in the
number of Acquired Companies. As a percentage of revenues, selling, general and
administrative expenses decreased from 15.3% in 1998 to 13.7% in 1999. This
decrease is primarily attributable to the change in classification of certain
costs as described above. Excluding the effect of this change in classification
for 1999 of approximately $37.2 million, SG&A expenses as a percentage of
revenues increased from 15.3% for 1998 to 16.4% for 1999. This increase in SG&A
as a percentage of revenues resulted primarily from lower internal revenue
growth as discussed above and increased healthcare costs under the Company's
self-insured medical plan. SG&A for 1998 includes $1.8 million of salaries
11
and benefits paid to the former owners of the Pooled Companies which the former
owners contractually agreed would not continue following their acquisition by
Comfort Systems.
OPERATING INCOME -- Operating income increased $24.7 million, or 36.1%, to
$93.2 million in 1999 compared to 1998 primarily due to the addition of
Purchased Companies. As a percentage of revenues, operating income decreased
from 8.1% in 1998 to 6.8% in 1999. The decrease in operating income as a
percentage of revenues resulted from issues discussed above.
OTHER INCOME (EXPENSE) -- Other expense, net, increased $12.7 million, or
197.5%, to $19.1 million in 1999 compared to 1998 primarily due to the increase
in interest expense related to the acquisition of the Purchased Companies.
1998 COMPARED TO 1997
REVENUES -- Revenues increased $556.3 million, or 186.9%, to $854.0 million
in 1998 compared to 1997. The increase in revenues over the prior year was
primarily due to the acquisition of the Founding Companies and Purchased
Companies coupled with broad growth in certain of its Pooled Companies located
in the Cincinnati, Syracuse and Kansas City, Kansas markets.
GROSS PROFIT -- Gross profit increased $129.2 million, or 167.3%, to $206.4
million in 1998 compared to 1997. The increase in gross profit was primarily due
to the acquisitions described above. As a percentage of revenues, gross profit
decreased from 25.9% in 1997 to 24.2% in 1998. This decline resulted primarily
from the acquisition of the Purchased Companies, which, taken as a whole, have
gross margins that are lower than the Company's historical average.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES -- SG&A, excluding goodwill
amortization, in 1997 and 1998 includes $10.3 million and $1.8 million,
respectively, of Compensation Differential and acquisition related costs which
will be eliminated prospectively. Additionally, the Company recorded the non-
recurring, non-cash compensation charge of $11.6 million in the first quarter of
1997. Excluding the Compensation Differential, the compensation charge, and
goodwill amortization, SG&A increased $81.3 million to $129.1 million in 1998.
Most of this increase was related to the Founding Companies and Purchased
Companies acquired since the IPO, along with corporate office and management
expenses associated with the Company's establishment as a public company.
OPERATING INCOME -- Operating income increased $62.8 million, or 1,101.9%
to $68.5 million in 1998 compared to 1997 primarily due to increased revenues at
the Founding Companies, the addition of the Purchased Companies and incremental
increases in volume at some of the Pooled Companies. As a percentage of
revenues, operating income increased from 1.9% in 1997 to 8.1% in 1998. As
discussed above, this increase primarily resulted from the Compensation
Differential and the compensation charge recorded in 1997.
OTHER INCOME (EXPENSE) -- Other expense, net, increased to $6.4 million in
1998 compared to 1997 primarily due to the increase in interest expense related
to the acquisition of the Purchased Companies acquired subsequent to the IPO and
through the end of 1998.
LIQUIDITY AND CAPITAL RESOURCES
For the year ended December 31, 1999, net cash provided by operating
activities was $18.4 million, or an increase of $23.9 million over the prior
year. This increase was primarily due to an increase in accounts payable and
accrued liabilities which were partially offset by an increase in accounts
receivable. Cash used in operations for 1998 was $5.5 million and cash provided
from operations in 1997 was $1.0 million.
Cash used in investing activities was $46.5 million for the year ended
December 31, 1999, primarily in connection with the acquisition of Purchased
Companies for $31.4 million, net of cash acquired. Cash flows used in investing
activities for 1998 and 1997 were $143.1 million and $57.6 million,
respectively. The uses
12
of cash in 1998 and 1997 were primarily for the acquisition of the Founding
Companies and Purchased Companies, net of cash acquired.
Cash provided by financing activities for the year ended December 31, 1999
was $24.7 million primarily from net borrowings of long-term debt which were
primarily used to fund acquisitions. Net cash provided by financing activities
in 1998 was $137.5 million and was primarily attributable to the $16.7 million
received from the second public offering (the "Second Public Offering") and
net borrowings of long-term debt of $124.2 million, which were primarily used to
fund acquisitions. Net cash provided by financing activities in 1997 was $66.6
million and was primarily attributable to the $79.9 million from the IPO, which
was partially offset by a net reduction in outstanding debt.
On July 2, 1997, Comfort Systems completed the offering of 6,100,000 shares
of Common Stock to the public at $13.00 per share. The net proceeds to Comfort
Systems from the IPO (after deducting underwriting commissions and offering
expenses) were $68.8 million. Of this amount, $45.3 million was used to pay the
cash portion of the purchase prices of the Founding Companies. In connection
with the IPO, the Company granted its underwriters an option to sell an
additional 915,000 shares at $13.00 per share. On July 9, 1997, the underwriters
exercised this option. Net proceeds to the Company from this sale of shares were
$11.1 million after deducting underwriting commissions.
On June 16, 1998, the Company completed a Second Public Offering of 400,000
shares of its Common Stock to the public at $20.00 per share. The net proceeds
from this offering of $7.6 million, after deducting underwriting commissions and
offering expenses, were used to repay debt. In connection with the Second Public
Offering, the Company granted its underwriters an option to sell additional
shares at $20.00 per share. On July 21, 1998, the underwriters exercised this
option. An additional 461,479 shares of Common Stock were sold and the net
proceeds of $8.8 million, after deducting underwriting commissions, were used to
repay debt.
In July 1997, the Company entered into a credit agreement with Bank One,
Texas, N.A. (the "Credit Facility"). The Credit Facility was amended and
restated in September 1997 primarily to provide for additional banks to lend to
the Company under the Credit Facility. At that time, the Credit Facility
provided the Company with an unsecured revolving line of credit of $75 million.
The Credit Facility was further amended in April 1998 and again in December 1998
in order to increase borrowing capacity and to provide for additional banks to
lend to the Company under the Credit Facility. The Credit Facility currently
provides the Company with a revolving line of credit of up to $300 million
secured by accounts receivable, inventory and the shares of capital stock of the
Company's subsidiaries. The Company currently has a choice of two interest rate
options when borrowing under the Credit Facility. Under one option, the interest
rate is determined based on the higher of the Federal Funds Rate plus 0.5% or
the bank's prime rate. An additional margin of zero to 1.25% is then added to
the higher of these two rates. Under the other interest rate option, borrowings
bear interest based on designated short-term Eurodollar rates (which generally
approximate LIBOR) plus 1.0% to 2.5%. The additional margin for both options
depends on the ratio of the Company's debt to EBITDA. Commitment fees of 0.25%
to 0.5% per annum, also depending on the ratio of debt to EBITDA, are payable on
the unused portion of the facility. The Credit Facility prohibits the payment of
dividends by the Company without the lenders' approval and requires the Company
to comply with certain financial covenants. The amended Credit Facility expires
on November 1, 2001, at which time all amounts outstanding under the Credit
Facility are due.
As of December 31, 1999, the Company had borrowed $225.2 million under the
Credit Facility at an average interest rate of approximately 7.4% for the year
ended December 31, 1999. The Company's unused committed borrowing capacity under
the Credit Facility was $72.9 million at December 31, 1999. As of March 13,
2000, $249.2 million was outstanding under this Facility.
On October 5, 1999, the Company announced that its Board of Directors had
approved a share repurchase program authorizing the Company to buy up to 4
million shares of its Common Stock. As of December 31, 1999, the Company
purchased approximately 1.8 million shares at a cost of approximately $12.9
million. Subsequent to yearend, the Company has purchased approximately 0.1
million additional shares at a cost of approximately $0.8 million through March
13, 2000.
13
The Company anticipates that available borrowings under its Credit Facility
and cash flow from operations will be sufficient to meet the Company's normal
working capital and capital expenditure needs, debt service requirements and
additional acquisition opportunities. Should the Company accelerate or revise
its acquisition program, the Company may need to seek additional financing
through the public or private sale of equity or debt securities or increase its
Credit Facility. There can be no assurance that the Company will secure such
financing if and when it is needed, or that such financing will be available on
terms that the Company deems acceptable.
YEAR 2000
Computers, software, and other equipment utilizing embedded technology that
use only two digits to identify a year in a date field may be unable to
accurately process certain date-based information at or after the year 2000.
This is commonly referred to as the "Year 2000 issue." The Company implemented
a Year 2000 program and used both internal and external resources to assess and
replace or reprogram computers, software and other equipment as needed. Key
areas of the Company's operations that were addressed included external
customers, external suppliers and internal computers, software and potential
back-up and contingency plans. To date, the Company has not experienced any
significant Year 2000 issues.
The Company's initial assessment identified Year 2000 issues within the
Company's operating systems. The total cost of Year 2000 enhancements was
approximately $800,000 and was funded from operating cash flows. The majority of
such costs was for the acquisition of hardware and software and were
capitalized. The remaining costs were expensed as incurred and did not have a
material effect on the results of operations.
The ability of third parties with which the Company transacts business to
adequately address remaining Year 2000 issues is outside of the Company's
control. There can be no assurance that the failure of the Company, or such
third parties, to adequately address their respective remaining Year 2000 issues
will not have a material adverse effect on the Company's financial condition or
results of operations. Accordingly, as part of the Year 2000 program,
contingency plans were developed to respond to any failures. At this time, the
Company does not expect that any failure of the Company or third parties to
achieve Year 2000 compliance will adversely affect the Company.
SEASONALITY AND CYCLICALITY
The HVAC industry is subject to seasonal variations. Specifically, the
demand for new installation and replacement is generally lower during the winter
months due to reduced construction activity during inclement weather and less
use of air conditioning during the colder months. Demand for HVAC services is
generally higher in the second and third calendar quarters due to increased
construction activity and increased use of air conditioning during the warmer
months. Accordingly, the Company expects its revenues and operating results
generally will be lower in the first and fourth calendar quarters.
Historically, the construction industry has been highly cyclical. As a
result, the Company's volume of business may be adversely affected by declines
in new installation projects in various geographic regions of the United States.
FACTORS WHICH MAY AFFECT FUTURE RESULTS
The Company's future operating results are difficult to predict and may be
affected by a number of factors, including the lack of a combined operating
history and the difficulty of integrating acquired businesses, a downturn in
construction, shortages of labor and specialty building materials, cyclical and
seasonal fluctuations in the demand for HVAC systems, the use of incorrect
estimates for bidding a fixed price contract, difficulties in implementing its
acquisition strategy and the availability of acquisition financing. As a result
of these and other factors, there can be no assurance that the Company will not
experience material fluctuations in future operating results on a quarterly or
annual basis.
The Company's success depends in part on its ability to integrate the
companies it has acquired. The businesses operated as separate, independent
entities prior to their affiliation with the Company, and there
14
can be no assurance that the Company will be able to integrate the operations of
these businesses successfully or institute the necessary systems and procedures,
including accounting and financial reporting systems, to effectively manage the
combined enterprise on a profitable basis. The historical results are not
necessarily indicative of future results of the Company because, among other
things, the Acquired Companies were not under common control or management prior
to their acquisition.
Key elements of the Company's strategy are to both maintain and improve the
profitability of the individual businesses and to continue to expand the
revenues of such businesses. The Company's level of success in this strategy, if
any, will be affected by demand for new or replacement HVAC systems. In part,
such demand will be contingent upon factors outside the Company's control, such
as the level of new construction or the potential for slower replacement based
upon the overall level of activity in the economy. The HVAC industry is subject
to both seasonal and cyclical variations, meaning that temperate weather and
downturns in the domestic or regional economies will negatively affect overall
demand for the Company's services.
The Company has grown significantly through the acquisition of additional
HVAC and complementary businesses and intends to continue acquisition activity
in the future, albeit more opportunistically. However, the Company could face
difficulties in continuing to acquire select companies. The HVAC industry
continues to undergo consolidation on both a national and a regional level by
the Company and by other companies that have acquisition objectives that are
similar to the Company's objectives. Additionally, HVAC equipment manufacturers
and certain public utilities are beginning to provide maintenance, repair and
replacement services within the HVAC industry. These companies generally are
better capitalized, have greater name recognition and may be able to provide
these services at a lower cost.
Recently acquired businesses also involve a number of special risks,
including failure of the acquired business to achieve expected results,
diversion of management's attention and failure to retain key personnel of the
acquired business. There are also risks associated with unanticipated events or
liabilities resulting from the acquired businesses' operations prior to their
acquisition. Any of these risks, or a combination of them, could have a material
adverse effect on the Company's business, financial condition and results of
operations.
The timely provision of high-quality installation service and maintenance,
repair and replacement of HVAC systems by the Company requires an adequate
supply of skilled HVAC technicians. In addition, the Company depends on the
senior management of the businesses it acquires and regional and corporate
management to remain committed to the success of the Company. Accordingly, the
Company's ability to maintain and increase its productivity and profitability is
also affected by its ability to employ, train and retain the skilled technicians
necessary to meet the Company's service requirements, and to retain senior
management in acquired businesses and at the corporate and regional level.
HVAC systems are also subject to various environmental statutes and
regulations, including the Clean Air Act and those regulating the production,
servicing and disposal of certain ozone depleting refrigerants used in HVAC
systems. There can be no assurance that the regulatory environment in which the
Company operates will not change significantly in the future. The Company's
failure to comply, or the costs of compliance, with such laws and regulations
could adversely affect the Company's future results.
Because of these and other factors, past financial performance should not
necessarily be considered an indicator of future performance. Investors should
not rely solely on historical trends to anticipate future results and should be
aware that the trading price of the Company's Common Stock may be subject to
wide fluctuations in response to quarter-to-quarter variations in operating
results, general conditions in the HVAC industry, the increasing supply of
tradable stock, changes in analysts' earnings estimates, recommendations by
analysts, or other events.
ITEM 7-A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is exposed to market risk primarily related to potential
adverse changes in interest rates as discussed below. Management is actively
involved in monitoring exposure to market risk and continues to develop and
utilize appropriate risk management techniques. The Company is not exposed to
any other
15
significant financial market risks including commodity price risk, foreign
currency exchange risk or interest rate risks from the use of derivative
financial instruments. Management does not use derivative financial instruments
for trading or to speculate on changes in interest rates or commodity prices.
The Company's exposure to changes in interest rates primarily results from
its short-term and long-term debt with both fixed and floating interest rates.
The Company's debt with fixed interest rates consists of capital leases,
convertible subordinated notes, subordinated notes and various other notes
payable. The Company's debt with variable interest rates consists entirely of
its revolving Credit Facility. The following table presents principal amounts
(stated in thousands) and related average interest rates by year of maturity for
the Company's debt obligations and their indicated fair market value at December
31, 1999:
FAIR
2000 2001 2002 2003 2004 THEREAFTER VALUE
--------- ---------- --------- --------- --------- ---------- --------
Liabilities -- Long-Term Debt:
Variable Rate Debt.................... $ -- $ 225,215 $ -- $ -- $ -- $-- $225,215
Average Interest Rate.............. -- % 7.4% -- % -- % -- % -- % 7.4%
Fixed Rate Debt....................... $ 27,889 $ 29,274 $ 22,072 $ 1,383 $ -- $-- $ 80,618
Average Interest Rate.............. 5.8% 5.8% 5.7% 5.5% -- % -- % 5.8%
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA
INDEX TO FINANCIAL STATEMENTS
PAGE
---------
Comfort Systems USA, Inc.
Report of Independent Public 17
Accountants....................
Consolidated Balance Sheets..... 18
Consolidated Statements of 19
Operations.....................
Consolidated Statements of 20
Stockholders' Equity...........
Consolidated Statements of Cash 21
Flow...........................
Notes to Consolidated Financial 22
Statements.....................
16
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Comfort Systems USA, Inc.:
We have audited the accompanying consolidated balance sheets of Comfort
Systems USA, Inc. (a Delaware corporation) and subsidiaries as of December 31,
1998 and 1999, and the related consolidated statements of operations,
stockholders' equity and cash flows for each of the three years in the period
ended December 31, 1999. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the consolidated
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the consolidated financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management, as well
as evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
Comfort Systems USA, Inc., and subsidiaries as of December 31, 1998 and 1999,
and the consolidated results of their operations and their cash flows for each
of the three years in the period ended December 31, 1999, in conformity with
accounting principles generally accepted in the United States.
ARTHUR ANDERSEN LLP
Houston, Texas
February 22, 2000
17
COMFORT SYSTEMS USA, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
DECEMBER 31,
----------------------
1998 1999
---------- ----------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents.......... $ 6,985 $ 3,664
Accounts receivable................ 241,332 314,599
Less -- Allowance............. 4,758 5,568
---------- ----------
Accounts receivable,
net................... 236,574 309,031
Other receivables.................. 2,733 4,575
Inventories........................ 14,768 20,907
Prepaid expenses and other......... 14,264 19,891
Costs and estimated earnings in
excess of billings................ 37,228 54,575
---------- ----------
Total current assets..... 312,552 412,643
PROPERTY AND EQUIPMENT, net............. 34,413 41,964
GOODWILL, net........................... 430,526 474,529
OTHER NONCURRENT ASSETS................. 11,802 14,136
---------- ----------
Total assets............. $ 789,293 $ 943,272
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current maturities of long-term
debt.............................. $ 1,568 $ 3,353
Current maturities of notes to
affiliates and former owners...... 7,509 24,536
Accounts payable................... 74,161 96,032
Accrued compensation and
benefits.......................... 25,869 36,187
Billings in excess of costs and
estimated earnings................ 43,968 52,170
Income taxes payable............... 1,299 --
Other current liabilities.......... 24,788 27,799
---------- ----------
Total current
liabilities........... 179,162 240,077
DEFERRED INCOME TAXES................... 1,124 4,547
LONG-TERM DEBT, NET OF CURRENT
MATURITIES............................ 171,039 225,471
NOTES TO AFFILIATES AND FORMER OWNERS,
NET OF CURRENT MATURITIES............. 56,330 52,473
OTHER LONG-TERM LIABILITIES............. 1,706 1,739
---------- ----------
Total liabilities........ 409,361 524,307
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Preferred stock, $.01 par,
5,000,000 shares authorized, none
issued and outstanding............ -- --
Common stock, $.01 par, 102,969,912
shares authorized, 38,141,180 and
39,258,913 shares issued,
respectively...................... 381 393
Treasury stock, at cost, 1,695,524
shares at December 31, 1999....... -- (11,978)
Additional paid-in capital......... 333,978 342,655
Retained earnings.................. 45,573 87,895
---------- ----------
Total stockholders'
equity................ 379,932 418,965
---------- ----------
Total liabilities and
stockholders'
equity................ $ 789,293 $ 943,272
========== ==========
The accompanying notes are an integral part of these consolidated financial
statements.
18
COMFORT SYSTEMS USA, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
YEAR ENDED DECEMBER 31,
------------------------------------
1997 1998 1999
---------- ---------- ------------
REVENUES............................. $ 297,646 $ 853,961 $ 1,370,035
COST OF SERVICES..................... 220,419 647,512 1,077,329
---------- ---------- ------------
Gross profit............... 77,227 206,449 292,706
SELLING, GENERAL AND ADMINISTRATIVE
EXPENSES........................... 69,102 130,370 187,771
GOODWILL AND OTHER AMORTIZATION...... 1,851 7,132 11,731
ACQUISITION RELATED EXPENSES......... 575 450 --
---------- ---------- ------------
Operating income........... 5,699 68,497 93,204
OTHER INCOME (EXPENSE):
Interest income................. 1,187 957 841
Interest expense................ (1,331) (7,633) (20,033)
Other........................... (17) 241 48
---------- ---------- ------------
Other income (expense)..... (161) (6,435) (19,144)
---------- ---------- ------------
INCOME BEFORE INCOME TAXES........... 5,538 62,062 74,060
PROVISION FOR INCOME TAXES........... 7,602 27,049 31,738
---------- ---------- ------------
NET INCOME (LOSS).................... $ (2,064) $ 35,013 $ 42,322
========== ========== ============
NET INCOME (LOSS) PER SHARE:
Basic........................... $ (0.11) $ 1.06 $ 1.10
========== ========== ============
Diluted......................... $ (0.11) $ 1.04 $ 1.09
========== ========== ============
SHARES USED IN COMPUTING NET INCOME
(LOSS) PER SHARE:
Basic........................... 18,954 32,962 38,561
========== ========== ============
Diluted......................... 18,954 34,329 39,699
========== ========== ============
Reflects a 121.1387-for-one stock split effective on March 19, 1997
The accompanying notes are an integral part of these consolidated financial
statements.
19
COMFORT SYSTEMS USA, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
COMMON STOCK TREASURY STOCK ADDITIONAL TOTAL
------------------ --------------------- PAID-IN RETAINED STOCKHOLDERS'
SHARES AMOUNT SHARES AMOUNT CAPITAL EARNINGS EQUITY
--------- ------ ---------- -------- ---------- --------- -------------
BALANCE AT DECEMBER 31, 1996............ 6,066,312 $ 60 -- $ -- $ 216 $15,153 $ 15,429
Issuance of Common Stock:
Initial Public Offering......... 7,015,000 70 -- -- 79,805 -- 79,875
Acquisition of Founding
Companies..................... 9,720,927 98 -- -- 100,999 -- 101,097
Issuance of management shares... 4,118,708 41 -- -- 11,556 -- 11,597
Acquisition of Purchased
Companies..................... 1,092,489 11 -- -- 13,253 -- 13,264
S Corporation distributions made by
certain Pooled Companies.......... -- -- -- -- -- (2,191) (2,191)
Adjustments to conform fiscal
year-ends of Pooled Companies..... -- -- -- -- -- 727 727
Net loss............................ -- -- -- -- -- (2,064) (2,064)
Other............................... -- -- -- -- -- (99) (99)
--------- ------ ---------- -------- ---------- --------- -------------
BALANCE AT DECEMBER 31, 1997............ 28,013,436 280 -- -- 205,829 11,526 217,635
Issuance of Common Stock:
Second Public Offering.......... 861,479 9 -- -- 15,892 -- 15,901
Acquisition of Purchased
Companies..................... 9,212,573 92 -- -- 111,456 -- 111,548
Issuance of Employee Stock
Purchase Plan shares.......... 29,362 -- -- -- 482 -- 482
Issuance of shares for options
exercised..................... 24,330 -- -- -- 319 -- 319
S Corporation distributions made by
certain Pooled Companies.......... -- -- -- -- -- (966) (966)
Net income.......................... -- -- -- -- -- 35,013 35,013
--------- ------ ---------- -------- ---------- --------- -------------
BALANCE AT DECEMBER 31, 1998............ 38,141,180 381 -- -- 333,978 45,573 379,932
Issuance of Common Stock:
Acquisition of Purchased
Companies..................... 958,533 10 125,197 885 6,164 -- 7,059
Issuance of Employee Stock
Purchase Plan shares.......... 142,276 2 -- -- 2,036 -- 2,038
Issuance of shares for options
exercised..................... 16,924 -- -- -- 477 -- 477
Common Stock repurchases............ -- -- (1,820,721) (12,863) -- -- (12,863)
Net income.......................... -- -- -- -- -- 42,322 42,322
--------- ------ ---------- -------- ---------- --------- -------------
BALANCE AT DECEMBER 31, 1999............ 39,258,913 $393 (1,695,524) $(11,978) $342,655 $87,895 $ 418,965
========= ====== ========== ======== ========== ========= =============
Reflects a 121.1387-for-one stock split effective on March 19, 1997
The accompanying notes are an integral part of these consolidated financial
statements.
20
COMFORT SYSTEMS USA, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
YEAR ENDED DECEMBER 31,
--------------------------------------
1997 1998 1999
---------- ------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)....................... $ (2,064) $ 35,013 $ 42,322
Adjustments to reconcile net income
(loss) to net cash provided by (used
in) operating activities
Depreciation and amortization
expense.......................... 4,786 14,001 23,055
Bad debt expense................... 583 1,253 1,650
Compensation expense related to
issuance of management shares.... 11,556 -- --
Deferred tax expense (benefit)..... (630) 960 1,339
Gain on sale of property and
equipment........................ (95) (274) (260)
Adjustment to conform year-end of
certain Pooled Companies......... 727 -- --
Changes in operating assets and
liabilities, net of effects of
acquisitions of Founding and
Purchased Companies --
(Increase) decrease in --
Receivables, net......... (12,066) (34,915) (58,096)
Inventories.............. 1,008 (788) (4,822)
Prepaid expenses and
other current
assets................ 503 2,437 3,213
Cost and estimated
earnings in excess of
billings.............. (5,167) (7,926) (15,433)
Other noncurrent
assets................ 65 113 (293)
Increase (decrease) in --
Accounts payable and
accrued liabilities... 1,170 (14,991) 20,166
Billings in excess of
costs and estimated
earnings.............. 546 208 6,080
Other, net............... 31 (616) (507)
---------- ------------ ------------
Net cash provided by (used in)
operating activities....... 953 (5,525) 18,414
---------- ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and
equipment........................ (4,501) (11,137) (16,054)
Proceeds from sales of property and
equipment........................ 936 1,369 1,507
Cash paid for Founding Companies,
net of cash acquired............. (42,295) -- --
Cash paid for Purchased Companies,
net of cash acquired............. (11,781) (133,338) (31,417)
Other.............................. -- -- (500)
---------- ------------ ------------
Net cash used in investing
activities................. (57,641) (143,106) (46,464)
---------- ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments on long-term debt......... (38,157) (109,508) (236,372)
Borrowings of long-term debt....... 27,107 233,684 271,706
S Corporation distributions paid by
certain Pooled Companies......... (2,090) (966) --
Proceeds from issuance of common
stock, net of offering costs..... 79,916 16,702 2,258
Repurchases of common stock........ -- -- (12,863)
Other.............................. (189) (2,393) --
---------- ------------ ------------
Net cash provided by financing
activities................. 66,587 137,519 24,729
---------- ------------ ------------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS........................... 9,899 (11,112) (3,321)
CASH AND CASH EQUIVALENTS, beginning of
year.................................. 8,198 18,097 6,985
---------- ------------ ------------
CASH AND CASH EQUIVALENTS, end of
year.................................. $ 18,097 $ 6,985 $ 3,664
========== ============ ============
The accompanying notes are an integral part of these consolidated financial
statements.
21
COMFORT SYSTEMS USA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999
1. BUSINESS AND ORGANIZATION:
Comfort Systems USA, Inc., a Delaware corporation ("Comfort Systems" and
collectively with its subsidiaries, the "Company"), is a leading national
provider of comprehensive heating, ventilation and air conditioning ("HVAC")
installation, maintenance, repair and replacement services. Founded in December
1996, the Company is composed of companies within the commercial and industrial
HVAC markets, and performs most of its services within manufacturing plants,
office buildings, retail centers, apartment complexes, and healthcare, education
and government facilities. In addition to standard HVAC services, the Company
also provides specialized applications such as process cooling, control systems,
electronic monitoring and process piping. Certain locations also perform related
services such as electrical and plumbing.
On July 2, 1997, Comfort Systems completed the initial public offering (the
"IPO") of its common stock (the "Common Stock") and simultaneously acquired
12 companies (collectively referred to as the "Founding Companies") engaged in
providing HVAC services. The Founding Companies had 18 operating locations in 10
states. Subsequent to the IPO, and through December 31, 1999, the Company
acquired 107 additional HVAC and complementary businesses (collectively with the
Founding Companies, the "Acquired Companies"). The companies acquired
subsequent to the IPO added 108 operating locations in 21 additional states.
These acquisitions included 26 "tuck-in" operations that have been or are
currently being integrated with existing Company operations.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
BASIS OF PRESENTATION
For financial statement purposes, Comfort Systems has been identified as
the accounting acquirer. Accordingly, the historical financial statements
include those of Comfort Systems since December 1996. Of the 107 acquisitions
noted above, 17 were accounted for as poolings-of-interests (the "Pooled
Companies") and 90 were accounted for as purchases (the "Purchased
Companies"). These consolidated financial statements reflect the acquisitions
of the Founding Companies and Purchased Companies as of their respective
acquisition dates and reflects 15 of the Pooled Companies (the "Restated
Companies") for all periods presented. Two of the Pooled Companies are
considered immaterial poolings based upon criteria set forth by the Securities
and Exchange Commission and have not been restated for all periods presented.
The acquisitions of the Founding and Purchased Companies were accounted for
using the purchase method of accounting. The allocations of the purchase prices
to the assets acquired and liabilities assumed of certain of these companies
have been recorded based on preliminary estimates of fair value and may be
changed as additional information becomes available.
Prior to their acquisition by Comfort Systems, seven of the Pooled
Companies reported annual results based on fiscal year-ends other than December
31. An adjustment to conform the year-ends of five of these companies to
December 31 year-ends was made in 1996. An adjustment to conform the year-ends
of two of these companies to December 31 year-ends was made in 1997 resulting in
an increase of approximately $727,000 to retained earnings and cash flows for
1997.
PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements include the accounts of
Comfort Systems and its wholly-owned subsidiaries. All significant intercompany
accounts and transactions have been eliminated.
22
COMFORT SYSTEMS USA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
CASH FLOW INFORMATION
The Company considers all highly liquid investments purchased with an
original maturity of three months or less to be cash equivalents.
Cash paid for interest in 1997, 1998 and 1999 was approximately $0.7
million, $6.6 million and $17.8 million, respectively. Cash paid for income
taxes in 1997, 1998 and 1999 was approximately $1.0 million, $33.3 million and
$33.6 million, respectively.
INVENTORIES
Inventories consist of parts and supplies held for use in the ordinary
course of business and are stated at the lower of cost or market using the
first-in, first-out method.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost, and depreciation is computed
using the straight-line method over the estimated useful lives of the assets.
Leasehold improvements are capitalized and amortized over the lesser of the
expected life of the lease or the estimated useful life of the asset.
Expenditures for repairs and maintenance are charged to expense when
incurred. Expenditures for major renewals and betterments, which extend the
useful lives of existing equipment, are capitalized and depreciated over the
remaining useful life of the equipment. Upon retirement or disposition of
property and equipment, the cost and related accumulated depreciation are
removed from the accounts and any resulting gain or loss is recognized in the
statement of operations.
GOODWILL
Goodwill represents the excess of the aggregate purchase price paid by the
Company in acquisitions accounted for as purchases over the fair value of the
net tangible assets acquired. Goodwill is amortized on a straight-line basis
over periods not exceeding 40 years.
As of December 31, 1998 and 1999, accumulated amortization of goodwill was
approximately $9.1 million and $20.7 million, respectively.
LONG-LIVED ASSETS
Long-lived assets are comprised principally of goodwill and property and
equipment. The Company periodically evaluates whether events and circumstances
have occurred that indicate that the remaining balances of these assets may not
be recoverable. The Company uses an estimate of future income from operations
and cash flows, as well as other economic and business factors as a measure of
recoverability of these assets.
REVENUE RECOGNITION
The Company recognizes revenue when services are performed except when work
is being performed under a construction contract. Revenues from construction
contracts are recognized on the percentage-of-completion method measured by the
percentage of costs incurred to total estimated costs for each contract.
Contract costs include all direct material (net of estimated rebates), labor and
subcontract costs and those indirect costs related to contract performance, such
as indirect labor, supplies, tools, repairs and depreciation costs. Provisions
for the total estimated losses on uncompleted contracts are made in the period
in which such losses are determined. Changes in job performance, job conditions,
estimated profitability and final contract settlements may result in revisions
to costs and revenues, and their effects are recognized in the period in which
the revisions are determined.
23
COMFORT SYSTEMS USA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Receivable balances billed but not paid by customers pursuant to retainage
provisions in construction contracts are due upon completion of the contracts
and acceptance by the customer. Based on the Company's experience with similar
contracts in recent years, the retention balance is billed and collected in the
upcoming fiscal year. The retainage balances at December 31, 1998 and 1999 are
$45.3 million and $58.2 million, respectively.
WARRANTY COSTS
The Company typically warrants labor for the first year after installation
on new air conditioning and heating systems. The Company generally warrants
labor for 30 days after servicing of existing air conditioning and heating
systems. A reserve for warranty costs is recorded based upon the historical
level of warranty claims and management's estimate of future costs.
INCOME TAXES
The Company files a consolidated return for federal income tax purposes.
Income taxes are provided for under the liability method, which takes into
account differences between financial statement treatment and tax treatment of
certain transactions. Deferred tax assets represent the tax effect of activity
that has been reflected in the financial statements but which will not be
deductible for tax purposes until future periods. Deferred tax liabilities
represent the tax effect of activity that has been reflected in the financial
statements but which will not be taxable until future periods.
Certain of the Pooled Companies were S Corporations for income tax purposes
and, accordingly, any income tax liabilities for the periods prior to the
acquisition date are the responsibility of the respective stockholders. All
acquired entities are subject to corporate income taxes subsequent to their
acquisition.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires the use of estimates and assumptions by
management in determining the reported amounts of revenues, expenses, assets,
liabilities and contingent assets and liabilities at the date of the financial
statements. Actual results could differ from those estimates.
CONCENTRATIONS OF CREDIT RISK
The Company provides services to a broad range of geographical regions. The
Company's credit risk primarily consists of receivables from a variety of
customers including general contractors, property owners and developers, and
commercial and industrial companies. The Company reviews its accounts receivable
and provides allowances as deemed necessary.
The Company's financial instruments consist of cash and cash equivalents,
accounts receivable, receivables from related parties, other receivables,
accounts payable, a line of credit, notes payable, notes payable to related
parties and long-term debt. The Company believes that the carrying value of
these instruments on the accompanying balance sheets approximates their fair
value.
CHANGE IN CLASSIFICATION OF CERTAIN COSTS
During 1999, the Company began presenting certain costs in cost of services
that related to activities that directly support project or service work. These
costs were previously presented in selling, general and administrative expenses
(SG&A). Management believes this revised presentation better aligns cost of
services and SG&A across all acquired operations. The change in classification
in 1999 resulted in approximately $37.2 million of costs included in cost of
services which would have been included in SG&A under the prior presentation.
Exclusive of this change in classification, gross profit in 1999 would have been
approximately $329.9 million. Prior periods have not been restated.
24
COMFORT SYSTEMS USA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
3. BUSINESS COMBINATIONS:
POOLINGS
During 1997 and 1998, the Company acquired all of the outstanding stock of
the Pooled Companies in exchange for 4,507,406 and 1,437,767 shares of Common
Stock, respectively. These acquisitions have been accounted for as
poolings-of-interests as described in Note 2. These companies provide HVAC and
related services. The historical financial statements for 1997 and 1998 reflect
the operations of the Restated Companies prior to their acquisition by the
Company.
PURCHASES
Subsequent to the IPO, and through December 31, 1997, Comfort Systems
acquired 13 of the Purchased Companies. These companies provide HVAC and related
services. The aggregate consideration paid in these transactions was $14.5
million in cash, 1,092,489 shares of the Company's stock with a market value at
the date of acquisition totaling $13.3 million and $5.0 million in the form of
convertible subordinated notes. Subsequent to the issuance of certain of the
convertible subordinated notes, the Company entered into agreements with certain
of the convertible noteholders to modify the terms of $4.7 million of these
notes in order to eliminate the provisions relating to convertibility into the
Company's Common Stock. The remaining convertible subordinated notes have
subsequently been paid.
During 1998, the Company acquired 52 of the Purchased Companies. These
companies provide HVAC and related services. The aggregate consideration paid in
these transactions was $161.2 million in cash, 9,212,573 shares of the Company's
stock with a market value at the date of acquisition totaling $111.5 million,
$57.4 million in the form of convertible subordinated notes and $3.1 million in
the form of subordinated notes (collectively the "Notes"). Subsequent to the
issuance of certain of the convertible subordinated notes, the Company entered
into agreements with certain of the convertible noteholders to modify the terms
of $49.3 million of these notes in order to eliminate the provisions relating to
convertibility into the Company's Common Stock. The remaining convertible
subordinated notes are convertible at various dates in 2000 into 74,975 shares
of Common Stock.
During 1999, the Company acquired 25 of the Purchased Companies. These
companies provide HVAC and related services. The aggregate consideration paid in
these transactions was $38.0 million in cash, 1,151,907 shares of the Company's
stock with a market value at the date of acquisition totaling $8.5 million, $2.2
million in the form of convertible subordinated notes and $21.3 million in the
form of subordinated notes. In addition, the Company received 68,177 shares from
a former owner related to a prior year acquisition. Subsequent to the issuance
of certain of the convertible subordinated notes, the Company entered into
agreements with certain of the convertible noteholders to modify the terms of
$2.1 million of these notes in order to eliminate the provisions relating to
convertibility into the Company's Common Stock. The remaining convertible
subordinated notes are convertible at various dates in 2000 into 5,133 shares of
Common Stock.
The accompanying balance sheet as of December 31, 1999 includes allocations
of the respective purchase prices to the assets acquired and liabilities assumed
based on preliminary estimates of fair value and is subject to final adjustment.
The allocations in 1998 and 1999 resulted in $277.4 million and $55.7 million in
goodwill, respectively, which represents the excess of the purchase price over
the estimated fair
25
COMFORT SYSTEMS USA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
value of the net assets acquired for the Purchased Companies. In conjunction
with the acquisitions, goodwill was determined as follows (in thousands):
1998 1999
------------ ----------
Fair value of assets acquired, net of
cash acquired...................... $ (261,754) $ (27,806)
Liabilities assumed.................. 233,669 20,138
Cash paid, net of cash acquired...... 133,338 31,417
Estimated market value of stock
consideration...................... 111,681 8,463
Issuance of Notes.................... 60,482 23,473
------------ ----------
Goodwill............................. $ 277,416 $ 55,685
============ ==========
The unaudited pro forma data presented below consists of the income
statement data presented in these consolidated financial statements plus income
statement data for the Purchased Companies as if the acquisitions were effective
on January 1, 1998 through the respective dates of acquisitions (in thousands,
except per share data):
YEAR ENDED DECEMBER 31,
--------------------------
1998 1999
------------ ------------
(UNAUDITED)
Revenues............................. $ 1,355,733 $ 1,421,118
Net income........................... $ 40,657 $ 41,992
Net income per share -- diluted...... $ 1.03 $ 1.06
Shares used in computing net income
per share -- diluted............... 40,113 40,156
Pro forma adjustments included in the preceding table regarding the
Purchased Companies primarily relate to (a) certain reductions in salaries and
benefits to the former owners (the "Compensation Differential") of the Pooled
Companies and Purchased Companies which the former owners agreed would take
effect as of the acquisition date, (b) elimination of merger costs in connection
with the acquisition of the Pooled Companies, (c) amortization of goodwill
related to the Purchased Companies, (d) interest expense on borrowings of $11.8
million that would have been necessary to fund certain S Corporation
distributions if they had occurred at the beginning of each period presented,
(e) interest expense on borrowings of $197.6 million related to the purchase
price of the Purchased Companies acquired during 1998 and 1999 and (f) interest
expense related to the subordinated notes issued in connection with the
acquisition of certain Acquired Companies. In addition, an incremental tax
provision has been recorded as if all applicable Purchased Companies and Pooled
Companies which were C Corporations had been subject to federal and state income
taxes.
The pro forma results presented above are not necessarily indicative of
actual results which might have occurred had the operations and management teams
of the Company, the Purchased Companies and Pooled Companies been combined at
the beginning of the periods presented.
26
COMFORT SYSTEMS USA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
4. PROPERTY AND EQUIPMENT:
Property and equipment consist of the following (dollars in thousands):
ESTIMATED DECEMBER 31,
USEFUL LIVES --------------------
IN YEARS 1998 1999
------------- --------- ---------
Land................................. N/A $ 124 $ 178
Transportation equipment............. 3-10 31,776 32,781
Machinery and equipment.............. 3-15 23,002 27,542
Computer and telephone equipment..... 3-7 10,168 15,942
Buildings and leasehold
improvements....................... 3-39 8,564 12,079
Furniture and fixtures............... 3-10 8,082 8,815
--------- ---------
81,716 97,337
Less -- Accumulated depreciation..... 47,303 55,373
--------- ---------
Property and equipment, net..... $ 34,413 $ 41,964
========= =========
5. DETAIL OF CERTAIN BALANCE SHEET ACCOUNTS:
Activity in the Company's allowance for doubtful accounts consists of the
following (in thousands):
DECEMBER 31,
-------------------------------
1997 1998 1999
--------- --------- ---------
Balance at beginning of year......... $ 994 $ 1,698 $ 4,758
Additions for bad debt expense....... 583 1,253 1,650
Deductions for recoveries and for
uncollectible receivables written
off................................ (488) (909) (1,940)
Allowance for doubtful accounts of
Founding and Purchased Companies at
date of acquisition................ 609 2,716 1,100
--------- --------- ---------
Balance at end of year............... $ 1,698 $ 4,758 $ 5,568
========= ========= =========
Other current liabilities consist of the following (in thousands):
DECEMBER 31,
--------------------
1998 1999
--------- ---------
Accrued warranty costs............... $ 4,596 $ 4,587
Accrued insurance expense............ 4,851 6,835
Deferred income taxes................ 4,940 4,195
Deferred revenue..................... 525 2,210
Other current liabilities............ 9,876 9,972
--------- ---------
$ 24,788 $ 27,799
========= =========
27
COMFORT SYSTEMS USA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Installation contracts in progress are as follows (in thousands):
DECEMBER 31,
----------------------------
1998 1999
------------ --------------
Costs incurred on contracts in
progress........................... $ 748,542 $ 895,662
Estimated earnings, net of losses.... 151,792 209,887
Less -- Billings to date............. (907,074) (1,103,144)
------------ --------------
$ (6,740) $ 2,405
============ ==============
Costs and estimated earnings in
excess of billings on
uncompleted contracts.............. $ 37,228 $ 54,575
Billings in excess of costs and
estimated earnings on
uncompleted contracts.............. (43,968) (52,170)
------------ --------------
$ (6,740) $ 2,405
============ ==============
6. LONG-TERM DEBT OBLIGATIONS:
Long-term debt obligations consist of the following (in thousands):
DECEMBER 31,
----------------------
1998 1999
---------- ----------
Revolving credit facility............ $ 170,700 $ 225,215
Notes to affiliates and former
owners............................. 63,839 77,009
Other................................ 1,907 3,609
---------- ----------
Total debt........................... 236,446 305,833
Less: current maturities............. 9,077 27,889
---------- ----------
$ 227,369 $ 277,944
========== ==========
At December 31, 1999, future principal payments of long-term debt are as
follows (in thousands):
YEAR ENDING DECEMBER 31 --
2000............................ $ 27,889
2001............................ 254,489
2002............................ 22,072
2003............................ 1,383
----------
$ 305,833
==========
REVOLVING CREDIT FACILITY
In July 1997, the Company entered into a credit agreement with Bank One,
Texas, N.A. (the "Credit Facility"). The Credit Facility was amended and
restated in September 1997 primarily to provide for additional banks to lend to
the Company under the Credit Facility. At that time, the Credit Facility
provided the Company with an unsecured revolving line of credit of $75 million.
The Credit Facility was further amended in April 1998 and again in December 1998
in order to increase borrowing capacity and to provide for additional banks to
lend to the Company under the Credit Facility. The Credit Facility currently
provides the Company with a revolving line of credit of up to $300 million
secured by accounts receivable, inventory and the shares of capital stock of the
Company's subsidiaries. The Company currently has a choice of two interest rate
options when borrowing under the Credit Facility. Under one option, the interest
rate is determined based on the higher of the Federal Funds Rate plus 0.5% or
the bank's prime rate. An additional margin of zero to 1.25% is then added to
the higher of these two rates. Under the other interest rate option,
28
COMFORT SYSTEMS USA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
borrowings bear interest based on designated short-term Eurodollar rates (which
generally approximate LIBOR) plus 1.0% to 2.5%. The additional margin for both
options depends on the ratio of the Company's debt to EBITDA. Commitment fees of
0.25% to 0.5% per annum, also depending on the ratio of debt to EBITDA, are
payable on the unused portion of the facility. The Credit Facility prohibits the
payment of dividends by the Company without the lenders' approval and requires
the Company to comply with certain financial covenants. The amended Credit
Facility expires on November 1, 2001, at which time all amounts outstanding
under the Credit Facility are due.
As of December 31, 1999, the Company had borrowed $225.2 million under the
Credit Facility at an average interest rate of approximately 7.4% for the year
ended December 31, 1999. The Company's unused committed borrowing capacity under
the Credit Facility was $72.9 million at December 31, 1999. As of March 13,
2000, $249.2 million (unaudited) was outstanding under this facility.
NOTES TO AFFILIATES AND FORMER OWNERS
The Notes in the amount of $77.0 million referred to above were issued to
former owners of certain Purchased Companies as partial consideration of the
acquisition purchase price. Of these Notes, $76.4 million bear interest, payable
quarterly, at a weighted average interest rate of 5.84% and $2.0 million of
these Notes are convertible by the holder into shares of the Company's Common
Stock at a weighted average price of $25.66 per share. The remaining Notes in
the amount of $0.6 million are non-interest bearing and require $0.2 million of
principal payments in 2000 and $0.4 million of principal payments in equal
annual installments in 2001, 2002, and 2003. The terms of the convertible
subordinated notes require $0.4 million of principal payments in 2000, $0.6
million of principal payments in 2001, $0.6 million of principal payments in
2002, and $0.4 million of principal payments in 2003. The terms of the
nonconvertible interest bearing subordinated notes require $23.9 million of
principal payments in 2000, $28.3 million of principal payments in 2001, $21.3
million of principal payments in 2002, and $0.9 million of principal payments in
2003.
The Company estimates the fair value of long-term debt as of December 31,
1998 and 1999 to be approximately the same as the recorded value.
7. INCOME TAXES:
The Company has implemented SFAS No. 109, "Accounting for Income Taxes,"
which provides for a liability approach to accounting for income taxes. The
provision for income taxes consists of the following (in thousands):
YEAR ENDED DECEMBER 31,
-------------------------------
1997 1998 1999
--------- --------- ---------
Current --
Federal......................... $ 6,469 $ 21,650 $ 25,622
State and Puerto Rico........... 1,763 4,439 4,777
--------- --------- ---------
8,232 26,089 30,399
--------- --------- ---------
Deferred --
Federal......................... (688) 907 2,067
State and Puerto Rico........... 58 53 (728)
--------- --------- ---------
(630) 960 1,339
--------- --------- ---------
$ 7,602 $ 27,049 $ 31,738
========= ========= =========
29
COMFORT SYSTEMS USA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The difference in income taxes provided for and the amounts determined by
applying the federal statutory tax rate to income before income taxes result
from the following (in thousands):
YEAR ENDED DECEMBER 31,
-------------------------------
1997 1998 1999
--------- --------- ---------
Income tax expense at the statutory
rate............................... $ 1,937 $ 21,713 $ 25,921
Increase (decrease) resulting from --
State income taxes, net of
federal tax effect............ 1,245 3,148 2,567
Non-deductible expenses......... 428 364 492
Non-recurring, non-cash
compensation charge........... 4,045 -- --
Effect of S Corporation income
previously taxed to the former
owners........................ (1,089) (308) --
Non-deductible goodwill
amortization.................. 633 2,047 2,730
Non-deductible acquisition costs
related to Pooled Companies... 201 157 --
Provision (benefit) recognized
upon termination of Subchapter
S election.................... 100 (101) --
Other........................... 102 29 28
--------- --------- ---------
$ 7,602 $ 27,049 $ 31,738
========= ========= =========
Deferred income tax provisions result from current period activity that has
been reflected in the financial statements but which is not includable in
determining the Company's tax liabilities until future periods. Deferred tax
assets and liabilities reflect the tax effect in future periods of all such
activity to date that has been reflected in the financial statements but which
is not includable in determining the Company's tax liabilities until future
periods.
DECEMBER 31,
--------------------
1998 1999
--------- ---------
(IN THOUSANDS)
Deferred income tax assets --
Accounts receivable and
allowance for doubtful
accounts...................... $ 1,699 $ 1,854
Accrued liabilities and
expenses...................... 6,038 7,206
Net operating loss.............. 126 1,343
Other........................... 344 630
--------- ---------
Total deferred income tax
assets.................. 8,207 11,033
--------- ---------
Deferred income tax liabilities --
Property and equipment.......... (873) (1,113)
Long-term installation
contracts..................... (4,716) (3,821)
Goodwill........................ (31) (3,180)
Other........................... (444) (628)
--------- ---------
Total deferred income tax
liabilities............. (6,064) (8,742)
--------- ---------
Net deferred income tax
assets.................. $ 2,143 $ 2,291
========= =========
30
COMFORT SYSTEMS USA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The deferred tax assets and liabilities reflected above are included in the
consolidated balance sheets as follows (in thousands):
DECEMBER 31,
--------------------
1998 1999
--------- ---------
Deferred income tax assets --
Prepaid expenses and other...... $ 7,778 $ 9,403
Other non-current assets....... 429 1,630
Deferred income tax liabilities --
Other current liabilities....... (4,940) (4,195)
Deferred income taxes........... (1,124) (4,547)
--------- ---------
Net deferred income tax assets....... $ 2,143 $ 2,291
========= =========
8. EMPLOYEE BENEFIT PLANS:
Certain of the Company's subsidiaries sponsor various retirement plans for
most full-time and some part-time employees. These plans consist of defined
contribution plans and multi-employer pension plans and cover employees at
substantially all of the Company's operating locations. The defined contribution
plans provide for contributions ranging from 2% to 6% of covered employees'
salaries or wages and totaled $1.8 million for 1997, $3.6 million for 1998 and
$5.4 million for 1999. Of these amounts, approximately $2.2 million and $2.5
million was payable to the plans at December 31, 1998 and 1999, respectively.
Certain of the Company's subsidiaries also participate in several
multi-employer pension plans for the benefit of their employees who are union
members. Company contributions to these plans were approximately $2.1 million
for 1997, $8.1 million for 1998 and $14.6 million for 1999. The data available
from administrators of the multi-employer pension plans is not sufficient to
determine the accumulated benefit obligations, nor the net assets attributable
to the multi-employer plans in which Company employees participate.
9. COMMITMENTS AND CONTINGENCIES:
LEASES
The Company leases certain facilities and equipment under noncancelable
operating leases. Rent expense for the years ended December 31, 1997, 1998, and
1999 was $2.2 million, $6.7 million and $17.5 million, respectively. Concurrent
with the acquisitions of certain Acquired Companies, the Company entered into
various agreements with previous owners to lease land and buildings used in the
Company's operations. The terms of these leases range from five years to ten
years and provide for certain escalations in the rental expenses each year.
Included in the 1997, 1998 and 1999 rent expense above is approximately $1.2
million, $3.9 million and $6.1 million of rent paid to these related parties,
respectively. The following represents future minimum rental payments under
noncancelable operating leases (in thousands):
Year ending December 31 --
2000............................ $ 13,403
2001............................ 12,000
2002............................ 10,500
2003............................ 7,629
2004............................ 5,445
Thereafter...................... 13,132
---------
$ 62,109
=========
31
COMFORT SYSTEMS USA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
CLAIMS AND LAWSUITS
The Company is party to litigation in the ordinary course of business.
There are currently no pending legal proceedings that, in management's opinion,
would have a material adverse effect on the Company's operating results or
financial condition. The Company maintains various insurance coverages in order
to minimize financial risk associated with certain claims. The Company has
provided accruals for probable losses and legal fees associated with certain of
these actions in the accompanying consolidated financial statements. A
wholly-owned insurance company subsidiary reinsures a portion of the risk
associated with surety bonds issued by a third party insurance company. Because
no claims have been made against these financial instruments in the past,
management does not expect these instruments will have a material effect on the
Company's consolidated financial statements.
10. STOCKHOLDERS' EQUITY:
COMMON STOCK AND PREFERRED STOCK
Comfort Systems effected a 121.1387-for-one stock split on March 19, 1997
for each share of Common Stock of the Company then outstanding. During 1998, the
Company increased the number of shares of Common Stock authorized to
102,969,912.
In December 1996, in connection with the organization and initial
capitalization of Comfort Systems, the Company issued 121,139 shares of Common
Stock at $.01 per share to Notre Capital Ventures II, L.L.C. ("Notre"). In
January 1997, the Company issued 2,848,773 additional shares to Notre for $.01
per share. In January and February 1997, the Company issued a total of 1,269,935
shares of Common Stock to management of and consultants to the Company at a
price of $.01 per share. As a result, the Company recorded a non-recurring,
non-cash compensation charge of $11.6 million in the first quarter of 1997,
representing the difference between the amount paid for the shares and the
estimated fair value of the shares on the date of sale.
On July 2, 1997, Comfort Systems completed the offering of 6,100,000 shares
of Common Stock to the public at $13.00 per share. The net proceeds to Comfort
Systems from the IPO (after deducting underwriting commissions and offering
expenses) were $68.8 million. Of this amount, $45.3 million was used to pay the
cash portion of the purchase prices of the Founding Companies. In connection
with the IPO, the Company granted its underwriters an option to sell an
additional 915,000 shares at $13.00 per share. On July 9, 1997, the underwriters
exercised this option. Net proceeds to the Company from this sale of shares were
$11.1 million after deducting underwriting commissions.
On June 16, 1998, the Company completed a second public offering (the
"Second Public Offering") of 400,000 shares of its Common Stock. The net
proceeds from this offering of $7.6 million, after deducting underwriting
commissions, were used to repay debt. On July 21, 1998, the underwriters
exercised their overallotment option in connection with the Second Public
Offering completed in June 1998. An additional 461,479 shares of Common Stock
were sold and the net proceeds of $8.8 million, after deducting underwriting
commissions, were used to repay debt.
TREASURY STOCK
On October 5, 1999, the Company announced that its Board of Directors had
approved a share repurchase program authorizing the Company to buy up to 4
million shares of its Common Stock. As of December 31, 1999, the Company
purchased approximately 1.8 million shares at a cost of approximately $12.9
million. Subsequent to yearend, the Company has purchased approximately 0.1
million additional shares at a cost of approximately $0.8 million (unaudited)
through March 13, 2000.
RESTRICTED COMMON STOCK
In March 1997, Notre exchanged 2,742,912 shares of Common Stock for an
equal number of shares of restricted voting common stock ("Restricted Voting
Common Stock"). The holder of Restricted Voting Common Stock is entitled to
elect one member of the Company's Board of Directors and to 0.55 of one vote for
each share on all other matters on which they are entitled to vote. Holders of
Restricted Voting Common Stock are not entitled to vote on the election of any
other directors.
Each share of Restricted Voting Common Stock will automatically convert to
Common Stock on a share-for-share basis (i) in the event of a disposition of
such share of Restricted Voting Common Stock by
32
COMFORT SYSTEMS USA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
the holder thereof (other than a distribution which is a distribution by a
holder to its partners or beneficial owners, or a transfer to a related party of
such holders (as defined in Sections 267, 707, 318 and/or 4946 of the Internal
Revenue Code of 1986, as amended)), (ii) in the event any person acquires
beneficial ownership of 15% or more of the total number of outstanding shares of
Common Stock of the Company, or (iii) in the event any person offers to acquire
15% or more of the total number of outstanding shares of Common Stock of the
Company. After July 1, 1998, the Board of Directors may elect to convert any
remaining shares of Restricted Voting Common Stock into shares of Common Stock
in the event that 80% or more of the originally outstanding shares of Restricted
Voting Common Stock have been previously converted into shares of Common Stock.
At December 31, 1999, 756,744 shares of Restricted Voting Common Stock had been
converted to shares of Common Stock.
EARNINGS PER SHARE
Basic earnings per share ("EPS") is computed by dividing net income by
the weighted average number of shares of common stock outstanding during the
year. Diluted EPS is computed considering the dilutive effect of stock options
and convertible subordinated notes. Options to purchase 2.2 million shares of
Common Stock at prices ranging from $15.375 to $21.438 per share were
outstanding in 1999, but were not included in the computation of diluted
earnings per share because the options' exercise prices were greater than the
respective average market price of the Common Stock. Diluted EPS is also
computed by adjusting both net earnings and shares outstanding as if the
conversion of the convertible subordinated notes occurred on the first day of
the year. The after tax interest expense related to the assumed conversion of
the convertible subordinated notes in 1998 and 1999 was $753,000 and $766,000,
respectively.
The following table summarizes weighted average shares outstanding for each
of the periods presented (in thousands):
YEAR ENDED DECEMBER 31,
-------------------------------
1997 1998 1999
--------- --------- ---------
Shares issued in connection with the
acquisitions of Founding Companies.... 5,008 9,721 9,721
Shares sold pursuant to the IPO......... 3,142 6,100 6,100
Shares held by Notre, management and
consultants........................... 4,240 4,240 4,240
Shares issued in connection with the
acquisitions of Pooled Companies...... 5,946 5,946 5,946
Weighted average shares issued in
connection with the underwriter's
overallotment......................... 434 1,122 1,376
Weighted average shares issued in
connection with the acquisitions of
the Purchased Companies............... 184 5,597 10,932
Weighted average shares repurchased..... -- -- (303)
Weighted average shares sold in the
Second Public Offering................ -- 215 400
Weighted average portion of shares
issued in connection with the Employee
Stock Purchase Plan................... -- 12 117
Weighted average portion of shares
issued in connection with the exercise
of stock options...................... -- 9 32
--------- --------- ---------
Weighted average shares
outstanding -- Basic.................. 18,954 32,962 38,561
Weighted average portion of shares
related to stock options under the
treasury stock method................. -- 462 69
Weighted average shares related to the
issuance of convertible notes......... -- 905 1,069
--------- --------- ---------
Weighted average shares
outstanding -- Diluted................ 18,954 34,329 39,699
========= ========= =========
33
COMFORT SYSTEMS USA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
11. STOCK OPTION PLANS:
LONG-TERM INCENTIVE PLANS
In March 1997, the Company's stockholders approved the Company's 1997
Long-Term Incentive Plan which provides for the granting or awarding of
incentive or non-qualified stock options, stock appreciation rights, restricted
or deferred stock, dividend equivalents or other incentive awards to directors,
officers, key employees and consultants to the Company.
The Company's 1997 Long-Term Incentive Plan provides for the granting of
options to key employees to purchase an aggregate of not more than 13% of the
total number of shares of the Company's Common Stock outstanding at the time of
grant. Such options have been issued by the Company at fair market value on the
date of grant and become exercisable in five equal annual installments beginning
on the first anniversary of the date of grant. The options expire after seven
years from the date of grant if unexercised. Outstanding options may be canceled
and reissued under terms specified in the plan.
The following table summarizes activity under the Company's stock option
plan:
1997 1998
---------------------------- ----------------------------
WEIGHTED-AVERAGE WEIGHTED-AVERAGE
FIXED OPTIONS SHARES EXERCISE PRICE SHARES EXERCISE PRICE
- ---------------------------------------- -------- ---------------- --------- ----------------
Outstanding at beginning of year........ -- $ -- 2,537,203 $ 13.72
Granted................................. 2,537,203 $ 13.72 1,495,500 $ 18.54
Exercised............................... -- $ -- (24,330) $ 13.45
Forfeited............................... -- $ -- (53,344) $ 16.01
Expired................................. -- $ -- -- $ --
-------- ---------
Outstanding at end of year.............. 2,537,203 $ 13.72 3,955,029 $ 15.51
======== =========
Options exercisable at year-end......... -- 518,281
Weighted-average fair value of options
granted during the year............... $ 3.53 $ 7.33
1999
----------------------------
WEIGHTED-AVERAGE
FIXED OPTIONS SHARES EXERCISE PRICE
- ---------------------------------------- -------- ----------------
Outstanding at beginning of year........ 3,955,029 $15.51
Granted................................. 758,200 $13.36
Exercised............................... (16,924) $13.00
Forfeited............................... (125,642) $14.78
Expired................................. (13,530) $15.90
---------
Outstanding at end of year.............. 4,557,133 $15.18
=========
Options exercisable at year-end......... 1,287,229
Weighted-average fair value of options
granted during the year............... $ 6.26
The following table summarizes information about fixed stock options
outstanding at December 31, 1999:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
----------------------------------------------------- --------------------------------
NUMBER WEIGHTED-AVERAGE NUMBER
RANGE OF OUTSTANDING REMAINING WEIGHTED-AVERAGE EXERCISABLE WEIGHTED-AVERAGE
EXERCISE PRICES AT 12/31/99 CONTRACTUAL LIFE EXERCSE PRICE AT 12/31/99 EXERCISE PRICE
- ------------------------------------- ------------ ------------------ ------------------ ------------ -----------------
$ 7.63- 7.63 96,700 6.8 years $ 7.63 -- $ --
$11.75-16.88 3,086,403 5.0 years $13.78 970,876 $ 13.57
$17.88-21.44 1,374,030 5.5 years $18.85 316,353 $ 18.85
------------ ------------
$ 7.63-21.44 4,557,133 5.2 years $15.18 1,287,229 $ 14.87
============ ============
In September 1997, the Company's stockholders approved the Company's 1998
Employee Stock Purchase Plan which allows employees to purchase shares from the
Company's authorized but unissued shares of Common Stock or from shares of
Common Stock reacquired by the Company, including shares repurchased on the open
market.
34
COMFORT SYSTEMS USA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The Company's 1998 Employee Stock Purchase Plan provides for the purchase
of 300,000 shares at semi-annual intervals. Full-time employees are eligible to
purchase shares with payroll deductions ranging from 2% to 8% of compensation
with a maximum deduction of $2,000 for any purchase period for each participant.
The purchase price per share is 85% of the lower of the market price on the
first business day of the purchase period or the purchase date.
The Company accounts for its stock-based compensation under Accounting
Principles Board Statement No. 25, "Accounting for Stock Issued to Employees"
(APB 25). Under this accounting method, no expense in connection with the stock
option plan or the stock purchase plan is recognized in the consolidated
statements of operations when the exercise price of the stock options is greater
than or equal to the value of the Common Stock on the date of grant. In October
1995, the Financial Accounting Standards Board issued SFAS No. 123, "Accounting
for Stock-Based Compensation," which requires that if a company accounts for
stock-based compensation in accordance with APB 25, the company must also
disclose the effects on its results of operations as if an estimate of the value
of stock-based compensation at the date of grant was recorded as an expense in
the company's statement of operations. These effects for the Company are as
follows (in thousands, except per share data):
1997 1998 1999
--------- --------- ---------
Net Income As reported........................ $ (2,064) $ 35,013 $ 42,322
Pro forma for SFAS No. 123......... $ (2,436) $ 33,341 $ 39,519
Income Per Share -- Basic As reported........................ $ (.11) $ 1.06 $ 1.10
Pro forma for SFAS No. 123......... $ (.13) $ 1.01 $ 1.02
Income Per Share -- Diluted As reported........................ $ (.11) $ 1.04 $ 1.09
Pro forma for SFAS No. 123......... $ (.13) $ 0.97 $ 1.01
LONG-TERM INCENTIVE PLAN -- The effects of applying SFAS No. 123 in the pro
forma disclosure may not be indicative of future amounts as additional option
awards in future years are anticipated. The fair value of each option grant is
estimated on the date of grant using the Black-Scholes option-pricing model with
the following assumptions:
1997 1998 1999
------------- ------------- ------------
Expected dividend yield.............. 0.00% 0.00% 0.00%
Expected stock price volatility...... 39.41% 44.87% 65.63%
Risk free interest rate.............. 5.77%-6.15% 5.00%-6.15% 4.64%-5.87%
Expected life of options............. 7 years 4 years 4 years
EMPLOYEE STOCK PURCHASE PLAN -- The effects of applying SFAS No. 123 in the
pro forma disclosure may not be indicative of future amounts as the granting of
additional purchase rights is anticipated. Compensation cost associated with the
stock purchase plan is recognized for the fair value of the employees' purchase
rights, which is estimated using the Black-Scholes model with the following
assumptions:
1998 1999
------------- ------------
Expected dividend yield.............. 0.00% 0.00%
Expected volatility.................. 42.10% 53.8%
Risk free interest rate.............. 5.19%-5.25% 4.56%-4.94%
Expected life of purchase rights..... 0.5 years 0.5 years
The weighted average fair values of the purchase rights granted in 1998 and
1999 were $5.37 and $4.88, respectively.
35
COMFORT SYSTEMS USA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NON-EMPLOYEE DIRECTORS' STOCK PLAN
In March 1997, the Company's stockholders approved the 1997 Non-Employee
Directors' Stock Plan (the "Directors' Plan"), which provides for the granting
or awarding of stock options and stock appreciation rights to non-employees. The
number of shares authorized and reserved for issuance under the Directors' Plan
is 250,000 shares. The Directors' Plan provided for the automatic grant of
options to purchase 10,000 shares to each non-employee director serving at the
commencement of the IPO.
Each non-employee director will be granted options to purchase 10,000
shares at the time of the initial election. In addition, each non-employee
director is automatically granted options to purchase an additional 5,000 shares
at each annual meeting of the stockholders that is more than two months after
the date of the director's initial election. All options are granted with an
exercise price equal to the fair market value at the date of grant and are
immediately vested upon grant.
Either at the time of the IPO or upon election as a director, options were
granted to four members of the board of directors to purchase in each case
10,000 shares of Common Stock at the IPO price or at the price in effect at the
time of their election. Each of these directors received an option for 5,000
shares on the dates of the annual meetings which they have attended. These
options will expire at the earlier of 10 years from the date of grant or one
year after termination of service as a director.
The Directors' Plan allows non-employee directors to receive shares
("Deferred Shares") at future settlement dates in lieu of cash. The number of
Deferred Shares will have an aggregate fair market value equal to the fees
payable to the directors. No Deferred Shares have been issued.
12. SIGNIFICANT VENDORS:
Significant vendors are defined as those that account for greater than 10%
of the Company's purchases. For the years ended December 31, 1998 and 1999,
there were no significant vendors. For the year ended December 31, 1997, one
vendor accounted for 10.5% of the Company's purchases.
13. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED):
Quarterly financial information for the years ended December 31, 1998 and
1999 is summarized as follows (in thousands, except per share data):
QUARTER ENDED QUARTER ENDED
------------------------------------------------------- ---------------------
MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31, MARCH 31, JUNE 30,
1998 1998 1998 1998 1999 1999
---------- -------- ------------- ------------ --------- --------
Revenues............................. $132,608 $194,350 $ 232,381 $294,622 $291,926 $341,493
Gross profit (a)..................... $ 31,339 $ 47,704 $ 57,073 $ 70,333 $ 63,178 $ 76,239
Operating income..................... $ 7,039 $ 15,917 $ 20,814 $ 24,727 $ 15,536 $ 30,023
Net income........................... $ 3,385 $ 8,418 $ 10,799 $ 12,411 $ 6,564 $ 14,645
Earnings per share:
Basic.............................. $ 0.12 $ 0.27 $ 0.32 $ 0.34 $ 0.17 $ 0.38
Diluted............................ $ 0.11 $ 0.26 $ 0.31 $ 0.33 $ 0.17 $ 0.37
SEPTEMBER 30, DECEMBER 31,
1999 1999
------------- ------------
Revenues............................. $ 374,815 $361,801
Gross profit (a)..................... $ 76,335 $ 76,954
Operating income..................... $ 27,559 $ 20,086
Net income........................... $ 12,868 $ 8,245
Earnings per share:
Basic.............................. $ 0.33 $ 0.22
Diluted............................ $ 0.33 $ 0.22
- ------------
The sum of the individual quarterly earnings per share amounts do not agree with
year-to-date earnings per share as each quarter's computation is based on the
weighted average number of shares outstanding during the quarter, the weighted
average stock price during the quarter and the dilutive effects of the
convertible subordinated notes in each quarter.
(a) As discussed in Note 2, during 1999 the Company began presenting certain
costs in cost of services that related to activities that directly support
project or service work. These costs were previously presented in SG&A.
Management believes this revised presentation better aligns cost of services
and SG&A across all acquired operations. Exclusive of this change in
classification, gross profit for 1999 would have been $68.9 million for the
first quarter, $86.1 million for the second quarter, $85.9 million for the
third quarter and $89.0 million for the fourth quarter. Prior periods have
not been restated.
36
COMFORT SYSTEMS USA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
ITEM 9. CHANGES AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
None.
PART III
ITEMS 10 TO 13 INCLUSIVE
These items have been omitted in accordance with the instructions to Form
10-K. The Company will file with the Commission a definitive proxy statement
including the information to be disclosed under the items in the 120 days
following December 31, 1999.
37
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) The following documents are filed as part of this report:
(1) Consolidated Financial Statements of the Company, which are
included at Item 8 of this report.
(2) None
(3) Exhibit Listing
INCORPORATED BY REFERENCE TO
THE EXHIBIT INDICATED BELOW
AND TO THE FILING WITH THE
COMMISSION INDICATED BELOW
-------------------------------
EXHIBIT EXHIBIT FILING OR
NUMBER DESCRIPTION OF EXHIBITS NUMBER FILE NUMBER
- ------------------------ ----------------------------------------------------------------- ------- ------------------
3.1 -- Second Amended and Restated Certificate of Incorporation of the 3.1 333-24021
Registrant.
3.2 -- Certificate of Amendment dated May 21, 1998 3.2 1998 Form 10-K
3.3 -- Bylaws of the Registrant, as amended 3.3 Filed Herewith
4.1 -- Form of certificate evidencing ownership of Common Stock of the 4.1 333-24021
Registrant.
10.1 -- Comfort Systems USA, Inc. 1997 Long-Term Incentive Plan 10.1 333-24021
10.2 -- Comfort Systems USA, Inc. 1997 Non-Employee Directors' Stock 10.2 333-24021
Plan.
10.3 -- Form of Employment Agreement between the Registrant and Fred M. 10.3 333-24021
Ferreira.
10.4 -- Form of Employment Agreement between the Registrant and J. Gordon 10.4 333-24021
Beittenmiller.
10.5 -- Form of Employment Agreement between the Registrant and William 10.5 333-24021
George, III.
10.6 -- Form of Employment Agreement between the Registrant and Reagan S. 10.6 333-24021
Busbee.
10.7 -- Form of Employment Agreement between the Registrant, Accurate Air 10.7 333-24021
Systems, Inc. and Thomas J. Beaty.
10.8 -- Form of Employment Agreement between the Registrant, Atlas 10.8 333-24021
Comfort Services USA, Inc. and Brian S. Atlas
10.9 -- Form of Employment Agreement between the Registrant, Contract 10.9 333-24021
Service, Inc. and John C. Phillips.
10.10 -- Form of Employment Agreement between the Registrant, Eastern 10.10 333-24021
Heating & Cooling, Inc. and Alfred J. Giardenelli, Jr.
10.11 -- Form of Employment Agreement between the Registrant, Quality Air 10.11 333-24021
Heating & Cooling, Inc. and Robert J. Powers
10.12 -- Form of Employment Agreement between the Registrant, S. M. 10.12 333-24021
Lawrence Company, Inc. and Samuel M. Lawrence III.
10.13 -- Form of Employment Agreement between the Registrant, Tech Heating 10.13 333-24021
and Air Conditioning, Inc. and Robert R. Cook
10.14 -- Form of Employment Agreement between the Registrant, Tri-City 10.14 333-24021
Mechanical, Inc. and Michael Nothum, Jr.
10.15 -- Form of Employment Agreement between the Registrant, Western 10.15 333-24021
Building Services, Inc. and Charles W. Klapperich.
10.16 -- Employment Agreement between the Registrant, F&G Mechanical February 1998
Corporation and Salvatore P. Giardina. Form 8-K
38
INCORPORATED BY REFERENCE TO
THE EXHIBIT INDICATED BELOW
AND TO THE FILING WITH THE
COMMISSION INDICATED BELOW
-------------------------------
EXHIBIT EXHIBIT FILING OR
NUMBER DESCRIPTION OF EXHIBITS NUMBER FILE NUMBER
- ------------------------ ----------------------------------------------------------------- ------- ------------------
10.17 -- Employment Agreement between the Registrant, Sham- 10.17 1998 Form 10-K
baugh & Son, Inc. and Mark P. Shambaugh.
10.18 -- Form of Agreement among certain stockholders. 10.16 333-24021
10.19 -- Lease between M & B Interests, Inc. and Atlas Air Conditioning 10.17 333-32595
Company, Inc. dated October 1, 1994.
10.20 -- Lease between Nothum Development, L.L.C. and Tri-City Mechanical, 10.20 333-32595
Inc. dated July 1, 1997.
10.21 -- Lease between Samuel Matthews Lawrence, Jr. and S.M. Lawrence 10.21 333-32595
Company, Incorporated dated November 1, 1996.
10.22 -- Lease between J&J Investments and Contract Service, Inc. dated 10.23 333-32595
March 1, 1997.
10.23 -- Lease by Tech Heating and Air Conditioning, Inc. dated April 2, 10.24 1998 Form 10-K
1995 as amended by Amendment between Cook Properties, Inc. and
Tech Heating and Air Conditioning, Inc. on March 13, 1997.
10.24 -- Third Amended and Restated Credit Agreement among the Company and 10.25 333-38009
its subsidiaries, Bank One, Texas, N.A., as agent and the banks
listed therein dated December 14, 1998.
10.25 -- Lease dated June 30, 1994, between Salpat Realty and F&G 10.27 1997 Form 10-K
Mechanical Corp., together with lease modification agreements
dated June 30, 1994 and February 12, 1998.
10.26 -- Lease dated October 31, 1998, between Mark Shambaugh and 10.28 1998 Form 10-K
Shambaugh & Sons, Inc. (Opportunity Drive).
10.27 -- Lease dated October 31, 1998, between Mark Shambaugh and 10.29 1998 Form 10-K
Shambaugh & Sons, Inc. (Di Salle Boulevard).
10.28 -- Lease dated October 31, 1998, between Mark Shambaugh and 10.30 1998 Form 10-K
Shambaugh & Sons, Inc. (Speedway Drive).
10.29 -- Lease dated October 31, 1998, between Mark Shambaugh and 10.31 1998 Form 10-K
Shambaugh & Sons, Inc. (South Bend).
10.30 -- Lease dated October 31, 1998, between Mark Shambaugh and 10.32 1998 Form 10-K
Shambaugh & Sons, Inc. (Lafayette).
10.31 -- Promissory Note dated February 12, 1998 by Sorce Properties LLC 10.28 1997 Form 10-K
in favor of F&G Mechanical Corporation.
10.32 -- Pledge Agreement dated February 12, 1998 by Salvatore Fichera and 10.29 1997 Form 10-K
Salvatore P. Giardina in favor of F&G Mechanical Corporation.
10.33 -- Form of Indemnity Agreement entered into by the Company with each 10.26 333-32595
of the following persons: Fred M. Ferreira, J. Gordon
Beittenmiller, Reagan S. Busbee, William George, III, Steven S.
Harter, Robert J. Powers, Michael Nothum, Jr., Robert R. Cook,
Brian S. Atlas, Thomas J. Beaty, John C. Phillips, Samuel M.
Lawrence III, Alfred J. Giardenelli, Jr., Charles W. Klapperich,
Larry Martin and John Mercadante, Jr. on June 27, 1997.
10.34 -- Indemnity Agreement between the Company and Notre 10.27 333-32595
Capital Ventures II, L.L.C.
10.35 -- Comfort Systems USA, Inc. 1998 Employee Stock Purchase Plan. 10.28 333-38009
10.36 -- Agreement Regarding Sale of Stock between Fred M. 10.1 Third Quarter 1997
Ferreira and the Registrant dated October 31, 1997. Form 10-Q
39
INCORPORATED BY REFERENCE TO
THE EXHIBIT INDICATED BELOW
AND TO THE FILING WITH THE
COMMISSION INDICATED BELOW
-------------------------------
EXHIBIT EXHIBIT FILING OR
NUMBER DESCRIPTION OF EXHIBITS NUMBER FILE NUMBER
- ------------------------ ----------------------------------------------------------------- ------- ------------------
10.37 -- Agreement Regarding Sale of Stock between Steve S. Harter and the 10.2 Third Quarter 1997
Registrant dated October 31, 1997. Form 10-Q
10.38 -- Agreement Regarding Sale of Stock between J. Gordon Beittenmiller 10.3 Third Quarter 1997
and the Registrant dated October 31, 1997. Form 10-Q
10.39 -- Agreement Regarding Sale of Stock between Thomas J. Beaty and the 10.4 Third Quarter 1997
Registrant dated October 31, 1997. Form 10-Q
10.40 -- Agreement Regarding Sale of Stock between Brian S. Atlas and the 10.5 Third Quarter 1997
Registrant dated October 31, 1997. Form 10-Q
10.41 -- Agreement Regarding Sale of Stock between John C. Phillips and 10.6 Third Quarter 1997
the Registrant dated October 31, 1997. Form 10-Q
10.42 -- Agreement Regarding Sale of Stock between Alfred J. Giardenelli, 10.7 Third Quarter 1997
Jr. and the Registrant dated October 31, 1997. Form 10-Q
10.43 -- Agreement Regarding Sale of Stock between Robert J. 10.8 Third Quarter 1997
Powers and the Registrant dated October 31, 1997. Form 10-Q
10.44 -- Agreement Regarding Sale of Stock between Samuel M. Lawrence and 10.9 Third Quarter 1997
the Registrant dated October 31, 1997. Form 10-Q
10.45 -- Agreement Regarding Sale of Stock between Michael Nothum, Jr. and 10.10 Third Quarter 1997
the Registrant dated October 31, 1997. Form 10-Q
10.46 -- Agreement Regarding Sale of Stock between Bob R. Cook and the 10.11 Third Quarter 1997
Registrant dated October 31, 1997. Form 10-Q
10.47 -- Agreement Regarding Sale of Stock between Charles W. Klapperich 10.12 Third Quarter 1997
and the Registrant dated October 31, 1997. Form 10-Q
10.48 -- Agreement Regarding Sale of Stock between Reagan S. Busbee and 10.13 Third Quarter 1997
the Registrant dated October 31, 1997. Form 10-Q
10.49 -- Agreement Regarding Sale of Stock between William George and the 10.14 Third Quarter 1997
Registrant dated October 31, 1997. Form 10-Q
10.50 -- Agreement and Plan of Merger dated November 15, 1998 by and among 2.1 November 1998
the Registrant, Shambaugh & Son, Inc. Form 8-K
10.51 -- First Amendment to Credit Agreement among the Company and its 10.63 1998 Form 10-K
subsidiaries, Bank One, Texas, N.A., as agent and the banks
listed therein dated January 14, 1999.
10.52 -- Form of Employment Agreement between the Registrant, Hess Filed Herewith
Mechanical Corporation and Gary E. Hess.
10.53 -- Lease dated April 1, 1998, between Gary E. and Susan B. Hess and Filed Herewith
Hess Mechanical Corporation.
21.1 -- List of subsidiaries of Comfort Systems USA, Inc. Filed Herewith
23.1 -- Consent of Arthur Andersen LLP Filed Herewith
27.1 -- Financial Data Schedule Filed Herewith
(b)Reports on Form 8-K
-- None.
(c) Exhibits: See attached.
(d)The following financial statements are filed as part of this report: as set
forth in the Index to Financial Statements at Item 8 of this report.
40
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Company has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
COMFORT SYSTEMS USA, INC.
By: /s/ FRED M. FERREIRA
FRED M. FERREIRA
CHIEF EXECUTIVE OFFICER
Date: March 15, 2000
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, this report has been signed by the following persons in
the capacities and on the date indicated.
SIGNATURE TITLE DATE
- -------------------------------------------------------------------------------------------------------------
/s/FRED M. FERREIRA Chairman of the Board, Chief March 15, 2000
FRED M. FERREIRA Executive Officer and President
/s/J. GORDON BEITTENMILLER Executive Vice President, Chief March 15, 2000
J. GORDON BEITTENMILLER Financial Officer and Director
(PRINCIPAL ACCOUNTING OFFICER)
/s/GARY HESS Executive Vice President, Chief March 15, 2000
GARY HESS Operating Officer and Director
/s/BRIAN S. ATLAS Director March 15, 2000
BRIAN S. ATLAS
/s/THOMAS J. BEATY Director March 15, 2000
THOMAS J. BEATY
/s/ROBERT R. COOK Director March 15, 2000
ROBERT R. COOK
/s/ALFRED J. GIARDENELLI, JR. Director March 15, 2000
ALFRED J. GIARDENELLI, JR.
/s/SALVATORE P. GIARDINA Director March 15, 2000
SALVATORE P. GIARDINA
/s/STEVEN S. HARTER Director March 15, 2000
STEVEN S. HARTER
/s/CHARLES W. KLAPPERICH Director March 15, 2000
CHARLES W. KLAPPERICH
41
SIGNATURES -- (CONTINUED)
SIGNATURE TITLE DATE
- ------------------------------------------------------------------------------------------- ---------------
/s/SAMUEL M. LAWRENCE III Director March 15, 2000
SAMUEL M. LAWRENCE III
/s/LARRY MARTIN Director March 15, 2000
LARRY MARTIN
/s/JOHN MERCADANTE, JR. Director March 15, 2000
JOHN MERCADANTE, JR.
/s/MICHAEL NOTHUM, JR. Director March 15, 2000
MICHAEL NOTHUM, JR.
/s/JOHN C. PHILLIPS Director March 15, 2000
JOHN C. PHILLIPS
/s/ROBERT J. POWERS Director March 15, 2000
ROBERT J. POWERS
/s/DIANE DAY SANDERS Director March 15, 2000
DIANE DAY SANDERS
/s/MARK P. SHAMBAUGH Director March 15, 2000
MARK P. SHAMBAUGH
42