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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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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, 2000
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
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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 23, 2001, the aggregate market value of the 32,696,669 shares
of the registrant's common stock held by non-affiliates of the registrant was
$80,106,839, based on the $2.45 last sale price of the registrant's common stock
on the New York Stock Exchange on that date.
As of March 23, 2001, 37,382,693 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, 2000.
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FORWARD-LOOKING STATEMENTS
This report contains "forward-looking statements" within the meaning of
Section 27A of the Securities Act of 1933, as amended ("Securities Act") and
Section 21E of the Exchange Act. Such forward-looking statements are made only
as of the date of this report and involve known and unknown risks, uncertainties
and other important factors that could cause the actual results, performance or
achievements of the Company, or industry results, to differ materially from any
future results, performance or achievements expressed or implied by such
forward-looking statements. Such risks, uncertainties and other important
factors include, among others, the lack of a combined operating history and the
difficulty of integrating acquired businesses, retention of key management, a
national downturn or one or more regional downturns in construction, shortages
of labor and specialty building materials, difficulty in obtaining or increased
costs associated with debt financing, seasonal fluctuations in the demand for
HVAC systems and the use of incorrect estimates for bidding a fixed price
contract. 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, 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. The Company operates
primarily in 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 provides specialized
applications such as process cooling, building automation 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 2000 revenues were derived from commercial and industrial customers
with approximately 58% of the revenues attributable to installation services and
42% 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, 2000, the Company
acquired 107 HVAC and complementary businesses (collectively with the Founding
Companies, the "Acquired Companies"). These acquisitions included 26 "tuck-in"
operations that have been integrated with existing Company operations. The
Company currently serves its customers with 125 operating locations in 33
states.
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
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indoor air quality, and the reduction or elimination of the refrigerants
commonly used in older HVAC 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 58% of
the Company's consolidated 2000 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 building automation controls. The growth and aging of
the installed base of HVAC systems and the increasing demand for more efficient,
sophisticated and complex systems and building automation 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 42% of the Company's consolidated 2000
revenues related to maintenance, repair and replacement services.
STRATEGY
The Company has implemented an operating strategy that emphasizes
strengthening operating competencies and increasing operating income.
OPERATING STRATEGY. After the recent period of sustained growth through
acquisitions, the Company is concentrating on the fundamental industry elements
needed to increase operating income and cash flow. The key elements of the
Company's operating strategy are:
Achieve Excellence in Core Competencies. The Company has identified
six core competencies, which it believes are critical to attracting and
retaining customers, increasing operating income and cash flow 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.
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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 employee 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.
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 2000
revenues were derived from commercial and industrial customers.
GROWTH IN OPERATING INCOME. A key component of the Company's strategy is
to nurture growth in operating income and cash flow 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 Group to
facilitate these activities including an Internet based technology platform
and call center designed to manage HVAC and related service along with the
information needs of multi-location customers. The Company believes its
growing ability to add value in these areas will lead to improved
profitability.
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 size and
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.
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.
Leveraging Resources. The Company believes that there are significant
operating efficiencies that can be achieved in the leveraging of resources
between its operating locations. The Company has shifted certain
prefabrication activities into centralized locations increasing asset
utilization in these centralized locations and redirecting prefabrication
employees into other operational areas that no longer perform these
services. The Company has also transferred its engineering, field and
supervisory labor from one operation to another in order to more fully
utilize the employee base to meet the customers' needs and share expertise.
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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 a decentralized basis, with
local management maintaining responsibility for day-to-day operating decisions.
Local management is augmented by a regional team that focuses its efforts on
cooperation and coordination between locations, implementation of best practices
and focus on major corporate initiatives. In addition to senior management,
local personnel generally include design engineers, sales personnel, customer
service personnel, installation and service technicians, sheet metal and
prefabrication technicians, estimators and administrative personnel. The Company
has centralized certain administrative functions such as insurance, employee
benefits, training, safety programs, marketing and cash management to enable the
management of its locations to focus on pursuing new business opportunities and
improving operating efficiencies. The Company is continuing to expand its
national sales and purchasing programs.
Installation Services. The Company's installation business, which
comprised approximately 58% of the Company's 2000 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 building automation 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, equipment, 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. Building automation 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 42% of the Company's
2000 consolidated revenues, and include the maintenance, repair, replacement,
reconfiguration and monitoring of HVAC systems and industrial process
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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-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 2000 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, 2000, the Company had 10,959 employees, including 599
management personnel, 8,859 engineers, service and installation technicians, 358
sales personnel and 1,143 administrative personnel across its 125 operating
locations. Certain of the Company's subsidiaries have collective bargaining
agreements that cover, in the aggregate, approximately 2,795 employees. The
Company has not experienced any
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significant strikes or work stoppages and believes its relations with employees
covered by collective bargaining agreements are good.
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 comprehensive 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
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Company. Certain of the Company's competitors and potential competitors may have
greater financial resources than the Company to finance development
opportunities and support their operations.
FACILITIES AND VEHICLES
The Company leases the majority of its facilities. In most instances these
leases are with the former owners of the Acquired Companies who are now employed
by the Company. Leased premises range in size from approximately 1,000 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 seven executive officers.
William F. Murdy, age 59, has served as Chairman of the Board and Chief
Executive Officer of Comfort Systems since June 2000. Prior to this he was
Interim President and Chief Executive Officer of Club Quarters, a
privately-owned chain of membership hotels. From January 1998 through July 1999,
Mr. Murdy served as President, Chief Executive Officer and Chairman of the Board
of LandCare USA, a publicly-traded commercial landscape and tree services
company. He was primarily responsible for the organization of LandCare USA and
its listing as a publicly-traded company on the New York Stock Exchange in July
1998. LandCare USA was acquired in July 1999 by another publicly-traded company
specializing in services to homeowners and commercial facilities. From 1989
through December 1997, Mr. Murdy was President and Chief Executive Officer of
General Investment and Development Company, a privately-held real estate
operating company. From 1981 to 1989, Mr. Murdy served as the Managing General
Partner of the Morgan Stanley Venture Capital Fund. From 1974 to 1981, Mr. Murdy
served as the Senior Vice President and Chief Operating Officer, among other
positions, of Pacific Resources, Inc., a publicly-traded company involved
primarily in petroleum refining and marketing.
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Gary E. Hess, age 53, has served as President and Chief Operating Officer
since September 2000 and Executive Vice President and Chief Operating Officer of
Comfort Systems since June 1999. 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 regional 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.
J. Gordon Beittenmiller, age 42, 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 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.
Reagan S. Busbee, age 37, 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 36, 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.
Milburn Honeycutt, age 37, has served as Vice President and Corporate
Controller of Comfort Systems since February 1997. He was promoted to Senior
Vice President in September 2000. From 1994 to January 1997, Mr. Honeycutt was
Financial Accounting Manager -- Corporate Controllers Group for Browning-Ferris
Industries, Inc., a publicly-traded waste services company. From 1986 to 1994,
he held various positions with Arthur Andersen LLP and was a Certified Public
Accountant.
D. F. "Rick" Miller, age 56, has served as Senior Vice
President-Organizational Development of Comfort Systems since January 2001. In
September 1999, Mr. Miller founded Innovative Leadership Partners LLP, a
leadership development consulting partnership serving both individuals and
organizations and was a consultant with that entity through December 2000. From
January 1999 to August 1999, Mr. Miller was Vice President of Administration
with Integrated Electrical Services, a publicly-traded provider of specialty
contractor services in the electrical and communications industry. Mr. Miller
served as a senior consultant involved with organizational improvement and
people development at Mercuri Urval USA from March 1998 to December 1998. Prior
to that, Mr. Miller served as a career naval officer and carrier aviator from
June 1968 to February 1998, where he held numerous leadership positions in
carrier-based squadrons and served in the Pentagon, on the Joint Staff and in
the office of the Secretary of the Navy.
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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 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.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The following table sets forth the reported high and low sales prices of
the Common Stock for the quarters indicated as traded at the New York Stock
Exchange. The Common Stock is traded under the symbol FIX.
HIGH LOW
-------- -------
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
First Quarter, 2000......................................... $ 9.375 $ 6.375
Second Quarter, 2000........................................ $ 7.50 $ 3.875
Third Quarter, 2000......................................... $ 5.625 $ 3.375
Fourth Quarter, 2000........................................ $ 5.1875 $ 2.00
January 1 -- March 23, 2001................................. $ 2.80 $2.0625
As of March 23, 2001, there were approximately 657 stockholders of record
of the Company's Common Stock, and the last reported sale price on that date was
$2.45 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 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 2000, the Company did not issue any unregistered shares of its
Common Stock.
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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, 2000, 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. 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 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,
--------------------------------------------------------
1996 1997 1998 1999 2000
-------- -------- -------- ---------- ----------
(IN THOUSANDS)
STATEMENT OF OPERATIONS DATA:
Revenues................... $161,419 $297,646 $853,961 $1,370,035 $1,591,066
Operating income........... $ 6,575 $ 5,699 $ 68,497 $ 93,204 $ 20,427
Net income (loss).......... $ 4,589 $ (2,064) $ 35,013 $ 42,322 $ (16,853)
BALANCE SHEET DATA:
Working capital............ $ 13,971 $ 63,137 $133,390 $ 168,341 $ 173,219
Total assets............... $ 50,366 $308,779 $789,293 $ 934,530 $ 926,410
Total debt, including
current portion......... $ 8,376 $ 24,726 $236,446 $ 305,833 $ 274,601
Stockholders' equity....... $ 15,429 $217,635 $379,932 $ 418,965 $ 400,239
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 historical
Consolidated Financial Statements of Comfort Systems USA, Inc. ("Comfort
Systems" and collectively with its subsidiaries, the "Company") and related
notes thereto included elsewhere in this Form 10-K. 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 uncertainties that could cause actual future
activities and results of operations to be materially different from those set
forth in the forward-looking statements. Important factors that could cause
actual results to differ are discussed under "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Factors Which May
Affect Future Results."
The Company is a leading national provider of comprehensive HVAC
installation, maintenance, repair and replacement services. The Company operates
primarily in 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 provides specialized
applications such as process cooling, building automation control systems,
electronic monitoring and process piping. Certain locations also perform related
services such as electrical and plumbing.
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RESULTS OF OPERATIONS
YEAR ENDED DECEMBER 31,
-------------------------------------------------------------
1998 1999 2000
----------------- ------------------- -------------------
(IN THOUSANDS)
Revenues.......................... $853,961 100.0% $1,370,035 100.0% $1,591,066 100.0%
Cost of services.................. 647,512 75.8% 1,077,329 78.6% 1,306,816 82.1%
-------- ---------- ----------
Gross profit...................... 206,449 24.2% 292,706 21.4% 284,250 17.9%
Selling, general and
administrative expenses......... 130,820 15.3% 187,771 13.7% 225,894 14.2%
Goodwill amortization............. 7,132 0.8% 11,731 0.9% 12,585 0.8%
Restructuring charges............. -- -- -- -- 25,344 1.6%
-------- ---------- ----------
Operating income.................. 68,497 8.1% 93,204 6.8% 20,427 1.3%
Other expense, net................ (6,435) (0.8)% (19,144) (1.4)% (25,628) (1.6)%
Reductions in non-operating assets
and liabilities, net............ -- -- -- -- (5,867) (0.4)%
-------- ---------- ----------
Income (loss) before income
taxes........................... 62,062 7.3% 74,060 5.4% (11,068) (0.7)%
Income tax expense................ 27,049 31,738 5,785
-------- ---------- ----------
Net income (loss)................. $ 35,013 4.1% $ 42,322 3.1% $ (16,853) (1.1)%
======== ========== ==========
2000 Compared to 1999
Revenues -- Revenues increased $221.0 million or 16.1% to $1.6 billion in
2000 compared to 1999. The 16.1% revenue growth was comprised of approximately
12.0% internal growth and 4.1% for 1999 acquisitions that are included in the
Company's results for the full year of 2000. Approximately 3% of the revenue
growth resulted from the Company's ability to increase volume by subcontracting
portions of projects to other contractors.
Of the 12.0% internal growth rate compared to last year, approximately
one-half of this internal growth was attributable to the Company's largest
single operation. This growth represented substantial increases in volume at
this operation which did not result in commensurate increases in profitability
due to scarce technical and skilled labor and customer scheduling and site
restrictions related to strong business conditions. The Company has experienced
these kinds of challenges at numerous other operations as well, and believes
they reflect high levels of activity and capacity constraints for the
construction industry in general. As a result, management is placing less
emphasis on revenue growth and more on operations, cash flow, efficiency and
profit margin improvements for 2001 across all operations. It is likely,
therefore, that the Company will experience flat to slower revenue growth in
future periods. There can be no assurance, however, that this strategy will lead
to improved profit margins in the near term.
Gross Profit -- Gross profit decreased $8.5 million, or 2.9%, to $284.3
million in 2000 compared to 1999. As a percentage of revenues, gross profit
decreased from 21.4% in 1999 to 17.9% in 2000.
During 2000, the Company experienced disappointing results from certain
locations due to execution shortfalls on projects and weak performance at
several locations relating to ongoing turnaround efforts.
During 2000, the Company experienced significant execution shortfalls on
certain projects at its largest operation, and at an operating location on the
West Coast, and at a location in the Southeast. These execution shortfalls
resulted from difficulty in obtaining quality skilled and technical labor in
certain markets, scheduling changes imposed by the customers and poor pricing
and estimating by two previous operating managers. The Company also experienced
weak operating performance at several locations relating to ongoing turnaround
efforts and execution difficulties. The Company has decided to cease operating
at or sell eight of these locations which reported a combined negative gross
profit of $2.7 million during 2000.
Gross profit in 2000 was also reduced, to a lesser extent, by the Company's
e-commerce activities which were abandoned in the fourth quarter of 2000. The
costs associated with these decisions are included in the
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restructuring charges discussed below. The remaining decrease in gross profit as
a percentage of revenues resulted from increased labor costs, pricing pressures
in certain markets and scheduling and efficiency challenges associated with
labor availability and productivity at the high levels of activity at most of
our operations. The Company has also increased the amount of activity it
subcontracts to third parties. Pricing to the Company's customers of such
subcontracted work generally carries lower margins than the Company's
self-performed work.
Selling, General and Administrative Expenses ("SG&A") -- SG&A increased
$38.1 million, or 20.3%, to $225.9 million in 2000 compared to 1999. As a
percentage of revenues, SG&A increased from 13.7% in 1999 to 14.2% in 2000. This
increase in SG&A as a percentage of revenues resulted primarily from the
inclusion in 2000 of results of companies acquired in 1999 that have higher SG&A
as a percentage of revenues than the rest of the Company's operations. These
acquisitions included Outbound Services where the Company incurred significantly
higher SG&A to support expansion of its e-commerce activities. During the 4th
quarter of 2000, the Company decided to cease its e-commerce activities at
Outbound, and costs associated with this decision are included in restructuring
charges as discussed below.
The Company has also increased corporate and regional office spending to
support the requirements of a larger organization, and to increase its efforts
to obtain more national account and energy project business. In addition, as
discussed above, the Company has experienced weak performance at several
locations related to turnaround efforts and execution difficulties, and these
companies have realized a disproportionate amount of SG&A as compared to their
revenues. During the latter part of 2000, the Company identified certain
accounts receivable that were deemed uncollectible and written off. This
necessitated increased provisions for bad debt in SG&A, which also contributed
to the Company's higher SG&A as a percentage of revenues.
Restructuring Charges -- During 2000, the Company recorded restructuring
charges of approximately $25.3 million primarily associated with restructuring
efforts at certain underperforming operations and its decision to cease its
e-commerce activities at Outbound Services, a subsidiary of the Company. As
announced by the Company in the third quarter of 2000, management performed an
extensive review of its operations during the second half of 2000. As part of
this review, management decided to cease operating at three locations, sell five
operations (including two smaller satellite operations), and merge two companies
into other operations. These actions are substantially complete except that the
Company is seeking buyers for two operations it is holding for sale. The Company
anticipates that these operations will be sold during the first half of 2001.
The aggregate results for 2000 related to the operations and activities included
in the restructuring charges were revenues of $46.1 million and operating losses
of $17.1 million. The restructuring charges are primarily non-cash and include
goodwill impairments of approximately $11.5 million and the writedown of other
long-lived assets of approximately $8.5 million. The remaining restructuring
items primarily include severance and lease termination costs. Severance costs
relate to the termination of approximately 145 employees including certain
corporate personnel and the management and employees of certain underperforming
locations, and to the departure of the Company's former chief executive officer.
Other Expense, Net -- Other expense, net, increased $6.5 million, or 33.9%,
to $25.6 million in 2000 compared to 1999. This increase was primarily due to
the increase in interest expense related to additional borrowings and
consideration paid for companies acquired in 1999.
Reductions in Non-Operating Assets and Liabilities, Net -- During 2000, the
Company recorded a non-cash charge of approximately $5.9 million primarily
related to the impairment of certain non-operating assets. These assets
primarily related to notes receivable from former business owners that were
collateralized by shares of the Company's stock. This charge also included an
impairment of approximately $1.4 million to the Company's minority investment in
two entities associated with the distribution and implementation of high-end
engineering and design software. These entities have ceased operations. Also
included in this charge was a gain of approximately $0.6 million on the
reduction of the Company's subordinated note payable to a former owner in
connection with the settlement of claims with this former owner.
Income Tax Expense -- The Company's effective tax rate for 2000 was (52.3%)
as compared to 42.9% for 1999. The Company reported income tax expense of $5.8
million for 2000 related to its pre-tax loss of $11.1 million primarily due to
the writedown of non-deductible goodwill associated with the Company's
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restructuring activities. The Company's provision for income taxes also differs
from the federal statutory rate due to state income taxes (net of federal income
tax benefit) and the non-deductibility of the amortization of goodwill
attributable to certain acquisitions.
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 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 SG&A 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 SG&A 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, SG&A 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 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 Expense, Net -- 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.
Income Tax Expense -- The Company's effective tax rate for 1999 was 42.9%
as compared to 43.6% for 1998. The Company's provision for income taxes differs
from the federal statutory rate primarily due to state income taxes (net of
federal income tax benefit) and the non-deductibility of the amortization of
goodwill attributable to certain acquisitions.
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LIQUIDITY AND CAPITAL RESOURCES
Cash Flow -- For the year ended December 31, 2000, net cash provided by
operating activities was $58.2 million, or an increase of $39.8 million over the
prior year. This improvement primarily results from lengthier payment cycles on
accounts payable and accrued liabilities, and from faster billing by the Company
for its project work while maintaining the same average days to collect
receivables once billed. Cash provided by operations for 1999 was $18.4 million
and cash used in operations in 1998 was $5.5 million.
Cash used in investing activities was $15.4 million for the year ended
December 31, 2000, primarily in connection with purchases of property and
equipment for $18.0 million. Cash flows used in investing activities for 1999
and 1998 were $46.5 million and $143.1 million, respectively. The uses of cash
in 1999 and 1998 were primarily for the acquisition of purchased companies.
Cash used in financing activities for the year ended December 31, 2000 was
$30.4 million and was primarily attributable to net payments on long-term debt
of $30.7 million. Net cash provided by financing activities in 1999 was $24.7
million and was due primarily to net borrowings of long-term debt which were
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 and net borrowings of long-term debt of $124.2
million, which were primarily used to fund acquisitions.
Revolving Credit Facility -- The Company amended its revolving credit
facility (the "Credit Facility" or the "Facility") provided by Bank One, Texas,
N.A. ("Bank One") and other banks (the "Bank Group") in March 2001. As amended,
the Credit Facility provides the Company with a revolving line of credit of up
to the lesser of $270 million or 80% of net accounts receivable. The Facility
decreases to the lesser of $250 million or 80% of net accounts receivable as of
December 31, 2001, and to the lesser of $240 million or 80% of net accounts
receivable as of June 30, 2002. Borrowings under the Facility are secured by
accounts receivable, inventory, fixed assets other than real estate, and the
shares of capital stock of the Company's subsidiaries. The Credit Facility
expires on January 1, 2003, at which time all amounts outstanding are due.
The Company has a choice of two interest rate options under the Facility.
Under one option, the interest rate is determined based on the higher of the
Federal Funds Rate plus 0.5% or Bank One's prime rate. An additional margin of
1% to 2% is then added to the higher of these two rates. Under the other
interest rate option, borrowings bear interest based on designated short-term
Eurodollar rates (which generally approximate London Interbank Offered Rates or
"LIBOR") plus 2.5% to 3.5%. The additional margin for both options depends on
the ratio of the Company's debt to earnings before interest, taxes, depreciation
and amortization ("EBITDA"), as defined. Commitment fees of 0.375% to 0.5% per
annum, also depending on the ratio of debt to EBITDA, are payable on the unused
portion of the Facility.
The Credit Facility prohibits payment of dividends by the Company, limits
certain non-Bank Group debt, and restricts outlays of cash by the Company
relating to certain investments, capital expenditures, vehicle leases,
acquisitions and subordinate debt. The Credit Facility also provides for the
maintenance of certain levels of shareholder equity and EBITDA, and for the
maintenance of certain ratios of the Company's EBITDA to interest expense and
debt to EBITDA.
Under the terms of the Credit Facility that were in effect as of June 30
and September 30, 2000, the Company was in violation of certain of the
Facility's financial balance and ratio requirements. The Bank Group waived these
violations. The restrictions and financial balance and ratio requirements
currently effective under the Facility allow for performance during the first
and second quarters of 2001 consistent with the Company's results in recent
quarters, excluding restructuring and other nonrecurring charges. The Facility's
restrictions and requirements then call for improvement from recent performance
levels in the third and fourth quarters of 2001 and on a quarterly basis in
2002. The Facility also prohibits repurchase of the Company's stock and has
relatively tight approval requirements on acquisitions. The Facility's
requirements reflect tighter restrictions, greater specificity and smaller
allowable variances on most financial balances and ratios than is typical for
such agreements due to the Company's weaker results in 2000. While management
believes its restructuring efforts and operating strategies along with general
market conditions in the commercial/industrial HVAC and building automation
controls industry will enable the Company to meet the
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Facility's requirements, there can be no assurance that the Company will be
successful in doing so. Management intends to seek more flexible terms under its
borrowing relationships as its results and credit market conditions allow.
As of December 31, 2000, the Company had $223.7 million in borrowings
outstanding under the Credit Facility and had incurred interest expense at an
average rate of approximately 8.9% for the year ended December 31, 2000. The
Credit Facility's interest rate terms as summarized above are effective as of
March 22, 2001 and currently result in an all-in floating interest rate under
the Facility's LIBOR option of approximately 8.9%. As of December 31, 2000, the
Company also had $2.0 million in letters of credit outstanding under the
Facility, and unused borrowing capacity under the Facility of $41.6 million. As
of March 23, 2001, $226.9 million in borrowings and $1.9 million in letters of
credit were outstanding under the Facility, and $36.6 million in unused capacity
was available.
Notes to Affiliates and Former Owners -- Subordinated notes were issued to
former owners of certain purchased companies as part of the consideration used
to acquire their companies. These notes had an outstanding balance of $50.3
million as of December 31, 2000. Of these notes, $49.9 million bear interest,
payable quarterly, at a weighted average interest rate of 5.8% and $0.4 million
are non-interest bearing. In addition, $1.2 million of these notes are
convertible by the holders into shares of the Company's Common Stock at a
weighted average price of $25.27 per share. The originally scheduled maturities
of the subordinated notes are $3.4 million in 2000, $24.0 million in 2001, $22.0
million in 2002, and $0.9 million in 2003.
As a result of the Company's covenant violations in 2000 under the Credit
Facility, the Bank Group required that originally scheduled principal payments
to subordinate debt holders be suspended. This requirement took effect in
October 2000. In March 2001, the Company entered into amended agreements with
subordinate debt holders representing $44.4 million in principal, including all
the principal originally scheduled to be paid through 2001. These amended
agreements allow for partial payments against certain originally scheduled
payment amounts, defer remaining principal balances to April 2003, and increase
the interest rate on this debt to 10% per annum, payable quarterly. As a result
of these amended agreements, the Company's annual maturities of subordinate debt
are now $8.9 million in 2001, $6.6 million in 2002, and $34.8 million in 2003.
Stock Repurchases -- 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 4.0 million shares of its Common Stock. During 1999, the
Company purchased approximately 1.8 million shares at a cost of approximately
$12.9 million. During 2000, the Company purchased approximately 0.2 million
shares at a cost of approximately $1.2 million. The Company does not expect
further share repurchases under this program for the foreseeable future.
Outlook -- 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. As noted above,
the Company has agreed to relatively tight restrictions under the Credit
Facility. If the Company violates any of these restrictions, it will be required
to negotiate new terms with its banks. There can be no assurance that in that
event, the Company will receive satisfactory new terms from its banks, or that
if the Company needs additional financing, that such financing can be secured
when needed or on terms the Company deems acceptable.
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.
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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, retention of key
management, a national downturn or one or more regional downturns in
construction, shortages of labor and specialty building materials, difficulty in
obtaining or increased costs associated with debt financing, seasonal
fluctuations in the demand for HVAC systems and the use of incorrect estimates
for bidding a fixed price contract. 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. These businesses operated as separate, independent
entities prior to their affiliation with the Company, and there 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
reasons, the Company's subsidiary operations were not under common control or
management prior to their acquisition.
The existing senior management at many of the Company's subsidiary
operations is generally comprised of former owners who committed to stay with
their operations after acquisition. Certain of these individuals have suffered
losses in the Company stock or have lower incomes than they averaged when they
owned their former businesses. Further, former owners generally have
noncompetition obligations that expire on the fifth anniversary of their date of
acquisition. There is no assurance that the Company will be able to retain these
individuals or find suitable replacements if such individuals leave the Company.
The failure to retain or replace such management on a timely basis could
negatively impact results from operations at such locations.
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
operations of these 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.
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 various 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.
The Company has a substantial amount of debt that could limit its ability
to fund future working capital needs and increase its exposure during adverse
economic conditions.
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Such indebtedness could increase vulnerability to adverse operational
performance and economic and industry conditions; limit the ability to fund
future working capital, capital expenditures and other general corporate
requirements; limit flexibility in planning for, or reacting to, changes in our
business or industry; place the Company at a disadvantage compared to a
competitor that has less debt. Such indebtedness, together with the financial
and other restrictive covenants in our debt instruments, could limit our ability
to borrow additional funds. Additionally, failing to comply with those covenants
could result in an event of default, which, if not cured or waived, could have a
material adverse effect on the Company.
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 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, 2000:
2001 2002 2003 2004 2005 THEREAFTER FAIR VALUE
------ ------ -------- ---- ---- ---------- ----------
Liabilities -- Long-Term Debt:
Variable Rate Debt............ $ -- $ -- $223,700 $ -- $ -- $ -- $223,700
Average Interest Rate...... --% --% 8.9% --% --% --% 8.9%
Fixed Rate Debt............... $9,066 $6,710 $ 34,912 $ 71 $ 43 $ 99 $ 50,901
Average Interest Rate...... 9.9% 6.2% 10.0% 6.6% 5.6% 5.0% 9.5%
18
20
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA
INDEX TO FINANCIAL STATEMENTS
PAGE
----
Comfort Systems USA, Inc.
Report of Independent Public Accountants.................. 20
Consolidated Balance Sheets............................... 21
Consolidated Statements of Operations..................... 22
Consolidated Statements of Stockholders' Equity........... 23
Consolidated Statements of Cash Flows..................... 24
Notes to Consolidated Financial Statements................ 25
19
21
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, 1999 and
2000, and the related consolidated statements of operations, stockholders'
equity and cash flows for each of the three years in the period ended December
31, 2000. 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, 1999 and 2000, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 2000, in conformity with accounting
principles generally accepted in the United States.
ARTHUR ANDERSEN LLP
Houston, Texas
March 27, 2001
20
22
COMFORT SYSTEMS USA, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
DECEMBER 31,
-------------------
1999 2000
-------- --------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents................................. $ 3,664 $ 16,021
Accounts receivable, less allowance of $5,568 and
$6,789................................................. 309,031 334,152
Other receivables......................................... 4,575 5,879
Inventories............................................... 20,907 19,399
Prepaid expenses and other................................ 11,471 10,568
Costs and estimated earnings in excess of billings........ 54,575 44,078
Net assets held for sale.................................. -- 3,197
-------- --------
Total current assets.............................. 404,223 433,294
PROPERTY AND EQUIPMENT, net................................. 41,964 40,085
GOODWILL, net............................................... 474,529 450,493
OTHER NONCURRENT ASSETS..................................... 13,814 2,538
-------- --------
Total assets...................................... $934,530 $926,410
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current maturities of long-term debt...................... $ 3,353 $ 216
Current maturities of notes to affiliates and former
owners................................................. 24,536 8,850
Accounts payable.......................................... 96,032 114,613
Accrued compensation and benefits......................... 36,187 40,880
Billings in excess of costs and estimated earnings........ 52,170 68,574
Other current liabilities................................. 23,604 26,942
-------- --------
Total current liabilities......................... 235,882 260,075
LONG-TERM DEBT, NET OF CURRENT MATURITIES................... 225,471 224,111
NOTES TO AFFILIATES AND FORMER OWNERS, NET OF CURRENT
MATURITIES................................................ 52,473 41,424
OTHER LONG-TERM LIABILITIES................................. 1,739 561
-------- --------
Total liabilities................................. 515,565 526,171
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,
39,258,913 shares issued............................... 393 393
Treasury stock, at cost, 1,695,524 and 2,002,629 shares,
respectively........................................... (11,978) (13,119)
Additional paid-in capital................................ 342,655 341,923
Retained earnings......................................... 87,895 71,042
-------- --------
Total stockholders' equity........................ 418,965 400,239
-------- --------
Total liabilities and stockholders' equity........ $934,530 $926,410
======== ========
The accompanying notes are an integral part of these consolidated financial
statements.
21
23
COMFORT SYSTEMS USA, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
YEAR ENDED DECEMBER 31,
----------------------------------
1998 1999 2000
-------- ---------- ----------
REVENUES.................................................. $853,961 $1,370,035 $1,591,066
COST OF SERVICES.......................................... 647,512 1,077,329 1,306,816
-------- ---------- ----------
Gross profit.................................... 206,449 292,706 284,250
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES.............. 130,370 187,771 225,894
GOODWILL AMORTIZATION..................................... 7,132 11,731 12,585
ACQUISITION RELATED EXPENSES.............................. 450 -- --
RESTRUCTURING CHARGES..................................... -- -- 25,344
-------- ---------- ----------
Operating income................................ 68,497 93,204 20,427
OTHER INCOME (EXPENSE):
Interest income......................................... 957 841 514
Interest expense........................................ (7,633) (20,033) (26,886)
Other................................................... 241 48 744
-------- ---------- ----------
Other expense, net.............................. (6,435) (19,144) (25,628)
-------- ---------- ----------
REDUCTIONS IN NON-OPERATING ASSETS AND LIABILITIES, NET... -- -- (5,867)
-------- ---------- ----------
INCOME (LOSS) BEFORE INCOME TAXES......................... 62,062 74,060 (11,068)
INCOME TAX EXPENSE........................................ 27,049 31,738 5,785
-------- ---------- ----------
NET INCOME (LOSS)......................................... $ 35,013 $ 42,322 $ (16,853)
======== ========== ==========
NET INCOME (LOSS) PER SHARE:
Basic................................................... $ 1.06 $ 1.10 $ (0.45)
======== ========== ==========
Diluted................................................. $ 1.04 $ 1.09 $ (0.45)
======== ========== ==========
SHARES USED IN COMPUTING NET INCOME (LOSS) PER SHARE:
Basic................................................... 32,962 38,561 37,397
======== ========== ==========
Diluted................................................. 34,329 39,699 37,397
======== ========== ==========
The accompanying notes are an integral part of these consolidated financial
statements.
22
24
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, 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
Issuance of Common Stock:
Issuance of Employee Stock Purchase
Plan shares........................ -- -- 329,212 2,254 (732) -- 1,522
Common Stock repurchases............... -- -- (175,513) (1,224) -- -- (1,224)
Shares exchanged in repayment of notes
receivable........................... -- -- (385,996) (1,975) -- -- (1,975)
Shares received from sale of
businesses........................... -- -- (74,808) (196) -- -- (196)
Net loss............................... -- -- -- -- -- (16,853) (16,853)
---------- ---- ---------- -------- -------- -------- --------
BALANCE AT DECEMBER 31, 2000............. 39,258,913 $393 (2,002,629) $(13,119) $341,923 $ 71,042 $400,239
========== ==== ========== ======== ======== ======== ========
The accompanying notes are an integral part of these consolidated financial
statements.
23
25
COMFORT SYSTEMS USA, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
YEAR ENDED DECEMBER 31,
---------------------------------
1998 1999 2000
--------- --------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)........................................... $ 35,013 $ 42,322 $ (16,853)
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities --
Restructuring charges..................................... -- -- 25,344
Reductions in non-operating assets and liabilities, net... -- -- 5,867
Depreciation and amortization expense..................... 14,001 23,055 24,902
Bad debt expense.......................................... 1,253 1,650 5,883
Deferred tax expense (benefit)............................ 960 1,339 (2,590)
Gain on sale of property and equipment.................... (274) (260) (697)
Changes in operating assets and liabilities, net of
effects of acquisitions of purchased companies --
(Increase) decrease in --
Receivables, net..................................... (34,915) (58,096) (36,791)
Inventories.......................................... (788) (4,822) 1,103
Prepaid expenses and other current assets............ 2,437 3,213 2,734
Costs and estimated earnings in excess of billings... (7,926) (15,433) 9,373
Other noncurrent assets.............................. 113 (293) 2,002
Increase (decrease) in --
Accounts payable and accrued liabilities............. (14,991) 20,166 21,980
Billings in excess of costs and estimated earnings... 208 6,080 17,105
Other, net........................................... (616) (507) (1,190)
--------- --------- ---------
Net cash provided by (used in) operating
activities...................................... (5,525) 18,414 58,172
--------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment....................... (11,137) (16,054) (18,037)
Proceeds from sales of property and equipment............. 1,369 1,507 1,937
Cash paid for purchased companies, net of cash acquired... (133,338) (31,417) --
Proceeds from businesses sold............................. -- -- 713
Other..................................................... -- (500) --
--------- --------- ---------
Net cash used in investing activities............. (143,106) (46,464) (15,387)
--------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments on long-term debt................................ (109,508) (236,372) (314,360)
Borrowings of long-term debt.............................. 233,684 271,706 283,634
S Corporation distributions paid by certain pooled
companies.............................................. (966) -- --
Proceeds from issuance of common stock, net of offering
costs.................................................. 16,702 2,258 1,522
Repurchases of common stock............................... -- (12,863) (1,224)
Other..................................................... (2,393) -- --
--------- --------- ---------
Net cash provided by (used in) financing
activities...................................... 137,519 24,729 (30,428)
--------- --------- ---------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS........ (11,112) (3,321) 12,357
CASH AND CASH EQUIVALENTS, beginning of year................ 18,097 6,985 3,664
--------- --------- ---------
CASH AND CASH EQUIVALENTS, end of year...................... $ 6,985 $ 3,664 $ 16,021
========= ========= =========
The accompanying notes are an integral part of these consolidated financial
statements.
24
26
COMFORT SYSTEMS USA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2000
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. The Company operates
primarily in 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 provides specialized
applications such as process cooling, building automation control systems,
electronic monitoring and process piping. Certain locations also perform related
services such as electrical and plumbing. Approximately 58% of the Company's
consolidated 2000 revenues were attributable to installation services, with the
remaining 42% attributable to maintenance, repair and replacement services.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
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.
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 1998, 1999 and 2000 was approximately $6.6
million, $17.8 million and $25.8 million, respectively. Cash paid for income
taxes in 1998, 1999 and 2000 was approximately $33.3 million, $33.6 million and
$13.1 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.
25
27
COMFORT SYSTEMS USA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
As of December 31, 1999 and 2000, accumulated amortization of goodwill was
approximately $20.7 million and $32.9 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.
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 at each balance sheet date is
billed and collected within the subsequent fiscal year. The retainage balances
at December 31, 1999 and 2000 are $58.2 million and $67.7 million, respectively,
and are included in accounts receivable.
The current asset "Costs and estimated earnings in excess of billings"
represents revenues recognized in excess of amounts billed. The current
liability "Billings in excess of costs and estimated earnings" represents
billings in excess of revenues recognized.
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 in accordance with
Statement of Financial Accounting Standards No. 109, "Accounting for Income
Taxes", 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 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.
26
28
COMFORT SYSTEMS USA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires the use of estimates and assumptions by
management in determining the reported amounts of assets and liabilities,
disclosures of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
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.
ACCOUNTING PRONOUNCEMENT
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities" ("SFAS No. 133"). This standard requires entities to
recognize all derivative instruments (including certain derivative instruments
embedded in other contracts) as assets or liabilities in its balance sheet and
measure them at fair value. The statement requires that changes in the
derivatives' fair value be recognized currently in earnings unless specific
hedge accounting criteria are met. SFAS No. 133, as amended, is effective for
the Company beginning January 1, 2001. The Company adopted these standards
effective January 1, 2001 and there was no impact as the Company does not
currently hold or trade derivative instruments.
RECLASSIFICATIONS
Certain reclassifications have been made in prior period financial
statements to conform to current period presentation. During 1999, the Company
began presenting certain costs in cost of services that relate 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 were not restated.
3. RESTRUCTURING CHARGES:
During 2000, the Company recorded restructuring charges of approximately
$25.3 million primarily associated with restructuring efforts at certain
underperforming operations and its decision to cease its e-commerce activities
at Outbound Services, a subsidiary of the Company. As announced by the Company
in the third quarter of 2000, management performed an extensive review of its
operations during the second half of 2000. As part of this review, management
decided to cease operating at three locations, sell five operations (including
two smaller satellite operations), and merge two companies into other
operations. These actions are substantially complete except that the Company is
seeking buyers for two operations it is holding for sale. The Company
anticipates that these operations will be sold during the first half of 2001.
The restructuring charges
27
29
COMFORT SYSTEMS USA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
are primarily non-cash and include goodwill impairments of approximately $11.5
million and the writedown of other long-lived assets of approximately $8.5
million. The remaining restructuring items primarily include severance and lease
termination costs. Severance costs relate to the termination of approximately
145 employees (approximately 90 of these employees were terminated as of
December 31, 2000) including certain corporate personnel and the management and
employees of certain underperforming locations, and to the departure of the
Company's former chief executive officer. The following table shows the portions
of the restructuring charges that are expected to result in cash disbursements,
and how much of those amounts had been paid by December 31, 2000 (in thousands):
BALANCE AT
DECEMBER 31,
TOTAL ACCRUAL PAYMENTS 2000
------------- -------- ------------
Severance......................................... $2,487 $(1,269) $1,218
Lease termination costs and other................. 2,920 (608) 2,312
------ ------- ------
Total................................... $5,407 $(1,877) $3,530
====== ======= ======
Aggregated financial information related to the operations and activities
included in the restructuring charges is as follows (in thousands):
TWELVE MONTHS ENDED
DECEMBER 31,
----------------------------
1998 1999 2000
------- ------- --------
Revenues............................................... $14,086 $50,235 $ 46,062
Operating income (loss)................................ $ 838 $ 1,427 $(17,053)
As of December 31, 2000, net assets held for sale are comprised of the following
(in thousands):
Current Assets (primarily accounts receivable)............ $ 5,789
Long-Term Assets.......................................... 6
Current Liabilities (primarily accounts payable).......... (2,577)
Long-Term Liabilities..................................... (21)
-------
Total........................................... $ 3,197
=======
The restructuring charges associated with the operations that were held for
sale at December 31, 2000 were $3.7 million and primarily related to impairments
of goodwill and other long-lived assets based upon the estimated proceeds from
the anticipated sale of these operations.
4. REDUCTIONS IN NON-OPERATING ASSETS AND LIABILITIES, NET:
During 2000, the Company recorded a non-cash charge of approximately $5.9
million primarily related to the impairment of certain non-operating assets.
These assets primarily related to notes receivable from former business owners
that were collateralized by shares of the Company's stock. This charge also
included an impairment of approximately $1.4 million to the Company's minority
investment in two entities associated with the distribution and implementation
of high-end engineering and design software. These entities have ceased
operations. Also included in this charge was a gain of approximately $0.6
million on the reduction of the Company's subordinated note payable to a former
owner in connection with the settlement of claims with this former owner.
28
30
COMFORT SYSTEMS USA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
5. BUSINESS COMBINATIONS:
POOLINGS
During 1998, the Company acquired all of the outstanding stock of three
businesses which were accounted for as poolings-of-interests in exchange for
1,437,767 shares of the Company's common stock ("Common Stock"). These companies
provide HVAC and related services. The historical financial statements for 1998
include the operations of these poolings prior to their acquisition by the
Company.
PURCHASES
During 1998, the Company acquired 52 businesses which were accounted for as
purchases. 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 Common Stock with a fair 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. 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 to eliminate the provisions relating to
convertibility into Common Stock. The remaining convertible subordinated notes
are convertible into 42,608 shares of Common Stock.
During 1999, the Company acquired 25 businesses which were accounted for as
purchases. 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 Common Stock with a fair 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 to eliminate the provisions
relating to convertibility into Common Stock. The remaining convertible
subordinated notes are convertible into 5,133 shares of Common Stock.
The accompanying consolidated balance sheets include allocations of the
respective purchase prices to the assets acquired and liabilities assumed based
on fair value. The allocations in 1999 resulted in $55.7 million in goodwill
which represents the excess of the purchase price over the estimated fair value
of the net assets acquired for the purchased companies. In conjunction with the
acquisitions, goodwill was determined as follows (in thousands):
1999
--------
Fair value of assets acquired, net of cash acquired...... $(27,806)
Liabilities assumed...................................... 20,138
Cash paid, net of cash acquired.......................... 31,417
Estimated fair value of stock consideration.............. 8,463
Issuance of notes........................................ 23,473
--------
Goodwill................................................. $ 55,685
========
29
31
COMFORT SYSTEMS USA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 had occurred
on January 1, 1999 (in thousands, except per share data):
YEAR ENDED DECEMBER 31,
-----------------------
1998 1999
---------- ----------
(UNAUDITED)
Revenues.................................................... $1,355,733 $1,425,182
Net income.................................................. $ 40,657 $ 41,966
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 relate to (a) certain
reductions in salaries and benefits to the former owners of the purchased
companies which the former owners agreed would take effect as of the acquisition
date, (b) amortization of goodwill related to the purchased companies, (c)
interest expense on borrowings used in the acquisition of the purchased
companies and (d) interest expense related to subordinated notes issued in the
acquisition of certain of the purchased companies. In addition, an incremental
tax provision has been recorded as if all applicable purchased companies 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 and the purchased companies been combined at the beginning of the
period presented.
6. PROPERTY AND EQUIPMENT:
Property and equipment consist of the following (dollars in thousands):
ESTIMATED DECEMBER 31,
USEFUL LIVES -----------------
IN YEARS 1999 2000
------------ ------- -------
Land.................................................. N/A $ 178 $ 155
Transportation equipment.............................. 3-10 32,781 30,118
Machinery and equipment............................... 3-10 27,542 25,978
Computer and telephone equipment...................... 3-7 15,942 20,612
Buildings and leasehold improvements.................. 3-39 12,079 13,935
Furniture and fixtures................................ 3-10 8,815 9,146
------- -------
97,337 99,944
Less -- Accumulated depreciation...................... 55,373 59,859
------- -------
Property and equipment, net......................... $41,964 $40,085
======= =======
Depreciation expense for the years ended December 31, 1998, 1999 and 2000 was
$6.9 million, $11.3 million and $12.3 million, respectively.
30
32
COMFORT SYSTEMS USA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
7. DETAIL OF CERTAIN BALANCE SHEET ACCOUNTS:
Activity in the Company's allowance for doubtful accounts consists of the
following (in thousands):
DECEMBER 31,
--------------------------
1998 1999 2000
------ ------- -------
Balance at beginning of year............................... $1,698 $ 4,758 $ 5,568
Additions for bad debt expense............................. 1,253 1,650 5,883
Deductions for uncollectible receivables written off, net
of recoveries............................................ (909) (1,940) (4,452)
Allowance for doubtful accounts of purchased companies at
date of acquisition...................................... 2,716 1,100 --
Allowance for doubtful accounts of businesses sold or held
for sale................................................. -- -- (210)
------ ------- -------
Balance at end of year..................................... $4,758 $ 5,568 $ 6,789
====== ======= =======
Other current liabilities consist of the following (in thousands):
DECEMBER 31,
-----------------
1999 2000
------- -------
Accrued warranty costs...................................... $ 4,587 $ 4,715
Accrued insurance expense................................... 6,835 6,710
Deferred revenue............................................ 2,210 2,397
Other current liabilities................................... 9,972 13,120
------- -------
$23,604 $26,942
======= =======
Installation contracts in progress are as follows (in thousands):
DECEMBER 31,
-------------------------
1999 2000
----------- -----------
Costs incurred on contracts in progress.................... $ 895,662 $ 1,252,685
Estimated earnings, net of losses.......................... 209,887 252,205
Less -- Billings to date................................... (1,103,144) (1,529,223)
Less -- Amounts related to businesses held for sale........ -- (163)
----------- -----------
$ 2,405 $ (24,496)
=========== ===========
Costs and estimated earnings in excess of billings on
uncompleted contracts.................................... $ 54,575 $ 44,078
Billings in excess of costs and estimated earnings on
uncompleted contracts.................................... (52,170) (68,574)
----------- -----------
$ 2,405 $ (24,496)
=========== ===========
31
33
COMFORT SYSTEMS USA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
8. LONG-TERM DEBT OBLIGATIONS:
Long-term debt obligations consist of the following (in thousands):
DECEMBER 31,
-------------------
1999 2000
-------- --------
Revolving credit facility................................... $225,215 $223,700
Notes to affiliates and former owners....................... 77,009 50,274
Other....................................................... 3,609 627
-------- --------
Total debt........................................ 305,833 274,601
Less: current maturities.......................... 27,889 9,066
-------- --------
$277,944 $265,535
======== ========
At December 31, 2000, future principal payments of long-term debt are as
follows (in thousands):
Year Ending December 31 --
2001................................................... $ 9,066
2002................................................... 6,710
2003................................................... 258,612
2004................................................... 71
2005................................................... 43
Thereafter............................................. 99
--------
$274,601
========
REVOLVING CREDIT FACILITY
The Company amended its revolving credit facility (the "Credit Facility" or
the "Facility") provided by Bank One, Texas, N.A. ("Bank One") and other banks
(the "Bank Group") in March 2001. As amended, the Credit Facility provides the
Company with a revolving line of credit of up to the lesser of $270 million or
80% of net accounts receivable. The Facility decreases to the lesser of $250
million or 80% of net accounts receivable as of December 31, 2001, and to the
lesser of $240 million or 80% of net accounts receivable as of June 30, 2002.
Borrowings under the Facility are secured by accounts receivable, inventory,
fixed assets other than real estate, and the shares of capital stock of the
Company's subsidiaries. The Credit Facility expires on January 1, 2003, at which
time all amounts outstanding are due.
The Company has a choice of two interest rate options under the Facility.
Under one option, the interest rate is determined based on the higher of the
Federal Funds Rate plus 0.5% or Bank One's prime rate. An additional margin of
1% to 2% is then added to the higher of these two rates. Under the other
interest rate option, borrowings bear interest based on designated short-term
Eurodollar rates (which generally approximate London Interbank Offered Rates or
"LIBOR") plus 2.5% to 3.5%. The additional margin for both options depends on
the ratio of the Company's debt to earnings before interest, taxes, depreciation
and amortization ("EBITDA"), as defined. Commitment fees of 0.375% to 0.5% per
annum, also depending on the ratio of debt to EBITDA, are payable on the unused
portion of the Facility.
The Credit Facility prohibits payment of dividends by the Company, limits
certain non-Bank Group debt, and restricts outlays of cash by the Company
relating to certain investments, capital expenditures, vehicle leases,
acquisitions and subordinate debt. The Credit Facility also provides for the
maintenance of certain levels of shareholder equity and EBITDA, and for the
maintenance of certain ratios of the Company's EBITDA to interest expense and
debt to EBITDA.
32
34
COMFORT SYSTEMS USA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Under the terms of the Credit Facility that were in effect as of June 30
and September 30, 2000, the Company was in violation of certain of the
Facility's financial balance and ratio requirements. The Bank Group waived these
violations. The restrictions and financial balance and ratio requirements
currently effective under the Facility allow for performance during the first
and second quarters of 2001 consistent with the Company's results in recent
quarters, excluding restructuring and other nonrecurring charges. The Facility's
restrictions and requirements then call for improvement from recent performance
levels in the third and fourth quarters of 2001 and on a quarterly basis in
2002. The Facility also prohibits repurchase of the Company's stock and has
relatively tight approval requirements on acquisitions. The Facility's
requirements reflect tighter restrictions, greater specificity and smaller
allowable variances on most financial balances and ratios than is typical for
such agreements due to the Company's weaker results in 2000. While management
believes its restructuring efforts and operating strategies along with general
market conditions in the commercial/industrial HVAC and building automation
controls industry will enable the Company to meet the Facility's requirements,
there can be no assurance that the Company will be successful in doing so.
Management intends to seek more flexible terms under its borrowing relationships
as its results and credit market conditions allow.
As of December 31, 2000, the Company had $223.7 million in borrowings
outstanding under the Credit Facility and had incurred interest expense at an
average rate of approximately 8.9% for the year ended December 31, 2000. The
Credit Facility's interest rate terms as summarized above are effective as of
March 22, 2001 and currently result in an all-in floating interest rate under
the Facility's LIBOR option of approximately 8.9%. As of December 31, 2000, the
Company also had $2.0 million in letters of credit outstanding under the
Facility, and unused borrowing capacity under the Facility of $41.6 million. As
of March 23, 2001, $226.9 million in borrowings and $1.9 million in letters of
credit were outstanding under the Facility, and $36.6 million in unused capacity
was available.
NOTES TO AFFILIATES AND FORMER OWNERS
Subordinated notes were issued to former owners of certain purchased
companies as part of the consideration used to acquire their companies. These
notes had an outstanding balance of $50.3 million as of December 31, 2000. Of
these notes, $49.9 million bear interest, payable quarterly, at a weighted
average interest rate of 5.8% and $0.4 million are non-interest bearing. In
addition, $1.2 million of these notes are convertible by the holders into shares
of the Company's Common Stock at a weighted average price of $25.27 per share.
The originally scheduled maturities of the subordinated notes are $3.4 million
in 2000, $24.0 million in 2001, $22.0 million in 2002, and $0.9 million in 2003.
As a result of the Company's covenant violations in 2000 under the Credit
Facility, the Bank Group required that originally scheduled principal payments
to subordinate debt holders be suspended. This requirement took effect in
October 2000. In March 2001, the Company entered into amended agreements with
subordinate debt holders representing $44.4 million in principal, including all
the principal originally scheduled to be paid through 2001. These amended
agreements allow for partial payments against certain originally scheduled
payment amounts, defer remaining principal balances to April 2003, and increase
the interest rate on this debt to 10% per annum, payable quarterly. As a result
of these amended agreements, the Company's annual maturities of subordinate debt
are now $8.9 million in 2001, $6.6 million in 2002, and $34.8 million in 2003.
OTHER LONG-TERM OBLIGATION DISCLOSURES
The Company estimates the fair value of long-term debt as of December 31,
1999 and 2000 to be approximately the same as the recorded value.
33
35
COMFORT SYSTEMS USA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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. As noted above, the Company has
agreed to relatively tight restrictions under the Credit Facility. If the
Company violates any of these restrictions, it will be required to negotiate new
terms with its banks. There can be no assurance that in that event, the Company
will receive satisfactory new terms from its banks, or that if the Company needs
additional financing, that such financing can be secured when needed or on terms
the Company deems acceptable.
9. INCOME TAXES:
The provision for income taxes consists of the following (in thousands):
YEAR ENDED DECEMBER 31,
---------------------------
1998 1999 2000
------- ------- -------
Current --
Federal............................................... $21,650 $25,622 $ 4,841
State and Puerto Rico................................. 4,439 4,777 3,534
------- ------- -------
26,089 30,399 8,375
------- ------- -------
Deferred --
Federal............................................... 907 2,067 (2,679)
State and Puerto Rico................................. 53 (728) 89
------- ------- -------
960 1,339 (2,590)
------- ------- -------
$27,049 $31,738 $ 5,785
======= ======= =======
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,
---------------------------
1998 1999 2000
------- ------- -------
Income tax expense (benefit) at the statutory rate...... $21,713 $25,921 $(3,838)
Increase (decrease) resulting from --
State income taxes, net of federal tax effect......... 3,148 2,567 1,652
Non-deductible goodwill amortization.................. 2,047 2,730 2,817
Non-deductible goodwill writeoffs related to
restructuring...................................... -- -- 4,300
Non-deductible expenses............................... 364 492 778
Effect of S Corporation income previously taxed to the
former owners...................................... (308) -- --
Non-deductible acquisition costs related to pooled
companies.......................................... 157 -- --
Provision (benefit) recognized upon termination of
Subchapter S election.............................. (101) -- --
Other................................................. 29 28 76
------- ------- -------
$27,049 $31,738 $ 5,785
======= ======= =======
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
34
36
COMFORT SYSTEMS USA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
been reflected in the financial statements but which is not includable in
determining the Company's tax liabilities until future periods.
DECEMBER 31,
-----------------
1999 2000
------- -------
(IN THOUSANDS)
Deferred income tax assets --
Accounts receivable and allowance for doubtful accounts... $ 1,854 $ 2,652
Accrued liabilities and expenses.......................... 7,206 8,210
Net operating loss........................................ 1,343 4,355
Other..................................................... 630 541
------- -------
Total deferred income tax assets.................. 11,033 15,758
------- -------
Deferred income tax liabilities --
Property and equipment.................................... (1,113) (1,729)
Long-term installation contracts.......................... (3,821) (995)
Goodwill.................................................. (3,180) (5,833)
Other..................................................... (628) (369)
------- -------
Total deferred income tax liabilities............. (8,742) (8,926)
------- -------
Less -- Valuation allowance................................. -- (1,951)
------- -------
Net deferred income tax assets.................... $ 2,291 $ 4,881
======= =======
The deferred tax assets and liabilities reflected above are included in the
consolidated balance sheets as follows (in thousands):
DECEMBER 31,
---------------
1999 2000
------ ------
Deferred income tax assets --
Prepaid expenses and other................................ $ 983 $4,478
Other non-current assets.................................. 1,308 403
------ ------
Total deferred income tax assets............................ $2,291 $4,881
====== ======
At December 31, 2000, the Company has $56.3 million of available state net
operating loss carryforwards for income tax purposes which expire 2012 through
2020.
At December 31, 2000, the Company's net deferred tax assets are partially
offset by a valuation allowance. The Company will continue to assess the
valuation allowance and to the extent it is determined that such allowance is no
longer required, the tax benefit of the remaining net deferred tax assets will
be recognized in the future.
10. EMPLOYEE BENEFIT PLANS:
The Company and 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 generally provide for contributions ranging from 1% to 6% of
covered employees' salaries or wages and totaled $3.6 million for 1998, $5.4
million for 1999, and $5.9 million for 2000. Of these amounts, approximately
$2.5 million and $2.9 million was payable to the plans at December 31, 1999 and
2000, respectively.
35
37
COMFORT SYSTEMS USA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Certain of the Company's subsidiaries also participate in various
multi-employer pension plans for the benefit of their employees who are union
members. Company contributions to these plans were approximately $8.1 million
for 1998, $14.6 million for 1999, and $17.7 million for 2000. 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.
11. COMMITMENTS AND CONTINGENCIES:
LEASES
The Company leases certain facilities and equipment under noncancelable
operating leases. Rent expense for the years ended December 31, 1998, 1999 and
2000 was $6.7 million, $17.5 million, and $25.0 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 to
ten years and provide for certain escalations in the rental expenses each year.
Included in the 1998, 1999 and 2000 rent expense above is approximately $3.9
million, $6.1 million and $8.0 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 --
2001.................................................... $17,193
2002.................................................... 15,782
2003.................................................... 12,950
2004.................................................... 10,416
2005.................................................... 8,487
Thereafter.............................................. 16,349
-------
$81,177
=======
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 has provided accruals for probable losses and
legal fees associated with certain of these actions in the accompanying
consolidated financial statements.
SELF-INSURANCE
The Company retains the risk for worker's compensation, employer's
liability, auto liability, general liability and employee group health claims
resulting from uninsured deductibles per accident or occurrence. Losses up to
the deductible amounts are accrued based upon the Company's known claims
incurred and an estimate of claims incurred but not reported. The accruals are
based upon known facts and historical trends, and management believes such
accruals to be adequate. A wholly-owned insurance company subsidiary reinsures a
portion of the risk associated with surety bonds issued by a third party
insurance company. Because no claims have been made against these financial
instruments in the past, management does not expect these instruments will have
a material effect on the Company's consolidated financial statements.
36
38
COMFORT SYSTEMS USA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
12. STOCKHOLDERS' EQUITY:
COMMON STOCK AND PREFERRED STOCK
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 4.0
million shares of its Common Stock. During 1999, the Company purchased
approximately 1.8 million shares at a cost of approximately $12.9 million.
During 2000, the Company purchased approximately 0.2 million shares at a cost of
approximately $1.2 million. The Company does not expect further share
repurchases under this program for the foreseeable future.
RESTRICTED COMMON STOCK
In March 1997, Notre Capital Ventures II, L.L.C. ("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 holders of
Restricted Voting Common Stock are entitled to elect one member of the Company's
Board of Directors and 0.55 of one vote for each share on all other matters on
which they are entitled to vote. Holders of Restricted Voting Common Stock are
not entitled to vote on the election of any other directors.
Each share of Restricted Voting Common Stock will automatically convert to
Common Stock on a share-for-share basis (i) in the event of a disposition of
such share of Restricted Voting Common Stock by the holder thereof (other than a
distribution which is a distribution by a holder to its partners or beneficial
owners, or a transfer to a related party of such holders (as defined in Sections
267, 707, 318 and/or 4946 of the Internal Revenue Code of 1986, as amended)),
(ii) in the event any person acquires beneficial ownership of 15% or more of the
total number of outstanding shares of Common Stock of the Company, or (iii) in
the event any person offers to acquire 15% or more of the total number of
outstanding shares of Common Stock of the Company. After July 1, 1998, the Board
of Directors may elect to convert any remaining shares of Restricted Voting
Common Stock into shares of Common Stock in the event 80% or more of the
originally outstanding shares of Restricted Voting Common Stock have been
previously converted into shares of Common Stock. As of December 31, 2000, there
are 1,395,217 shares of Restricted Voting Common Stock remaining.
EARNINGS PER SHARE
Basic earnings per share ("EPS") is computed by dividing net income by the
weighted average number of shares of common stock outstanding during the year.
Diluted EPS is computed considering the dilutive effect of stock options and
convertible subordinated notes. Options had an anti-dilutive effect for the year
ended December 31, 2000 because the Company reported a net loss during this
period, and therefore, are not included in the diluted EPS calculation. The
Company would have included 175,767 shares related to the dilutive impact of
stock options for the year ended December 31, 2000 if it were not for the net
loss during the period. The Company has options outstanding to purchase 7.4
million shares of Common Stock at prices ranging from $2.875 to $21.438 per
share as of December 31, 2000. Diluted EPS is also computed by adjusting both
net earnings and shares outstanding as if the conversion of the convertible
subordinated notes occurred on the first day of the year. The convertible
subordinated notes had an anti-dilutive effect during the twelve
37
39
COMFORT SYSTEMS USA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
months ended December 31, 2000, and therefore, are not included in the diluted
EPS calculation. The after-tax interest expense related to the assumed
conversion of the convertible subordinated notes in 1999 was $0.8 million.
The following table reconciles the number of shares outstanding with the
number of shares used in computing basic and diluted earnings per share for each
of the periods presented (in thousands):
YEAR ENDED DECEMBER 31,
------------------------
1998 1999 2000
------ ------ ------
Common shares outstanding, end of period................... 38,141 37,563 37,256
Effect of using weighted average common shares
outstanding.............................................. (5,179) 998 141
------ ------ ------
Shares used in computing earnings per share -- basic....... 32,962 38,561 37,397
Effect of shares issuable under stock option plans based on
the treasury stock method................................ 462 69 --
Effect of shares issuable related to convertible notes..... 905 1,069 --
------ ------ ------
Shares used in computing earnings per share -- diluted..... 34,329 39,699 37,397
====== ====== ======
13. 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.
In May 2000, the Company's stockholders approved the Company's 2000
Incentive Plan which provides for the granting or awarding of incentive or
non-qualified stock options, restricted stock or performance awards to
directors, officers, key employees and other persons or entities as approved by
the Board of Directors. Options granted under this plan have been issued by the
Company at fair market value on the date of grant and become exercisable in four
equal annual installments beginning on the first anniversary of the date of
grant. The options expire after ten years from the date of grant if unexercised.
38
40
COMFORT SYSTEMS USA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following table summarizes activity under the Company's stock option
plans:
1998 1999 2000
---------------------------- ---------------------------- ----------------------------
WEIGHTED-AVERAGE WEIGHTED-AVERAGE WEIGHTED-AVERAGE
FIXED OPTIONS SHARES EXERCISE PRICE SHARES EXERCISE PRICE SHARES EXERCISE PRICE
- ------------- --------- ---------------- --------- ---------------- --------- ----------------
Outstanding at beginning of
year........................ 2,537,203 $13.72 3,955,029 $15.51 4,557,133 $15.18
Granted....................... 1,495,500 $18.54 758,200 $13.36 3,692,000 $ 3.29
Exercised..................... (24,330) $13.45 (16,924) $13.00 -- $ --
Forfeited..................... (53,344) $16.01 (139,172) $14.78 (892,974) $13.95
Expired....................... -- $ -- -- $ -- -- $ --
--------- --------- ---------
Outstanding at end of year.... 3,955,029 $15.51 4,557,133 $15.18 7,356,159 $ 9.35
========= ========= =========
Options exercisable at
year-end.................... 518,281 1,287,229 1,838,099
Weighted-average fair value of
options granted during the
year........................ $ 7.33 $ 6.26 $ 2.46
The following table summarizes information about fixed stock options
outstanding at December 31, 2000:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------------------------- ------------------------------
NUMBER WEIGHTED-AVERAGE NUMBER
RANGE OF OUTSTANDING REMAINING WEIGHTED-AVERAGE EXERCISABLE WEIGHTED-AVERAGE
EXERCISE PRICES AT 12/31/00 CONTRACTUAL LIFE EXERCISE PRICE AT 12/31/00 EXERCISE PRICE
- --------------- ----------- ---------------- ---------------- ----------- ----------------
$ 2.88- 7.63 3,717,700 9.44 years $ 3.34 37,040 $ 7.15
$11.75-16.88 2,417,067 4.03 years $13.82 1,270,142 $13.76
$17.88-21.44 1,221,392 4.50 years $18.79 530,917 $18.77
--------- ---------
$ 2.88-21.44 7,356,159 6.84 years $ 9.35 1,838,099 $15.08
========= =========
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.
The Company's 1998 Employee Stock Purchase Plan originally provided for the
purchase of up to 300,000 shares, which was increased by an additional 600,000
shares in May 2000, at semi-annual intervals. In March 2001, the Board of
Directors of the Company voted to suspend the Employee Stock Purchase Plan
indefinitely. Through the suspension date, full-time employees were 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
39
41
COMFORT SYSTEMS USA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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):
1998 1999 2000
------- ------- --------
Net Income (Loss)
As reported.......................................... $35,013 $42,322 $(16,853)
Pro forma for SFAS No. 123........................... $33,341 $39,519 $(20,065)
Income (Loss) Per Share -- Basic
As reported.......................................... $ 1.06 $ 1.10 $ (0.45)
Pro forma for SFAS No. 123........................... $ 1.01 $ 1.02 $ (0.54)
Income (Loss) Per Share -- Diluted
As reported.......................................... $ 1.04 $ 1.09 $ (0.45)
Pro forma for SFAS No. 123........................... $ 0.97 $ 1.01 $ (0.54)
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:
1998 1999 2000
---------- ---------- ----------
Expected dividend yield......................... 0.00% 0.00% 0.00%
Expected stock price volatility................. 44.87% 65.63% 52.42%
Risk free interest rate......................... 5.00%-6.15% 4.64%-5.87% 5.58-6.94%
Expected life of options........................ 4 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 2000
----------- ----------- -----------
Expected dividend yield.................... 0.00% 0.00% 0.00%
Expected volatility........................ 42.10% 53.8% 76.24%
Risk free interest rate.................... 5.19%-5.25% 4.56%-4.94% 6.00%-6.30%
Expected life of purchase rights........... 0.5 years 0.5 years 0.5 years
The weighted average fair values of the purchase rights granted in 1998,
1999 and 2000 were $5.37 per share, $4.88 per share and $1.65 per share,
respectively.
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 initial public offering of the Company.
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.
40
42
COMFORT SYSTEMS USA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Either at the time of the initial public offering 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 initial public
offering 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. In addition, directors who cease to be
employees become eligible for the annual grant. One former employee received an
annual grant in 2000. 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. As of
December 31, 2000, 95,000 options were outstanding related to this plan.
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 as of December 31,
2000.
14. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED):
Quarterly financial information for the years ended December 31, 1999 and
2000 is summarized as follows (in thousands, except per share data):
YEAR ENDED DECEMBER 31, 1999
---------------------------------------------------------
QUARTER ENDED
---------------------------------------------------------
MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31,
1999 1999 1999 1999
--------- -------- ------------- ------------
Revenues......................... $291,926 $341,493 $374,815 $361,801
Gross profit..................... $ 63,178 $ 76,239 $ 76,335 $ 76,954
Operating income................. $ 15,536 $ 30,023 $ 27,559 $ 20,086
Net income....................... $ 6,564 $ 14,645 $ 12,868 $ 8,245
Earnings per share:
Basic.......................... $ 0.17 $ 0.38 $ 0.33 $ 0.22
Diluted........................ $ 0.17 $ 0.37 $ 0.33 $ 0.22
YEAR ENDED DECEMBER 31, 2000
---------------------------------------------------------
QUARTER ENDED
---------------------------------------------------------
MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31,
2000 2000 2000 2000
--------- -------- ------------- ------------
Revenues......................... $362,566 $404,970 $423,922 $399,608
Gross profit..................... $ 70,867 $ 70,638 $ 71,084 $ 71,661
Operating income (loss).......... $ 12,856 $ 10,802 $ (47)(b) $ (3,184)(c)
Net income (loss)................ $ 4,008 $ (905)(a) $ (3,689)(b) $(16,267)(c)
Earnings (loss) per share:
Basic.......................... $ 0.11 $ (0.02) $ (0.10) $ (0.44)
Diluted........................ $ 0.11 $ (0.02) $ (0.10) $ (0.44)
- ---------------
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) During the second quarter of 2000, the Company recorded a non-cash, pre-tax
charge of approximately $5.2 million primarily related to the impairment of
certain non-operating assets.
(b) During the third quarter of 2000, the Company recorded pre-tax
restructuring charges of approximately $10.0 million associated primarily
with restructuring efforts at certain underperforming operations.
(c) During the fourth quarter of 2000, the Company recorded an additional
pre-tax charge of $0.7 million related to the impairment of certain
non-operating assets. In addition, during the fourth quarter of 2000, the
Company recorded additional pre-tax restructuring charges of approximately
$15.0 million primarily related to restructuring efforts at certain
underperforming operations and its decision to cease its e-commerce
activities at Outbound Services.
41
43
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, 2000.
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 (Included Under Item 8): The
Index to the Consolidated Financial Statements is included on page 19 of
this report and is incorporated herein by reference.
(2) Financial Statement Schedules:
Report of Independent Public Accountants on Supplementary Data.
Schedule II -- Valuation and Qualifying Accounts.
All other schedules have been omitted since the required
information is not significant or is included in the Consolidated
Financial Statements or Notes thereto or is not applicable.
(b) Reports on Form 8-K
None.
(c) Exhibits
Reference is made to the Index of Exhibits beginning on page 46, which
index is incorporated herein by reference.
42
44
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
ON SUPPLEMENTARY DATA
To Comfort Systems USA, Inc.:
We have audited in accordance with auditing standards generally accepted in the
United States, the consolidated financial statements of Comfort Systems USA,
Inc. and subsidiaries included in this Annual Report on Form 10-K and have
issued our report thereon dated March 27, 2001, in which we expressed an
unqualified opinion. Our audits were made for the purpose of forming an opinion
on the basic financial statements taken as a whole. The Valuation and Qualifying
Accounts Schedule (Schedule II) listed in the index at Item 14(a) is the
responsibility of the Company's management and is presented for purposes of
complying with the Securities and Exchange Commission's rules and is not part of
the basic financial statements. This information has been subjected to the
auditing procedures applied in our audits of the basic financial statements and,
in our opinion, is fairly stated in all material respects in relation to the
basic financial statements taken as a whole.
ARTHUR ANDERSEN LLP
Houston, Texas
March 27, 2001
43
45
COMFORT SYSTEMS USA, INC.
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
(IN THOUSANDS)
ADDITIONS
---------------------
BALANCE AT CHARGED TO CHARGED BALANCE
BEGINNING COSTS AND TO OTHER AT END
OF PERIOD EXPENSES ACCOUNTS DEDUCTIONS OF PERIOD
------------ ---------- -------- ---------- ---------
Year ended December 31, 2000:
Deducted from accounts
receivable allowance for
doubtful accounts............ $5,568 5,883 -- (4,662)(a),(b) $6,789
Accrued restructuring charges... $ -- 5,407 -- (1,877) $3,530
Year ended December 31, 1999:
Deducted from accounts
receivable allowance for
doubtful accounts............ $4,758 1,650 1,100(c) (1,940)(a) $5,568
Year ended December 31, 1998:
Deducted from accounts
receivable allowance for
doubtful accounts............ $1,698 1,253 2,716(c) (909)(a) $4,758
- ---------------
(a) Deductions for uncollectible receivables written off, net of recoveries.
(b) Includes $210 of allowance for doubtful accounts related to businesses sold
or held for sale.
(c) Allowance for doubtful accounts of purchased companies at date of
acquisition.
44
46
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/ WILLIAM F. MURDY
----------------------------------
William F. Murdy
Chief Executive Officer
Date: March 27, 2001
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/ WILLIAM F. MURDY Chairman of the Board and Chief March 27, 2001
- ----------------------------------------------------- Executive Officer
William F. Murdy
/s/ GARY E. HESS President, Chief Operating March 27, 2001
- ----------------------------------------------------- Officer and Director
Gary E. Hess
/s/ J. GORDON BEITTENMILLER Executive Vice President, Chief March 27, 2001
- ----------------------------------------------------- Financial Officer and
J. Gordon Beittenmiller Director (principal
accounting officer)
/s/ HERMAN E. BULLS Director March 27, 2001
- -----------------------------------------------------
Herman E. Bulls
/s/ VINCENT J. COSTANTINI Director March 27, 2001
- -----------------------------------------------------
Vincent J. Costantini
/s/ ALFRED J. GIARDINELLI, JR. Director March 27, 2001
- -----------------------------------------------------
Alfred J. Giardinelli, Jr.
/s/ STEVEN S. HARTER Director March 27, 2001
- -----------------------------------------------------
Steven S. Harter
/s/ ROBERT J. POWERS Director March 27, 2001
- -----------------------------------------------------
Robert J. Powers
/s/ MARK P. SHAMBAUGH Director March 27, 2001
- -----------------------------------------------------
Mark P. Shambaugh
45
47
INDEX OF EXHIBITS
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 3.1 333-24021
of Incorporation of the Registrant.
3.2 -- Certificate of Amendment dated May 21, 3.2 1998 Form 10-K
1998.
3.3 -- Bylaws of the Registrant, as amended. 3.3 1999 Form 10-K
4.1 -- Form of certificate evidencing ownership 4.1 333-24021
of Common Stock of the Registrant.
10.1 -- Comfort Systems USA, Inc. 1997 Long-Term 10.1 333-24021
Incentive Plan.
10.2 -- Comfort Systems USA, Inc. 1997 10.2 333-24021
Non-Employee Directors' Stock Plan.
10.3 -- Form of Employment Agreement between the 10.4 333-24021
Registrant and J. Gordon Beittenmiller.
10.4 -- Form of Employment Agreement between the 10.5 333-24021
Registrant and William George, III.
10.5 -- Form of Employment Agreement between the 10.6 333-24021
Registrant and Reagan S. Busbee.
10.6 -- Form of Employment Agreement between the 10.10 333-24021
Registrant, Eastern Heating & Cooling,
Inc. and Alfred J. Giardinelli, Jr.
10.7 -- Employment Agreement between the 10.17 1998 Form 10-K
Registrant, Shambaugh & Son, Inc. and
Mark P. Shambaugh.
10.8 -- Form of Agreement among certain 10.16 333-24021
stockholders.
10.9 -- Third Amended and Restated Credit 10.25 333-38009
Agreement among the Company and its
subsidiaries, Bank One, Texas, N.A., as
agent and the banks listed therein dated
December 14, 1998.
10.10 -- Lease dated October 31, 1998, between 10.28 1998 Form 10-K
Mark Shambaugh and Shambaugh & Sons, Inc.
(Opportunity Drive).
10.11 -- Lease dated October 31, 1998, between 10.29 1998 Form 10-K
Mark Shambaugh and Shambaugh & Sons, Inc.
(Di Salle Boulevard).
10.12 -- Lease dated October 31, 1998, between 10.30 1998 Form 10-K
Mark Shambaugh and Shambaugh & Sons, Inc.
(Speedway Drive).
10.13 -- Lease dated October 31, 1998, between 10.31 1998 Form 10-K
Mark Shambaugh and Shambaugh & Sons, Inc.
(South Bend).
46
48
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
------- ----------------------- -------- -----------
10.14 -- Lease dated October 31, 1998, between 10.32 1998 Form 10-K
Mark Shambaugh and Shambaugh & Sons, Inc.
(Lafayette).
10.15 -- Form of Indemnity Agreement entered into 10.26 333-32595
by the Company with each of the following
persons: J. Gordon Beittenmiller, Reagan
S. Busbee, William George, III, Steven S.
Harter, Robert J. Powers, Alfred J.
Giardinelli, Jr., on June 27, 1997.
10.16 -- Indemnity Agreement between the Company 10.27 333-32595
and Notre Capital Ventures II, L.L.C.
10.17 -- Comfort Systems USA, Inc. 1998 Employee 10.28 333-38009
Stock Purchase Plan.
10.18 -- Agreement Regarding Sale of Stock between 10.2 Third Quarter 1997
Steve S. Harter and the Registrant dated Form 10-Q
October 31, 1997.
10.19 -- Agreement Regarding Sale of Stock between 10.3 Third Quarter 1997
J. Gordon Beittenmiller and the Form 10-Q
Registrant dated October 31, 1997.
10.20 -- Agreement Regarding Sale of Stock between 10.7 Third Quarter 1997
Alfred J. Giardinelli, Jr. and the Form 10-Q
Registrant dated October 31, 1997.
10.21 -- Agreement Regarding Sale of Stock between 10.8 Third Quarter 1997
Robert J. Powers and the Registrant dated Form 10-Q
October 31, 1997.
10.22 -- Agreement Regarding Sale of Stock between 10.13 Third Quarter 1997
Reagan S. Busbee and the Registrant dated Form 10-Q
October 31, 1997.
10.23 -- Agreement Regarding Sale of Stock between 10.14 Third Quarter 1997
William George and the Registrant dated Form 10-Q
October 31, 1997.
10.24 -- Agreement and Plan of Merger dated 2.1 November 1998 Form
November 15, 1998 by and among the 8-K
Registrant, Shambaugh & Son, Inc.
10.25 -- First Amendment to Credit Agreement among 10.63 1998 Form 10-K
the Company and its Subsidiaries, Bank
One, Texas, N.A., as agent and the banks
listed Therein dated January 14, 2000.
10.26 -- Employment Agreement between the Filed Herewith
Registrant and Gary E. Hess dated January
1, 2001.
10.27 -- Lease dated April 1, 1998, between Gary 10.53 1999 Form 10-K
E. and Susan B. Hess and Hess Mechanical
Corporation.
10.28 -- Employment Agreement between William F. 10.2 Second Quarter 2000
Murdy and the Registrant dated June 27, Form 10-Q
2000.
47
49
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
------- ----------------------- -------- -----------
10.29 -- Note Modification Agreement between Mark 10.3 Second Quarter 2000
Shambaugh and the Registrant dated August Form 10-Q
8, 2000.
10.30 -- Third Amendment to Credit Agreement dated 10.5 Second Quarter 2000
as of August 11, 2000 amending the Third Form 10-Q
Amended and Restated Credit Agreement
dated December 14, 1998 among the
Registrant and its subsidiaries, Bank
One, Texas, N.A., as agent and the banks
listed therein.
10.31 -- Amendment to 1998 Employee Stock Purchase 10.6 Second Quarter 2000
Plan dated May 18, 2000. Form 10-Q
10.32 -- Comfort Systems USA, Inc. 2000 Incentive 10.7 Second Quarter 2000
Plan. Form 10-Q
10.33 -- Fourth Amendment to Credit Agreement 10.1 Third Quarter 2000
dated as of November 13, 2000 amending Form 10-Q
the Third Amended and Restated Credit
Agreement dated December 14, 1998 among
the Registrant and its subsidiaries, Bank
One, Texas, N.A., as agent and the banks
listed therein.
10.34 -- Fourth Amended and Restated Credit Filed Herewith
Agreement dated as of March 22, 2001
among the Registrant and its
subsidiaries, Bank One, Texas, N.A., as
agent and the banks listed therein.
10.35 -- Employment Agreement between the Filed Herewith
Registrant and Milburn Honeycutt dated
January 2, 2001.
21.1 -- List of subsidiaries of Comfort Systems Filed Herewith
USA, Inc.
23.1 -- Consent of Arthur Andersen LLP. Filed Herewith
48