COMFORT SYSTEMS USA INC - 10-Q Quarterly Report

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

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FORM 10-Q

(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934

FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2003

OR

[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934

FOR THE TRANSITION PERIOD FROM TO

COMMISSION FILE NUMBER: 1-13011

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COMFORT SYSTEMS USA, INC.
(Exact name of registrant as specified in its charter)

DELAWARE 76-0526487
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)

777 POST OAK BOULEVARD
SUITE 500
HOUSTON, TEXAS 77056
(Address of Principal Executive Offices) (Zip Code)

REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (713) 830-9600

Indicate by check mark whether the registrant (1) has filed all reports
required 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 whether the Registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes [X] No [ ]

The number of shares outstanding of the issuer's common stock, as of
November 7, 2003 was 37,991,883.

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COMFORT SYSTEMS USA, INC.

INDEX TO FORM 10-Q
FOR THE QUARTER ENDED SEPTEMBER 30, 2003

1

COMFORT SYSTEMS USA, INC.

CONSOLIDATED BALANCE SHEETS

The accompanying notes are an integral part of these consolidated financial
statements.
2

COMFORT SYSTEMS USA, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

The accompanying notes are an integral part of these consolidated financial
statements.
3

COMFORT SYSTEMS USA, INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

The accompanying notes are an integral part of these consolidated financial
statements.
4

COMFORT SYSTEMS USA, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

The accompanying notes are an integral part of these consolidated financial
statements.
5

COMFORT SYSTEMS USA, INC.

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2003
(UNAUDITED)

1. BUSINESS AND ORGANIZATION

Comfort Systems USA, Inc., a Delaware corporation ("Comfort Systems" and
collectively with its subsidiaries, the "Company"), is a national provider of
comprehensive heating, ventilation and air conditioning ("HVAC") installation,
maintenance, repair and replacement services within the mechanical services
industry. The Company operates primarily in the commercial, industrial and
institutional HVAC markets, and performs most of its services within office
buildings, retail centers, apartment complexes, manufacturing plants, and
healthcare, education and government facilities. In addition to standard HVAC
services, the Company provides specialized applications such as building
automation control systems, fire protection, process cooling, electronic
monitoring and process piping. Certain locations also perform related activities
such as electrical service and plumbing. Approximately 52% of the Company's
consolidated 2003 revenues to date are attributable to installation of systems
in newly constructed facilities, with the remaining 48% attributable to
maintenance, repair and replacement services. The Company's consolidated 2003
revenues to date relate to the following service activities: HVAC -- 76%,
plumbing -- 12%, building automation control systems -- 6%, and other -- 6%.
These service activities are within the mechanical services industry which is
the single industry segment served by Comfort Systems.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

BASIS OF PRESENTATION

These interim statements should be read in conjunction with the historical
Consolidated Financial Statements and related notes of Comfort Systems included
in the Annual Report on Form 10-K as filed with the Securities and Exchange
Commission for the year ended December 31, 2002 (the "Form 10-K").

There were no significant changes in the accounting policies of the Company
during the current period. For a description of the significant accounting
policies of the Company, refer to Note 2 of Notes to Consolidated Financial
Statements of Comfort Systems included in the Form 10-K.

The accompanying unaudited consolidated financial statements were prepared
using generally accepted accounting principles for interim financial information
and the instructions to Form 10-Q and applicable rules of Regulation S-X.
Accordingly, these financial statements do not include all the footnotes
required by generally accepted accounting principles for complete financial
statements, and should be read in conjunction with the Form 10-K. The Company
believes all adjustments necessary for a fair presentation of these interim
statements have been included and are of a normal and recurring nature. The
results of operations for interim periods are not necessarily indicative of the
results for the full fiscal year.

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,
revenues and expenses and disclosures regarding contingent assets and
liabilities. Actual results could differ from those estimates. The most
significant estimates used in the Company's financial statements include revenue
and cost recognition for construction contracts, allowance for doubtful accounts
and self-insurance accruals.

CASH FLOW INFORMATION

Cash paid for interest for continuing and discontinued operations for the
nine months ended September 30, 2002 and 2003 was approximately $4.5 million and
$1.4 million, respectively. Cash paid for income taxes for continuing operations
for the nine months ended September 30, 2002 and 2003 was
6

COMFORT SYSTEMS USA, INC.

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

approximately $5.0 million and $1.7 million, respectively. Cash paid for income
taxes for discontinued operations for the nine months ended September 30, 2002
and 2003 was approximately $4.2 million and $9.4 million, respectively. The cash
tax payments for the nine months ended September 30, 2003 include approximately
$10.4 million associated with the sale in 2002 of 19 operations to Emcor Group,
Inc. ("Emcor"). These taxes are included in the caption "Taxes paid related to
the sale of businesses" in the accompanying Consolidated Statement of Cash
Flows.

NEW ACCOUNTING PRONOUNCEMENTS

In July 2002, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 146, "Accounting for
Costs Associated with Exit or Disposal Activities" ("SFAS No. 146"). SFAS No.
146 addresses financial accounting and reporting for costs associated with exit
or disposal activities, such as restructurings, involuntarily terminating
employees, and consolidating facilities, where those activities were initiated
after December 31, 2002. The implementation of SFAS No. 146 does not require the
restatement of previously issued financial statements. See Note 5 for a
discussion of restructuring charges recorded during 2003 in accordance with SFAS
No. 146.

In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation -- Transition and Disclosure" ("SFAS 148"). SFAS 148 amends FASB
Statement No. 123, "Accounting for Stock-Based Compensation" ("SFAS 123") to
provide alternative methods of transition for a voluntary change to the fair
value-based method of accounting for stock-based employee compensation. In
addition, SFAS 148 amends the disclosure requirements of SFAS 123 to require
prominent disclosures in both annual and interim financial statements of the
method of accounting for stock-based employee compensation and the effect of the
method used on reported results. SFAS 148 is effective for fiscal years ending
after December 15, 2002. The footnote disclosure provisions were adopted by the
Company in the fourth quarter of 2002.

In January 2003, the FASB issued Interpretation No. 46, "Consolidation of
Variable Interest Entities" ("FIN 46"). FIN 46 expands upon and strengthens
existing accounting guidance that addresses when a company should include in its
financial statements the assets, liabilities and activities of another entity. A
variable interest entity is a corporation, partnership, trust, or any other
legal structure used for business purposes that either (a) does not have equity
investors with voting rights or (b) has equity investors that do not provide
sufficient financial resources for the entity to support its activities. FIN 46
requires a variable interest entity to be consolidated by a company if that
company is subject to a majority of the risk of loss from the variable interest
entity's activities or is entitled to receive a majority of the entity's
residual returns or both. FIN 46 is effective for all new variable interest
entities created or acquired after January 31, 2003. For variable interest
entities created or acquired prior to February 1, 2003, the provisions of FIN 46
must be applied for the first interim or annual period ending after December 15,
2003. The Company's preliminary assessment is that the adoption of FIN 46 will
not have a significant effect on its consolidated financial condition or results
of operations. However, the Company's evaluation of this impact is not yet
complete, and therefore, could change.

SEGMENT DISCLOSURE

Comfort Systems' activities are within the mechanical services industry
which is the single industry segment served by the Company. Under SFAS No. 131,
"Disclosures About Segments of an Enterprise and Related Information," each
operating subsidiary represents an operating segment and these segments have
been aggregated, as no individual operating unit is material and the operating
units meet a majority of the aggregation criteria.

7

COMFORT SYSTEMS USA, INC.

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

STOCK-BASED COMPENSATION

The Company accounts for its stock-based compensation using the intrinsic
value method 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 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. SFAS No.
123, "Accounting for Stock-Based Compensation," requires that if a company
accounts for stock-based compensation in accordance with APB 25, the company
must also disclose the effects on its results of operations as if an estimate of
the value of stock-based compensation at the date of grant was recorded as an
expense in the company's statement of operations. These effects for the Company
are as follows (in thousands, except per share data):

Stock Option Plans -- 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:

RECLASSIFICATIONS

Certain reclassifications have been made in prior period financial
statements to conform to current period presentation. These reclassifications
have not resulted in any changes to previously reported net income for any
periods.

8

COMFORT SYSTEMS USA, INC.

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

3. DISCONTINUED OPERATIONS

During the third quarter of 2003, the Company committed to a plan to divest
of an operating company. This unit's after-tax income of $0.2 million for the
first nine months of both 2002 and 2003 has been reported in discontinued
operations under "Operating income (loss), net of applicable income taxes" in
the Company's statement of operations. As a result of the decision in the third
quarter of 2003 to sell this unit, the Company recorded an estimated loss of
$2.8 million, including taxes, related to this planned disposition in "Estimated
loss on disposition, including income taxes" in the Company's statement of
operations based upon an estimated sales price. The estimated loss results from
the non-cash writeoff of nondeductible goodwill.

During the second quarter of 2003, the Company sold an operating company.
This unit's after-tax income of $0.2 million and $0.1 million, for the first
nine months of 2002 and the first six months of 2003, respectively, has been
reported in discontinued operations under "Operating income (loss), net of
applicable income taxes" in the Company's statement of operations. As a result
of the decision in the first quarter of 2003 to sell this unit, the Company
recorded an estimated loss in the first quarter of 2003 of $0.9 million,
including taxes, related to this transaction in "Estimated loss on disposition,
including income taxes" in the Company's statement of operations. The final loss
as measured at the closing of this sale in the second quarter of 2003 was not
materially different than the estimate recorded in the preceding quarter. The
loss resulted from the non-cash writeoff of nondeductible goodwill.

On March 1, 2002, the Company sold 19 operations to Emcor. The total
purchase price was $186.25 million, including the assumption by Emcor of
approximately $22.1 million of subordinated notes to former owners of certain of
the divested companies.

The transaction with Emcor provided for a post-closing adjustment based on
a final accounting, done after the closing of the transaction, of the net assets
of the operations that were sold to Emcor. That accounting indicated that the
net assets transferred to Emcor were approximately $7 million greater than a
target amount that had been agreed to with Emcor. In the second quarter of 2002,
Emcor paid the Company that amount, and released $2.5 million that had been
escrowed in connection with this element of the transaction.

Of Emcor's purchase price, $5 million was deposited into an escrow account
to secure potential obligations on the Company's part to indemnify Emcor for
future claims and contingencies arising from events and circumstances prior to
closing, all as specified in the transaction documents. Of this escrow, $4
million has been applied in determining the Company's liability to Emcor in
connection with the settlement of certain claims as described subsequently in
this section. The remaining $1 million of escrow is available for book purposes
to apply to any future claims and contingencies in connection with this
transaction, and has not been recognized as part of the Emcor transaction
purchase price.

The net cash proceeds of approximately $150 million received to date from
the Emcor transaction were used to reduce the Company's debt. The Company paid
$10.4 million of taxes related to this transaction in March 2003.

In the fourth quarter of 2002, the Company recognized a charge of $1.2
million, net of tax benefit of $2.7 million, in "Estimated loss on disposition,
including income taxes" in the Company's statement of operations in connection
with the Emcor transaction. This charge primarily relates to a settlement with
Emcor for reimbursement of impaired assets and additional liabilities associated
with the operations acquired from the Company. Under this settlement, the
Company was released from liability on all other outstanding receivables and
issues relating to the profitability of projects that were in process at the
time Emcor acquired these operations. During May 2003, the Company paid $2.7
million in cash to Emcor associated with this settlement. The settlement
agreement also included the use of $2.5 million of the $5 million escrow
described above to fund settled claims. The Company further recognized an
additional
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COMFORT SYSTEMS USA, INC.

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

$1.5 million of the remaining escrow applicable to elements of the settlement
still to be funded, of which $0.8 million was paid from escrow during September
2003. Accordingly, for book purposes, $1.0 million of escrow remains available
to apply against future claims that may arise from Emcor in connection with this
transaction. The Company recorded a tax benefit of $1.4 million related to this
additional charge. In addition, the $1.2 million charge recognized during the
fourth quarter of 2002 is also net of a tax credit of $1.3 million as a result
of lower final tax liabilities in connection with the overall Emcor transaction
than were estimated when the transaction originally closed in the first quarter
of 2002.

Under SFAS No. 144, "Accounting for the Impairment or Disposal of
Long-Lived Assets," which took effect for the Company on January 1, 2002, the
operating results of the companies sold to Emcor for all periods presented
through the sale, as well as the loss on the sale of these operations, have been
presented as discontinued operations in the Company's statements of operations.
The Company realized an aggregate loss of $11.8 million, including related tax
expense, in connection with the sale of these operations. As a result of the
adoption of SFAS No. 142, "Goodwill and Other Intangible Assets," the Company
also recognized a goodwill impairment charge related to these operations of
$32.4 million, net of tax benefit, as of January 1, 2002. The reporting of the
Company's aggregate initial goodwill impairment charge in connection with
adopting SFAS No. 142 is discussed further in Note 4, "Goodwill."

In March 2002, the Company also decided to divest of an additional
operating company. In the first quarter of 2002, the Company recorded an
estimated loss of $0.4 million, net of tax benefit, from this planned
disposition in "Estimated loss on disposition, including income taxes" in the
Company's statement of operations. In the fourth quarter of 2002, the Company
reversed this estimated loss because the Company decided not to sell this unit.

During the second quarter of 2002, the Company sold a division of one of
its operations. The after-tax loss for this division for the first two quarters
of 2002 of $0.3 million, has been reported in discontinued operations under
"Operating income (loss), net of applicable income taxes" in the Company's
statement of operations. The Company realized a loss of $0.2 million, net of tax
benefit, on the sale of this division. This loss is included in "Estimated loss
on disposition, including income taxes" during the second quarter of 2002 in the
Company's statement of operations.

Assets and liabilities related to discontinued operations were as follows
(in thousands):

10

COMFORT SYSTEMS USA, INC.

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Revenues and pre-tax income (loss) related to discontinued operations were
as follows (in thousands):

Interest expense allocated to the discontinued operations in the first
quarter of 2002 was $1.5 million. This amount was allocated based upon the
Company's net investment in these operations. No additional interest expense was
allocated to discontinued operations subsequent to the first quarter of 2002.

4. GOODWILL

In most businesses the Company has acquired, the value paid to buy the
business was greater than the value of specifically identifiable net assets in
the business. Under generally accepted accounting principles, this excess is
termed goodwill and is recognized as an asset at the time the business is
acquired. It is generally expected that future net earnings from an acquired
business will exceed the goodwill asset recognized at the time the business is
bought. Under previous generally accepted accounting principles, goodwill was
required to be amortized, or regularly charged to the Company's operating
results in its statement of operations.

SFAS No. 142, "Goodwill and Other Intangible Assets," went into effect in
2002. The Company adopted it as of January 1, 2002. SFAS No. 142 requires
companies to assess goodwill asset amounts for impairment each year, and more
frequently if circumstances suggest an impairment may have occurred. In addition
to discontinuing the regular charge, or amortization, of goodwill against
income, the new standard also introduces more rigorous criteria for determining
how much goodwill should be reflected as an asset in a company's balance sheet.

To perform the transitional impairment testing required by SFAS No. 142
under its new, more rigorous impairment criteria, the Company broke its
operations into "reporting units," as prescribed by the new standard, and tested
each of these reporting units for impairment by comparing the unit's fair value
to its carrying value. The fair value of each reporting unit was estimated using
a discounted cash flow model combined with market valuation approaches.
Significant estimates and assumptions were used in assessing the fair value of
reporting units. These estimates and assumptions involved future cash flows,
growth rates, discount rates, weighted average cost of capital and estimates of
market valuations for each of the reporting units.

As provided by SFAS No. 142, the transitional impairment loss identified by
applying the standard's new, more rigorous valuation methodology upon initial
adoption of the standard was reflected as a cumulative effect of a change in
accounting principle in the Company's statement of operations. The resulting
non-cash charge was $202.5 million, net of tax benefit, and was recorded during
the first quarter of 2002. Impairment charges recognized after the initial
adoption, if any, generally are to be reported as a component of operating
income.

11

COMFORT SYSTEMS USA, INC.

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

The changes in the carrying amount of goodwill for the year ended December
31, 2002 and the nine months ended September 30, 2003 are as follows (in
thousands):

Goodwill balance as of January 1, 2002(a)................... $ 438,448
Impairment adjustment....................................... (229,056)
Goodwill related to sale of operations...................... (95,965)
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Goodwill balance as of December 31, 2002(a)................. 113,427
Goodwill related to sale of operation....................... (882)
Goodwill impairment related to discontinued operation....... (2,679)
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Goodwill balance as of September 30, 2003(a)................ $ 109,866
=========

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(a) A portion of this goodwill balance is included in "Assets Related to
Discontinued Operations" in the Company's consolidated balance sheet.

5. RESTRUCTURING CHARGES

During the first three quarters of 2003, the Company recorded restructuring
charges of approximately $3.2 million pre-tax. These charges included
approximately $1.5 million for severance costs and stay bonuses primarily
associated with the curtailment of the Company's energy efficiency activities, a
reorganization of the Company's national accounts operations as well as a
reduction in corporate personnel. The severance costs and stay bonuses related
to the termination of 88 employees (86 of these employees had been terminated as
of September 30, 2003). The restructuring charges for this period also included
approximately $1.6 million for remaining lease obligations and $0.1 million of
other costs recorded in connection with the actions described above.

During the first quarter of 2002, the Company recorded restructuring
charges of approximately $1.9 million. These charges included approximately $0.8
million for severance costs primarily associated with the reduction in corporate
office overhead in light of the Company's smaller size following the Emcor
transaction described in Note 3, "Discontinued Operations." The severance costs
related to the termination of 33 employees, none of whom were employed as of
March 31, 2002. The restructuring charges for the quarter also included
approximately $0.7 million for costs associated with decisions to merge or close
three smaller divisions and realign regional operating management. The
restructuring charges for the quarter were primarily cash obligations, but did
include approximately $0.3 million of non-cash writedowns associated with
long-lived assets.

During the second half of 2000, the Company recorded restructuring charges
primarily associated with reconfiguration of certain underperforming operations
and with its decision to cease e-commerce activities at Outbound Services, a
subsidiary of the Company. As of December 31, 2002 and September 30, 2003,
accrued lease termination costs of $0.8 million and $0.6 million, respectively,
remain that were associated with these restructuring charges.

12

COMFORT SYSTEMS USA, INC.

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

The following table shows the remaining liabilities associated with the
cash portion of the restructuring charges as of December 31, 2002 and September
30, 2003 (in thousands):

6. LONG-TERM DEBT OBLIGATIONS

Long-term debt obligations consist of the following (in thousands):

CREDIT FACILITY

The Company's primary current debt financing capacity consists of a $53
million senior credit facility (the "Facility") provided by a syndicate of three
financial institutions led by General Electric Capital Corporation ("GE"). The
Facility includes a $20 million sublimit for letters of credit. The Facility is
secured by substantially all the assets of the Company. The Facility was entered
into on October 11, 2002 and consists of two parts: a term loan and a revolving
credit facility.

The term loan under the Facility (the "Term Loan") was originally $15
million, which the Company borrowed upon the closing of the Facility. The Term
Loan must be repaid in quarterly installments over five years. The amount of
each quarterly installment increases annually.

The Facility requires prepayments of the Term Loan in certain
circumstances. Approximately half of any free cash flow (as defined in the
Facility agreement -- primarily cash from operations less capital expenditures)
in excess of scheduled principal payments and voluntary prepayments must be used
to pay down the Term Loan. This requirement is measured annually based on
full-year results. The Company did not have any prepayments of the Term Loan due
as of December 31, 2002 under this requirement, primarily as a result of the
significant amount of voluntary prepayments of debt made by the Company

13

COMFORT SYSTEMS USA, INC.

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

during 2002. In addition, proceeds in excess of $250,000 from any individual
asset sales, or in excess of $1 million for a full year's asset sales, must be
used to pay down the Term Loan. Proceeds from asset sales that are less than
these individual transaction or annual aggregate levels must also be used to pay
down the Term Loan unless they are reinvested in long-term assets within six
months of the receipt of such proceeds.

All prepayments under the Term Loan, whether required or voluntary, are
applied to scheduled principal payments in inverse order, i.e. to the last
scheduled principal payment first, followed by the second-to-last, etc. All
principal payments under the Term Loan permanently reduce the original $15
million capacity under this portion of the Facility. As of September 30, 2003,
$13.3 million was outstanding under the Term Loan.

The Facility also includes a three-year $40 million revolving credit
facility (the "Revolving Loan"). Subject to capacity limitations as described
below, $20 million of the $40 million revolving facility is available for
borrowings, with the other $20 million available for letters of credit. Capacity
under the Revolving Loan is also limited by the leverage and fixed charge
coverage covenants described below under "Restrictions and Covenants" and
"Amounts Outstanding and Capacity." As noted in the latter section, under the
most restrictive of these capacity provisions, the Company's current borrowing
capacity, on a month-end measurement basis, is $6.4 million. Borrowing capacity
can be greater than this amount on an intra-month basis. Letters of credit
currently outstanding are $19.1 million.

A common practice in the Company's industry is the posting of payment and
performance bonds with customers. These bonds are offered by financial
institutions known as sureties, and provide assurance to the customer that in
the event the Company encounters significant financial or operational
difficulties, the surety will arrange for the completion of the Company's
contractual obligations and the payment of the Company's vendors on the projects
subject to the bonds. In cooperation with its lenders, the Company has granted
its surety a secured interest in assets such as receivables, costs incurred in
excess of billings, and equipment specifically identifiable to projects for
which bonds are outstanding, as collateral for potential obligations under
bonds. As of September 30, 2003, the amount of these assets was approximately
$42.6 million. The Company has also posted a $5 million letter of credit as
collateral for potential obligations under bonds.

INTEREST RATES AND FEES

The Company has a choice of two interest rate options for borrowings under
the Facility. Under one option, the interest rate is determined based on the
higher of the Federal Funds Rate plus 0.5% or the prime rate of at least 75% of
the US's 30 largest banks, as published each business day by the Wall Street
Journal. An additional margin of 2.25% is then added to the higher of these two
rates for borrowings under the Revolving Loan, while an additional margin of
2.75% is added to the higher of these two rates for borrowings under the Term
Loan.

Under the other interest rate option, borrowings bear interest based on
designated rates that are described in various general business media sources as
the London Interbank Offered Rate or "LIBOR." Revolving Loan borrowings using
this interest rate option then have 3.25% added to LIBOR, while Term Loan
borrowings have 3.75% added to LIBOR.

Commitment fees of 0.5% per annum are payable on the unused portion of the
Revolving Loan.

The Company incurred certain financing and professional costs in connection
with the arrangement and the closing of the Facility. These costs are being
amortized to interest expense over the term of the Facility in the amount of
approximately $0.4 million per quarter. To the extent prepayments of the Term
Loan are made or the size of the Facility is reduced, the Company may have to
accelerate amortization of these deferred financing and professional costs.
During the first quarter of 2003, the Company charged
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COMFORT SYSTEMS USA, INC.

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

approximately $0.8 million of deferred financing costs to interest expense that
were associated with previously higher levels of capacity under the Facility.

The weighted average interest rate that the Company currently pays on
borrowings under the Facility is 5.3% per annum. This reflects a combination of
borrowings under both interest rate options described above, as well as the swap
of floating rates to a fixed rate described below. This rate does not include
amortization of debt financing and arrangement costs, or mark-to-market
adjustments for derivatives.

INTEREST RATE DERIVATIVE

The rates underlying the interest rate terms of the Facility are floating
interest rates determined by the broad financial markets, meaning they can and
do move up and down from time to time. The Facility required that the Company
convert these floating interest rate terms on at least half of the original Term
Loan to fixed rates for at least a one-year term. In January 2003, the Company
converted $10 million of principal value to a fixed rate of 5.62% for an
eighteen-month term. This was done via a transaction known as a "swap" under
which the Company agreed to pay fixed interest rate payments on $10 million for
eighteen months to a bank in exchange for receiving from the bank floating LIBOR
interest rate payments on $10 million for the same term.

This transaction is a derivative and has been designated a cash flow
hedging instrument under applicable generally accepted accounting principles.
Changes in market interest rates in any given period may increase or decrease
the valuation of the Company's obligations to the bank under this swap versus
the bank's obligations to the Company. So long as the instrument remains
"effective" as defined under applicable generally accepted accounting
principles, such changes in market valuation are reflected in stockholders'
equity as other comprehensive income (loss) for that period, and not in the
Company's statement of operations. If the swap is terminated earlier than its
eighteen-month term, any gain or loss on settlement will be reflected in the
Company's statement of operations. The swap was effective as a hedge for
accounting purposes from its inception through September 30, 2003, and the
Company expects it to continue to be effective throughout its term.

During the nine months ended September 30, 2003, a reduction to
stockholders' equity of less than $0.1 million, net of tax, was recorded through
other comprehensive income (loss) in connection with this swap and is included
in other current liabilities in the Company's consolidated balance sheet.

The counterparty to the above derivative agreement is a major bank. Based
on its continuing review of the financial position of this bank, the Company
believes there is minimal risk that the bank will not meet its obligations to
the Company under this swap.

WARRANT

In connection with the Facility, the Company granted GE a warrant to
purchase 409,051 shares of Company common stock for nominal consideration. In
addition, GE may "put," or require the Company to repurchase, these shares at
the higher of market price, appraised price or book value per share, during the
fifth and final year of the Facility -- October 11, 2006 to October 11, 2007.
This put may be accelerated under certain circumstances including a change of
control of the Company, full repayment of amounts owing under the Facility, or a
public offering of shares by the Company. This warrant and put are discussed in
greater detail in Note 8, "Stockholders' Equity."

The value of this warrant and put as of the start of the Facility of $2.9
million, less amortization to date of $0.5 million, is reflected as a discount
of the Company's obligation under the Facility and is being amortized over the
term of the Facility, as described above.

15

COMFORT SYSTEMS USA, INC.

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

This warrant and put obligation are also recorded as a liability in the
Company's balance sheet. The value of the warrant and put will change over time,
principally in response to changes in the market price of the Company's common
stock. The warrant and put qualify as a derivative for financial reporting
purposes. Accordingly, such changes in the value of the warrant and put in any
given period will be reflected in interest expense for that period, even though
the warrant and put may not have been terminated and settled in cash during the
period. Such adjustments are known as mark-to-market adjustments. The loss
included in interest expense related to the warrant's mark-to-market obligation
during the nine months ended September 30, 2003 was $0.2 million.

The table below provides an indication of the potential effect on the
valuation of this derivative that might result from changes in the market price
for the Company's stock. In this table, the value of the warrant has been
calculated based upon the stock price being $1 lower and $1 higher than the
Company's closing stock price at September 30, 2003 (value of warrant and put
obligation in thousands).

- ---------------

(a) This was the Company's closing stock price on September 30, 2003.

RESTRICTIONS, COVENANTS, AND POTENTIAL REFINANCING

Borrowings under the Facility are specifically limited by the Company's
ratio of total debt to earnings before interest, taxes, depreciation, and
amortization ("EBITDA") also known as the leverage covenant, and by the
Company's ratio of EBITDA less taxes and capital expenditures to interest
expense and scheduled principal payments, also known as the fixed charge
coverage ratio. The Facility's definition of debt for purposes of the ratio of
total debt to EBITDA includes aggregate letters of credit outstanding less $10
million and excludes cash balances in certain of the Company's bank accounts.

The definition of EBITDA under the Facility excludes certain items,
generally non-cash amounts and transactions reported in Other Income and
Expense, that are otherwise included in the determination of earnings under
generally accepted accounting principles in the Company's financial statements.
As such, EBITDA as determined under the Facility's definition could be less than
EBITDA as derived from the Company's financial statements in the future.

The Facility prohibits payment of dividends, repurchase of shares and
acquisitions by the Company. It also limits annual lease expense and
non-Facility debt, and restricts outlays of cash by the Company relating to
certain investments and subordinate debt.

16

COMFORT SYSTEMS USA, INC.

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

The financial covenants under the Facility are summarized below. Covenant
compliance is measured on a monthly basis. EBITDA amounts are in thousands:

The Company's trailing twelve months' EBITDA as of December 31, 2002 as
determined under the Facility did not comply with the covenant then in effect.
The Company's lenders waived this violation and agreed to modify most of the
Company's minimum EBITDA, leverage and fixed charge covenants for 2003. The
Company's trailing twelve months' EBITDA as of September 30, 2003 as determined
under the Facility did not comply with the covenant then in effect. The
Company's lenders waived this violation and agreed to modify most of the
Company's minimum EBITDA, leverage and fixed charge covenants for the remainder
of 2003 and 2004. While the Company believes it will comply with these modified
covenants as provided above, these covenants leave only moderate room for
variance based on the Company's recent performance.

The Company is in the process of refinancing its current credit facility
with a new senior lending facility of at least $45 million. As of November 12,
2003, the Company has received lending commitments in excess of this amount
toward a facility with more flexible terms and more available credit capacity
than the Company's current facility. Such commitments are subject to customary
closing conditions which the Company believes it will be able to meet. The
Company expects to complete this refinancing during the fourth quarter, although
there can be no guarantee that it will be successful in doing so.

If the Company does not complete the refinancing on which it is currently
working, and it again violates a covenant under its current facility, the
Company may have to negotiate new borrowing terms

17

COMFORT SYSTEMS USA, INC.

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

under its current facility or obtain new financing. While the Company believes
that its levels of debt in comparison to its EBITDA and its cash flows would
enable the Company to negotiate new borrowing terms under its current facility
or to obtain new financing from other sources if necessary, there can be no
assurance that the Company would be successful in doing so.

If the Company completes the refinancing on which it is currently working,
the remaining deferred financing costs and discount associated with its current
facility will be written off in the Company's statement of operations in the
period in which the refinancing is completed. The current amount of such
deferred financing costs and discount is $4.7 million, which would be written
off as a non-cash charge in the fourth quarter of this year if the Company
completes its refinancing during that period as expected.

As discussed above, if the Facility is repaid in full, GE has the right to
put to the Company, or require the Company to repurchase, the warrant it
received in connection with establishing the Facility. The repurchase price per
warrant share would be the higher of market value, appraised value, or book
value per share. If the Company completes the refinancing on which it is
currently working, and if, as a result, GE exercises its put, the Company
estimates it would pay approximately $2.2 million to GE. This amount would be
charged against the warrant and put obligation in Other Long-Term Liabilities on
the Company's balance sheet, and thus would not be charged to the Company's
statement of operations in the period in which the put is paid. If $2.2 million
is paid to discharge the put, the remaining amount of $1.2 million in the
warrant and put accrual would be credited to the statement of operations as a
non-cash item in the same period that the put payment is made.

AMOUNTS OUTSTANDING AND CAPACITY

Apart from the Term Loan, the Company's available credit capacity under the
Facility is governed by the nominal limits of the Facility, and by calculated
limits based on the leverage and fixed charge coverage covenants described
above. Available credit capacity is limited to the most restrictive of these
measures. The nominal limits are in effect at all times. The leverage provision
limits borrowings that can be outstanding at month end. The fixed charge
provision limits amounts that can be outstanding at month end, or at any other
time that GE requests that this covenant be measured. Even though available
credit capacity under the leverage provision is only measured at month end, it
is presented below because it is the most restrictive of these limitations as of
recent month ends. Available capacity under the Revolving Loan can be greater
than the amount below on an intra-month basis. The following recaps the
Company's debt amounts outstanding and capacity (in thousands):

OTHER LONG-TERM OBLIGATIONS DISCLOSURES

The Company has generated positive cash flow in most recent periods, and it
currently has a moderate level of debt. The Company anticipates that cash flow
from operations and credit capacity under

18

COMFORT SYSTEMS USA, INC.

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

the Facility will provide the Company with sufficient liquidity to fund its
operations for the foreseeable future. However, the Company does not have a
significant amount of excess credit capacity under the Facility in comparison to
expected working capital requirements over the next year. In addition, as
described above, the financial covenants under the Company's credit facility
leave only moderate room for variance based on the Company's recent performance.
Also as described above, the Company is in the process of refinancing its
current facility with a new facility with more flexible terms and more available
credit capacity than the Company's current facility. The Company expects to
complete this refinancing during the fourth quarter, although there can be no
guarantee that it will be successful in doing so.

If the Company does not complete the refinancing on which it is currently
working, and it again violates a covenant or it encounters borrowing limitations
under its current facility, the Company may have to negotiate new borrowing
terms under its current facility or obtain new financing. The Company believes
that its levels of debt in comparison to its EBITDA and its cash flows would
enable it to obtain new financing if necessary, but there can be no assurance
that it would be successful in doing so.

Certain of the Company's vendors require letters of credit to ensure
reimbursement for amounts they are disbursing on the Company's behalf, such as
to beneficiaries under its self-funded insurance programs. Some customers also
require the Company to post letters of credit to guarantee performance under its
contracts and to ensure payment to its subcontractors and vendors under those
contracts. Such letters of credit are generally issued by a bank or similar
financial institution. The letter of credit commits the issuer to pay specified
amounts to the holder of the letter of credit if the holder demonstrates that
the Company has failed to perform specified actions. If this were to occur, the
Company would be required to reimburse the issuer of the letter of credit.
Depending on the circumstances of such a reimbursement, the Company may also
have to record a charge to earnings for the reimbursement. To date the Company
has not had a claim made against a letter of credit that resulted in payments by
the issuer of the letter of credit or by the Company. The Company believes that
it is unlikely that it will have to fund claims under a letter of credit in the
foreseeable future.

The Company currently has $19.1 million in letters of credit outstanding,
against a limit of $20 million under the Facility. The Company self-insures a
significant portion of its worker's compensation, auto liability and general
liability risks. The Company uses third parties to manage this self-insurance
and to retain some of these risks. As is customary under such arrangements,
these third parties require letters of credit as security for amounts they fund
or risks they might potentially absorb on the Company's behalf. Under its
current self-insurance arrangements, the Company has posted $13.2 million in
letters of credit. In connection with the Company's renewal of its
self-insurance program as of November 1, 2003, the Company must post an
additional $4.1 million in letters of credit as follows: $0.5 million in
November, 2003, $0.5 million in February, 2004, $1.0 million in May, 2004, and
$2.1 million in August, 2004. If the Company is unable to retire any of its
other outstanding letters of credit, or if it receives other letter of credit
requests in the ordinary course of business, then the Company's letter of credit
needs will exceed the letter of credit capacity limit under the Facility not
later than February, 2004. The new senior credit facility on which the Company
is working, as described above, would provide sufficient letter of credit
capacity to meet the Company's expected letter of credit needs. If the Company
does not complete this new facility, then it may have to seek additional letter
of credit capacity or post different forms of security such as bonds or cash in
lieu of letters of credit. The Company believes that its levels of debt in
comparison to its EBITDA and its cash flows would enable it to obtain additional
letter of credit capacity or to otherwise meet financial security requirements
of third parties if necessary, but there can be no assurance that the Company
would be successful in doing so.

19

COMFORT SYSTEMS USA, INC.

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

7. COMMITMENTS AND CONTINGENCIES

CLAIMS AND LAWSUITS

The Company is party to litigation in the ordinary course of business. The
Company has estimated and provided accruals for probable losses and related
legal fees associated with certain of these actions in the accompanying
consolidated financial statements. There are currently no pending legal
proceedings that, in management's opinion, would have a material adverse effect
on the Company's operating results or financial condition.

SURETY

Many customers, particularly in connection with new construction, require
the Company to post performance and payment bonds issued by a financial
institution known as a surety. These bonds provide a guarantee to the customer
that the Company will perform under the terms of a contract and that the Company
will pay subcontractors and vendors who provided goods and services under a
contract. If the Company fails to perform under a contract or to pay
subcontractors and vendors, the customer may demand that the surety make
payments or provide services under the bond. The Company must reimburse the
surety for any expenses or outlays it incurs. To date, the Company is not aware
of any losses to its surety in connection with bonds the surety has posted on
the Company's behalf, and does not expect such losses to be incurred in the
foreseeable future.

Surety market conditions are currently difficult as a result of significant
losses incurred by many sureties in recent periods, both in the construction
industry as well as in certain larger corporate bankruptcies. As a result, less
bonding capacity is available in the market and terms have become more
restrictive. Further, under standard terms in the surety market, sureties issue
bonds on a project-by-project basis, and can decline to issue bonds at any time.
Historically, approximately 25% of the Company's business has required bonds.
While the company has enjoyed a longstanding relationship with its surety,
current market conditions as well as changes in the surety's assessment of the
Company's operating and financial risk could cause the surety to decline to
issue bonds for the Company's work. If that were to occur, the alternatives
include doing more business that does not require bonds, posting other forms of
collateral for project performance such as letters of credit or cash, and
seeking bonding capacity from other sureties. The Company would likely also
encounter concerns from customers, suppliers and other market participants as to
its creditworthiness. While the Company believes its general operating and
financial performance would enable it to ultimately respond effectively to an
interruption in the availability of bonding capacity, such an interruption would
likely cause the Company's revenues and profits to decline in the near term.

SELF-INSURANCE

The Company is substantially self-insured for worker's compensation,
employer's liability, auto liability, general liability and employee group
health claims in view of the relatively high deductibles under the Company's
insurance arrangements for these risks. Losses up to deductible amounts are
estimated and accrued based upon known facts, historical trends and industry
averages. A third-party actuary reviews these estimates annually.

A wholly-owned insurance company subsidiary reinsures a portion of the risk
associated with surety bonds that were issued on the Company's behalf from 1998
through 2000 by a third-party insurance company. No significant claims have been
made against these bonds and management does not expect any material claims will
be made in connection with these bonds in the foreseeable future.

20

COMFORT SYSTEMS USA, INC.

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

8. STOCKHOLDERS' EQUITY

RESTRICTED STOCK GRANTS

The Company awarded 200,000 shares of restricted stock to its Chief
Executive Officer on March 22, 2002 under its 2000 Equity Incentive Plan. The
shares were subject to forfeiture if the Company had not achieved certain
performance levels for the twelve-month period ending March 31, 2003. These
performance levels were met by the Company. The shares are subject to forfeiture
if the executive leaves voluntarily or is terminated for cause. Such forfeiture
provisions lapse pro rata over a four-year period that started on the date of
grant.

The Company awarded 75,000 shares of restricted stock to its President on
November 1, 2002 under its 2000 Equity Incentive Plan. The shares are subject to
forfeiture if the Company does not meet certain performance levels for the
twelve-month period ending December 31, 2003 or if the executive leaves
voluntarily or is terminated for cause. Such forfeiture provisions lapse upon
achievement of the performance levels, and pro rata over a four-year period that
started on the date of grant.

Compensation expense relating to the grants will be charged to earnings
over the respective four-year periods during which their forfeiture provisions
lapse. The initial value of each award was established based on the market price
on the date of grant, and was reflected as a reduction of stockholders' equity
for unearned compensation at that time. This value, and the related compensation
expense, will be adjusted up or down based on the market price of the Company's
stock during the first year following each respective grant while the
performance conditions are in effect. If the performance conditions are met, the
value of the award will then be fixed based on the market price of the Company's
stock at that time, and charged to earnings over the remaining three-year period
during which remaining forfeiture provisions lapse.

WARRANT

In connection with the arrangement of the Company's current debt facility
as described above in Note 6, "Long-Term Debt Obligations," the Company granted
GE, its lender, a warrant to purchase 409,051 shares of Company common stock for
nominal consideration. The warrant agreement also provides for the following:

- In most situations where the Company issues shares, options or warrants,
GE may acquire additional shares or warrants on equivalent terms to
maintain the proportionate interest its warrant shares represent in
comparison to the Company's total shares outstanding.

- GE may require the Company to register its warrant shares.

- GE may include its warrant shares in any public offering of stock by the
Company.

- GE may "put," or require the Company to repurchase, some or all of its
warrant shares at the higher of market price, appraised price or book
value per share, during the fifth and final year of the debt
facility -- October 11, 2006 to October 11, 2007. This put may be
accelerated under certain circumstances including a change of control of
the Company, full repayment of amounts owing under the Facility, or a
public offering of shares by the Company.

The initial value of this warrant and put of $2.9 million is reflected as a
discount of the Company's obligations under its debt facility with GE, less
amortization to date of $0.5 million, and as an obligation in long-term
liabilities. The value of this warrant and put will change over time,
principally in response to changes in the market price of the Company's common
stock. The warrant and the put qualify as a derivative for financial reporting
purposes. Accordingly, such changes in the value of the warrant and put in any
given period will be reflected in interest expense for that period and in the
Company's long-term warrant obligation, even though the warrant and put may not
have been terminated and settled in cash

21

COMFORT SYSTEMS USA, INC.

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

during the period. Such adjustments are known as mark-to-market adjustments. The
loss included in interest expense related to the warrant's mark-to-market
obligation for the nine months ended September 30, 2003 was $0.2 million.

The table below provides an indication of the potential effect on the
valuation of this derivative that might result from changes in the market price
for the Company's stock. In this table, the value of the warrant has been
calculated based upon the stock price being $1 lower and $1 higher than the
Company's closing stock price at September 30, 2003 (value of warrant and put
obligation in thousands).

- ---------------

(a) This was the Company's closing stock price on September 30, 2003.

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 to 0.55 of one vote for each share on all other matters
on which they are entitled to vote. Holders of Restricted Voting Common Stock
are not entitled to vote on the election of any other directors.

Each share of Restricted Voting Common Stock will automatically convert to
Common Stock on a share-for-share basis (i) in the event of a disposition of
such share of Restricted Voting Common Stock by 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 September 30, 2003,
there were 1,127,612 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,
convertible subordinated notes, warrants and contingently issuable restricted
stock.

The exercise prices for options to purchase 3.0 million shares of the
Company's Common Stock ("Common Stock") at prices ranging from $3.63 to $21.44
per share and options to purchase 3.1 million shares of Common Stock at prices
ranging from $3.39 to $21.44 per share were greater than the average market
price of the Common Stock for the three months and nine months ended September
30, 2003, respectively. Under the calculations normally required by generally
accepted accounting principles for determining EPS, including the effect of
these options would increase diluted EPS, or have an "anti-dilutive" effect.
When this situation occurs, generally accepted accounting principles require
that such

22

COMFORT SYSTEMS USA, INC.

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

options or other common stock equivalents be excluded from the determination of
diluted EPS. Accordingly, they have been excluded. Options to purchase 3.3
million shares of Common Stock at prices ranging from $3.86 to $21.44 per share
and options to purchase 2.7 million shares of Common Stock at prices ranging
from $4.24 to $21.44 per share were outstanding for the three months and nine
months ended September 30, 2002, respectively, but were not included in the
computation of diluted EPS for the same reason.

As noted above, the Company granted GE, its primary lender, a warrant to
purchase 409,051 shares of Company common stock for nominal consideration. The
dilutive impact of these warrants is computed assuming the issuance of shares
required to fulfill the warrant obligation at the end of the reporting period
and excluding the effect on the income statement for the period of any
mark-to-market adjustments made in connection with valuing the warrants. When
this is done for the three months and nine months ended September 30, 2003, the
warrants have an anti-dilutive effect on diluted EPS and accordingly they are
not included in the determination of diluted EPS. Had the warrants not been
anti-dilutive, the Company would have included 883,271 shares in the diluted EPS
calculation for the three months and nine months ended September 30, 2003 and
the after-tax loss related to the warrant's mark-to-market adjustment of $0.2
million and $0.1 million for the three months and nine months ended September
30, 2003, respectively, would have been added to net income for purposes of
calculating diluted EPS. The amount of shares that would have been included in
the diluted EPS calculation for the warrant exceeds the amount of shares under
the related warrant by such a large amount because the calculations required
under generally accepted accounting principles for such instruments require the
assumption that new shares would be sold at current prices to fund the put
obligation associated with the warrant.

The shares associated with the contingently issuable restricted stock
granted on November 1, 2002, as described above, are included in the diluted EPS
calculation for the three months and nine months ended September 30, 2003
because it is probable that the performance requirements for the issuance of
these shares will be met.

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):

- ---------------

(a) Excludes 225,000 shares of unvested contingently issuable restricted stock
outstanding as of September 30, 2003 (see "Restricted Stock Grant"
paragraphs above).

23

COMFORT SYSTEMS USA, INC.

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS

INTRODUCTION

The following discussion should be read in conjunction with our historical
Consolidated Financial Statements and related notes thereto included elsewhere
in this Form 10-Q and the Annual Report on Form 10-K as filed with the
Securities and Exchange Commission for the year ended December 31, 2002 (the
"Form 10-K"). This discussion contains "forward-looking statements" regarding
our business and industry within the meaning of the Private Securities
Litigation Reform Act of 1995. These statements are based on our current plans
and expectations and involve risks and uncertainties that could cause our actual
future activities and results of operations to be materially different from
those set forth in the forward-looking statements. Important factors that could
cause actual results to differ include risks set forth in "Factors Which May
Affect Future Results," included in our Form 10-K.

We are a national provider of comprehensive heating, ventilation and air
conditioning ("HVAC") installation, maintenance, repair and replacement services
within the mechanical services industry. We operate primarily in the commercial,
industrial and institutional HVAC markets and perform most of our services
within office buildings, retail centers, apartment complexes, manufacturing
plants, and healthcare, education and government facilities. In addition to
standard HVAC services, we provide specialized applications such as building
automation control systems, fire protection, process cooling, electronic
monitoring and process piping. Certain locations also perform related activities
such as electrical service and plumbing. The segment of the HVAC industry we
serve can be broadly divided into two service functions: installation in newly
constructed facilities, which has provided approximately 52% of our 2003
revenues to date, and maintenance, repair and replacement, which has provided
the remaining 48% of our 2003 revenues to date. Our consolidated 2003 revenues
to date are derived from the following service activities, all of which are in
the mechanical services industry, the single industry segment we serve:

In response to the Securities and Exchange Commission's Release No.
33-8040, "Cautionary Advice Regarding Disclosure About Critical Accounting
Policies", we identified our critical accounting policies based upon the
significance of the accounting policy to our overall financial statement
presentation, as well as the complexity of the accounting policy and our use of
estimates and subjective assessments. We have concluded that our most critical
accounting policy is our revenue recognition policy. As discussed elsewhere in
this report, our business has two service functions: (i) installation, which we
account for under the percentage of completion method, and (ii) maintenance,
repair and replacement, which we account for as the services are performed, or
in the case of replacement, under the percentage of completion method. In
addition, we identified other critical accounting policies related to our
allowance for doubtful accounts receivable, the recording of our self-insurance
liabilities and the assessment of goodwill impairment. These accounting
policies, as well as others, are described in Note 2 to the Consolidated
Financial Statements included in our Form 10-K.

PERCENTAGE OF COMPLETION METHOD OF ACCOUNTING

Under the percentage of completion method of accounting as provided by
American Institute of Certified Public Accountants Statement of Position 81-1,
"Accounting for Performance of Construction-Type and Certain Production-Type
Contracts," contract revenue recognizable at any time during the life of

24

a contract is determined by multiplying expected total contract revenue by the
percentage of contract costs incurred at any time to total estimated contract
costs. More specifically, as part of the negotiation and bidding process in
which we engage in connection with obtaining installation contracts, we estimate
our contract costs, which include all direct materials (net of estimated
rebates), labor and subcontract costs and indirect costs related to contract
performance, such as indirect labor, supplies, tools, repairs and depreciation
costs. Then, as we perform under those contracts, we measure such costs
incurred, compare them to total estimated costs to complete the contract, and
recognize a corresponding proportion of contract revenue. As a result, contract
revenues recognized in the statement of operations can and usually do differ
from amounts that can be billed or invoiced to the customer at any point during
the contract.

The percentage of completion method of accounting is also affected by
changes in job performance, job conditions, and final contract settlements.
These factors may result in revisions to estimated costs and, therefore,
revenues. Such revisions are frequently based on further estimates and
subjective assessments, and we recognize these revisions in the period in which
they are determined. If such revisions lead us to conclude that we will
recognize a loss on a contract, the full amount of the estimated ultimate loss
is recognized in the period we reach that conclusion, regardless of the
percentage of completion of the contract. Depending on the size of a project,
variations from estimated project costs could have a significant impact on our
operating results.

ACCOUNTING FOR ALLOWANCE FOR DOUBTFUL ACCOUNTS

We are required to estimate the collectibility of accounts receivable.
Inherent in the assessment of the allowance for doubtful accounts are certain
judgments and estimates including, among others, the creditworthiness of the
customer, our prior collection history with the customer, the ongoing
relationships with our customers, the aging of past due balances, our lien
rights, if any, in the property where we performed the work, and the
availability, if any, of payment bonds applicable to our contract. These
estimates are re-evaluated and adjusted as additional information is received.

ACCOUNTING FOR SELF-INSURANCE LIABILITIES

We are substantially self-insured for worker's compensation, employer's
liability, auto liability, general liability and employee group health claims in
view of the relatively high deductibles under our insurance arrangements for
these risks. Losses up to deductible amounts are estimated and accrued based
upon known facts, historical trends and industry averages. A third-party actuary
reviews these estimates annually. We believe such accruals to be adequate.
However, insurance liabilities are difficult to estimate due to unknown factors,
including the severity of an injury, the determination of our liability in
proportion to other parties, timely reporting of occurrences and the
effectiveness of safety and risk management programs. Therefore, if actual
experience differs from the assumptions and estimates used for recording the
liabilities, adjustments may be required and would be recorded in the period
that the experience becomes known.

ACCOUNTING FOR GOODWILL AND OTHER INTANGIBLE ASSETS

In most businesses we have acquired, the value we paid to buy the business
was greater than the value of specifically identifiable net assets in the
business. Under generally accepted accounting principles, this excess is termed
goodwill and is recognized as an asset at the time the business is acquired. It
is generally expected that future net earnings from an acquired business will
exceed the goodwill asset recognized at the time the business is bought. Under
previous generally accepted accounting principles, goodwill was required to be
amortized, or regularly charged to our operating results in our statement of
operations.

Statement of Financial Accounting Standards ("SFAS") No. 142, "Goodwill and
Other Intangible Assets," went into effect in 2002. We adopted it as of January
1, 2002. This new standard has two effects. First, we are no longer required to
amortize goodwill against our operating results. Second, we are required

25

to regularly test the goodwill on our books to determine whether its value has
been impaired, and if it has, to immediately write off, as a component of
operating income, the amount of the goodwill that is impaired.

More specifically, we are required to assess our goodwill asset amounts for
impairment each year, and more frequently if circumstances suggest an impairment
may have occurred. The new requirements for assessing whether goodwill assets
have been impaired involve market-based information. This information, and its
use in assessing goodwill, entails some degree of subjective assessment.

As part of the adoption of SFAS No. 142, we were required to make a
one-time determination of any transitional impairment loss by applying the
standard's new, more rigorous valuation methodology. The result of this
transitional analysis was a $202.5 million charge, net of tax benefit, reflected
as a cumulative effect of a change in accounting principle in our statement of
operations in the first quarter of 2002.

RESULTS OF OPERATIONS

Revenues -- Revenues decreased $1.9 million, or 0.9%, to $210.2 million for
the third quarter of 2003 and decreased $17.8 million, or 2.9%, to $592.0
million for the first nine months of 2003 compared to the same periods in 2002.
The 0.9% decline in revenue for the quarter was comprised of a 1.3% increase in
revenue at ongoing operations and a 2.2% decline in revenue related to
operations that were sold during 2003. The 2.9% decline in revenue for the first
nine months of 2003 was comprised of a 1.0% decline in revenue at ongoing
operations and a 1.9% decline in revenue related to operations that were sold
during 2003.

The increase in revenues at ongoing operations during the third quarter as
compared to the prior year was driven primarily by strong activity levels at our
operations in Washington, D.C., Phoenix, Jackson, TN, and San Diego, offset to a
lesser degree by declines in entities whose operations we are scaling back,

26

by what we believe is a temporary decrease in revenue in our National Accounts
operations, and by a decline in our Salt Lake City operations.

The year-to-date decline in revenues at ongoing operations in 2003 resulted
primarily from continued economic weakness in several markets. In addition, the
general economic slowdown in the U.S. which began in 2001 led to deferrals in
both new and replacement project activity, and has also resulted in a more
competitive pricing environment. This slowdown worsened in late 2002 and early
2003 based on renewed uncertainty about the economy and international events. We
and other industry participants believe that there has been a general deferral
of maintenance and replacement activity in the installed base of
commercial/industrial HVAC equipment in response to the more difficult economy.
We and other industry participants believe this trend will not continue
indefinitely due to the fundamental operating needs of the equipment, but it is
not clear when maintenance and replacement activity might increase. In addition,
while we have seen some signs that activity levels in our industry may increase
over the next year as compared to current levels, there can be no assurance that
this will occur. In view of the challenging economic environment and price
competition affecting our industry, we may continue to experience only modest
revenue growth or revenue declines in upcoming periods. In addition, if general
economic activity in the U.S. slows significantly from current levels, we may
realize further decreases in revenue and lower operating margins.

Backlog primarily contains installation and replacement project work, and
maintenance agreements. These projects generally last less than a year. Service
work and short duration projects are generally billed as performed and therefore
do not flow through backlog. Accordingly, backlog represents only a portion of
our revenues for any given future period, and it represents revenues that are
likely to be reflected in our operating results over the next six to twelve
months. As a result, we believe the predictive value of backlog information is
limited to indications of general revenue direction over the near term, and
should not be interpreted as indicative of ongoing revenue performance over
several quarters.

Backlog associated with continuing operations as of September 30, 2003 was
$442.1 million, a 1.8% increase from December 31, 2002 backlog of $434.4 million
and a decrease of $22.2 million, or 4.8%, from September 30, 2002 backlog of
$464.3 million. During the fourth quarter of 2002, we removed $16.0 million from
backlog that related to a project that we now believe will not proceed. This
project was first reflected in backlog in the third quarter of 2001. If this
project is excluded from September 30, 2002 backlog, our backlog reflected a
decrease of 1.4% from an adjusted September 30, 2002 backlog of $448.3 million.
The decrease is within normal quarter-to-quarter and seasonal ranges of
variation.

Gross Profit -- Gross profit decreased $3.9 million, or 10.0%, to $35.4
million for the third quarter of 2003 and decreased $10.1 million, or 9.4%, to
$97.2 million for the first nine months of 2003 compared to the same periods in
2002. As a percentage of revenues, gross profit decreased from 18.6% for the
three months ended September 30, 2002 to 16.9% for the three months ended
September 30, 2003 and decreased from 17.6% for the nine months ended September
30, 2002 to 16.4% for the nine months ended September 30, 2003.

The decline in gross profit in the third quarter of 2003 as compared to the
third quarter of 2002 is primarily due to lower industry activity levels,
increased price competition, and moderate execution shortfalls in three of our
operations, offset to a lesser degree by improved efficiency at two of our
operations. One of the operations with shortfalls this quarter is being combined
with another unit. The other two are stronger operations at which such
shortfalls are expected to be temporary. Lower industry activity levels and
increased price competition also contributed to the decline in gross profit for
the first nine months of 2003 as compared to the same period in 2002, along with
adverse cost developments on certain projects in two of our operations during
the first quarter of 2003.

Selling, General and Administrative Expenses ("SG&A") -- SG&A decreased
$3.6 million, or 11.4%, to $28.1 million for the third quarter of 2003 and
decreased $6.2 million, or 6.6%, to $87.7 million for the first nine months of
2003 compared to the same periods in 2002. As a percentage of revenues, SG&A
decreased from 14.9% for the three months ended September 30, 2002 to 13.4% for
the three months ended September 30, 2003 and decreased from 15.4% for the nine
months ended September 30, 2002 to
27

14.8% for the nine months ended September 30, 2003. During the second quarter of
2002, we reversed $0.8 million of the bad debt reserves that were established in
the fourth quarter of 2001 related to our receivables with Kmart as a result of
a settlement with Kmart. Accordingly, the decrease in normal SG&A from 2002 to
2003 was greater by this amount. The decreases in SG&A primarily result from a
concerted effort to reduce SG&A throughout our company. This effort included a
reduction in corporate overhead at the end of the first quarter of 2002 in
response to our smaller size following the sale of 19 units to Emcor as
discussed further below under "Discontinued Operations." We also initiated
further steps in the second quarter of 2003 to reduce overhead both in our
corporate office and in our field operations based on continuing weakness in
industry activity levels and pricing.

Restructuring Charges -- During the first three quarters of 2003, we
recorded restructuring charges of approximately $3.2 million pre-tax. These
charges included approximately $1.5 million for severance costs and stay bonuses
primarily associated with the curtailment of our energy efficiency activities, a
reorganization of our national accounts operations as well as a reduction in
corporate personnel. The severance costs and stay bonuses related to the
termination of 88 employees (86 of these employees had been terminated as of
September 30, 2003). The restructuring charges for this period also included
approximately $1.6 million for remaining lease obligations and $0.1 million of
other costs recorded in connection with the actions described above.

During the first quarter of 2002, we recorded restructuring charges of
approximately $1.9 million. These charges included approximately $0.8 million
for severance costs primarily associated with the reduction in corporate office
overhead in light of our smaller size following the Emcor transaction described
below under "Discontinued Operations." The severance costs related to the
termination of 33 employees, none of whom were employed as of March 31, 2002.
The restructuring charges for the quarter also included approximately $0.7
million for costs associated with decisions to merge or close three smaller
divisions and realign regional operating management. The restructuring charges
for the quarter were primarily cash obligations but did include approximately
$0.3 million of non-cash writedowns associated with long-lived assets.

Interest Expense, Net -- Interest expense, net, increased $0.1 million to
$1.1 million for the third quarter of 2003 and decreased $0.4 million to $3.5
million for the first nine months of 2003 compared to the same periods in 2002.
Interest expense for the first quarter of 2003 includes a non-cash charge of
$0.8 million for deferred financing costs that were associated with previously
higher levels of capacity under our credit facility. A portion of our actual
interest expense in the first quarter of 2002 was allocated to the discontinued
operations caption based upon our net investment in these operations. Therefore,
interest expense relating to continuing operations does not reflect the pro
forma reduction of interest expense from applying the proceeds from the sale of
these operations to reduce debt in any earlier period. Interest expense
allocated to the discontinued operations for the three months ended March 31,
2002 was $1.5 million. In addition, first quarter 2002 interest expense in
continuing operations includes a non-cash writedown of $0.6 million, before
taxes, of loan arrangement costs in connection with the reduction in our
borrowing capacity following the Emcor transaction.

Other Income (Expense) -- Other income was $0.1 million for the third
quarter of 2002 and less than $0.1 million for the third quarter of 2003. Other
income was $1.2 million for the first nine months of 2002 and other expense was
$0.1 million for the first nine months of 2003. First quarter 2003 includes a
loss of $0.3 million on the disposition of a division of one of our operations.
Other income for the second quarter of 2002 includes a gain of $0.6 million on
the sale of the residential portion of one of our operations.

Income Tax Expense (Benefit) -- Our effective tax rates associated with
results from continuing operations for the nine months ended September 30, 2002
and 2003 were 48.2% and 49.0%, respectively. These effective rates are higher
than statutory rates because of the effect of certain expenses that we incur
that are not deductible for tax purposes, and due to reserves that we have
established in connection with the possibility that we will not be able to
ultimately realize the tax benefit for certain losses we have incurred,
primarily at the state income tax level. In addition, since our current pre-tax
profit margins are

28

relatively low on a historical and an absolute basis, the impact of
non-deductible expenses on our effective rate is increased.

Discontinued Operations -- During the third quarter of 2003, we committed
to a plan to divest of an operating company. This unit's after-tax income of
$0.2 million for the first nine months of both 2002 and 2003 has been reported
in discontinued operations under "Operating results, net of tax" in our results
of operations. As a result of the decision in the third quarter of 2003 to sell
this unit, we recorded an estimated loss of $2.8 million, including taxes,
related to this planned disposition in "Estimated loss on disposition, including
tax" in our results of operations based upon an estimated sales price. The
estimated loss results from the non-cash writeoff of nondeductible goodwill.

During the second quarter of 2003, we sold an operating company. This
unit's after-tax income of $0.2 million and $0.1 million for the first nine
months of 2002 and the first six months of 2003, respectively, has been reported
in discontinued operations under "Operating results, net of tax" in our results
of operations. As a result of the decision in the first quarter of 2003 to sell
this unit, we recorded an estimated loss in the first quarter of 2003 of $0.9
million, including taxes, related to this transaction in "Estimated loss on
disposition, including tax" in our results of operations. The final loss as
measured at the closing of this sale in the second quarter of 2003 was not
materially different than the estimate recorded in the preceding quarter. The
loss resulted from the non-cash writeoff of nondeductible goodwill.

On March 1, 2002, we sold 19 operations to Emcor Group. The total purchase
price was $186.25 million, including the assumption by Emcor of approximately
$22.1 million of subordinated notes to former owners of certain of the divested
companies.

The transaction with Emcor provided for a post-closing adjustment based on
a final accounting, done after the closing of the transaction, of the net assets
of the operations that were sold to Emcor. That accounting indicated that the
net assets transferred to Emcor were approximately $7 million greater than a
target amount that had been agreed to with Emcor. In the second quarter of 2002,
Emcor paid us that amount, and released $2.5 million that had been escrowed in
connection with this element of the transaction.

Of Emcor's purchase price, $5 million was deposited into an escrow account
to secure potential obligations on our part to indemnify Emcor for future claims
and contingencies arising from events and circumstances prior to closing, all as
specified in the transaction documents. Of this escrow, $4 million has been
applied in determining the Company's liability to Emcor in connection with the
settlement of certain claims as described subsequently in this section. The
remaining $1 million of escrow is available for book purposes to apply to any
future claims and contingencies in connection with this transaction, and has not
been recognized as part of the Emcor transaction purchase price.

The net cash proceeds of approximately $150 million received to date from
the Emcor transaction were used to reduce our debt. We paid $10.4 million of
taxes related to this transaction in March 2003.

In the fourth quarter of 2002, we recognized a charge of $1.2 million, net
of tax benefit of $2.7 million, in "Estimated loss on disposition, including
tax" in our results of operations in connection with the Emcor transaction. This
charge primarily relates to a settlement with Emcor for reimbursement of
impaired assets and additional liabilities associated with the operations
acquired from us. Under this settlement, we were released from liability on all
other outstanding receivables and issues relating to the profitability of
projects that were in process at the time Emcor acquired these operations from
us. During May 2003, we paid $2.7 million in cash to Emcor associated with this
settlement. The settlement agreement also included the use of $2.5 million of
the $5 million escrow described above to fund settled claims. We further
recognized an additional $1.5 million of the remaining escrow applicable to
elements of the settlement still to be funded, of which $0.8 million was paid
from escrow in September 2003. Accordingly, for book purposes, $1.0 million of
escrow remains available to apply against future claims that may arise from
Emcor in connection with this transaction. We recorded a tax benefit of $1.4
million related to this additional charge. In addition, the $1.2 million charge
recognized during the fourth quarter of 2002 is also net of a tax credit of $1.3
million as a result of lower final tax liabilities in connection with

29

the overall Emcor transaction than we estimated when the transaction originally
closed in the first quarter of 2002.

Under SFAS No. 144, "Accounting for the Impairment or Disposal of
Long-Lived Assets," which took effect for us on January 1, 2002, the operating
results of the companies sold to Emcor for all periods presented through the
sale, as well as the loss on the sale of these operations, have been presented
as discontinued operations in our results of operations. We realized an
aggregate loss of $11.8 million, including related tax expense, in connection
with the sale of these operations. As a result of the adoption of SFAS No. 142
"Goodwill and Other Intangible Assets," we also recognized a goodwill impairment
charge related to these operations of $32.4 million, net of tax benefit, as of
January 1, 2002. The reporting of our aggregate initial goodwill impairment
charge in connection with adopting SFAS No. 142 is discussed further below under
"Cumulative Effect of Change in Accounting Principle."

In March 2002, we also decided to divest of an additional operating
company. In the first quarter of 2002, we recorded an estimated loss of $0.4
million, net of tax benefit, from this planned disposition in "Estimated loss on
disposition, including tax" in our results of operations. In the fourth quarter
of 2002, we reversed this estimated loss because we decided not to sell this
unit.

During the second quarter of 2002, we sold a division of one of our
operations. The after-tax loss for this division for the first two quarters of
2002 of $0.3 million has been reported in discontinued operations under
"Operating results, net of tax" in our results of operations. We realized a loss
of $0.2 million, net of tax benefit, on the sale of this division. This loss is
included in "Estimated loss on disposition, including tax" during the second
quarter of 2002 in our results of operations.

Cumulative Effect of Change in Accounting Principle -- SFAS No. 142,
"Goodwill and Other Intangible Assets," which required a transitional assessment
of our goodwill assets went into effect in 2002. We adopted it as of January 1,
2002.

To perform the transitional impairment testing required by SFAS No. 142
under its new, more rigorous impairment criteria, we broke our operations into
"reporting units", as prescribed by the new standard, and tested each of these
reporting units for impairment by comparing the unit's fair value to its
carrying value. The fair value of each reporting unit was estimated using a
discounted cash flow model combined with market valuation approaches.
Significant estimates and assumptions were used in assessing the fair value of
reporting units. These estimates and assumptions involved future cash flows,
growth rates, discount rates, weighted average cost of capital and estimates of
market valuations for each of the reporting units.

As provided by SFAS No. 142, the transitional impairment loss identified by
applying the standard's new, more rigorous valuation methodology upon initial
adoption of the standard was reflected as a cumulative effect of a change in
accounting principle in our results of operations. The resulting non-cash charge
was $202.5 million, net of tax benefit, and was recorded during the first
quarter of 2002.

Outlook -- As noted above, we have reported lower earnings in 2003 than in
2002. We have experienced reduced activity levels and increased price
competition stemming from the general economic slowdown which began in 2001 and
which worsened in late 2002 and early 2003 based on renewed uncertainty about
the economy and international events. In addition, we had adverse cost
developments in certain projects in two of our operations early in the current
year.

We and other industry participants believe that there has been a general
deferral of maintenance and replacement activity in the installed base of
commercial, industrial, and institutional HVAC equipment in response to the more
difficult economy. We and other industry participants believe this trend will
not continue indefinitely due to the fundamental operating needs of the
equipment, but it is not clear when maintenance and replacement activity might
increase. In addition, while we have seen some signs that activity levels in our
industry may increase over the next year as compared to current levels, there
can be no assurance that this will occur. Based on these indications as well as
significant cost reductions we have initiated, we expect to be profitable in
2003 as a whole and believe our full-year 2003 net income from continuing
operations, excluding restructuring, will be comparable to the same measure for
2002. Based on
30

generally improving macroeconomic and construction industry indicators, industry
specific factors such as expectation of increased demand to meet deferred
maintenance and replacement needs, and based on our continuing internal emphasis
on improving operations and controlling costs, we believe that our 2004 results
will be significantly better than our 2003 results.

LIQUIDITY AND CAPITAL RESOURCES

Cash Flow -- We define free cash flow as cash provided by operating
activities excluding items related to nonrecurring transactions such as sales of
businesses, less customary capital expenditures, plus the proceeds from asset
sales. Positive free cash flow represents funds available to invest in
significant operating initiatives, to acquire other companies or to reduce a
company's outstanding debt or equity. If free cash flow is negative, additional
debt or equity is generally required to fund the outflow of cash. Free cash flow
may be defined differently by other companies. Free cash flow is presented
because it is a financial measure that is frequently requested by capital market
participants and utilized by management in evaluating our company. However, free
cash flow is not considered under generally accepted accounting principles to be
a primary measure of an entity's financial results, and accordingly free cash
flow should not be considered an alternative to operating income, net income, or
cash flows as determined under generally accepted accounting principles and as
reported by us.

For the three months ended September 30, 2003, we had negative free cash
flow of $6.9 million as compared to positive free cash flow of $11.3 million for
the same period in 2002. The negative third quarter 2003 cash flow resulted
primarily from use of working capital during our busiest time of the year,
following the first two quarters of the year in which we posted relatively
strong working capital performance. We have generated positive free cash flow in
eleven of the last fourteen quarters. For the nine months ended September 30,
2003, we had positive free cash flow of $13.2 million as compared to $11.1
million for the same period in 2002.

During the first quarter of 2003, free cash flow as well as borrowings from
the credit facility discussed below, were used to pay final tax payments of
$10.4 million associated with the sale of the operations to Emcor. The net
proceeds received at the closing of the Emcor transaction in the first quarter
of 2002 were all used to reduce our debt.

Credit Facility -- Our primary current debt financing capacity consists of
a $53 million senior credit facility, or the Facility, provided by a syndicate
of three financial institutions led by General Electric Capital Corporation, or
GE. The Facility includes a $20 million sublimit for letters of credit. The
Facility is secured by substantially all of our assets. The Facility was entered
into on October 11, 2002 and consists of two parts: a term loan and a revolving
credit facility.

31

The term loan under the Facility, or the Term Loan, was originally $15
million, which we borrowed upon the closing of the Facility. The Term Loan must
be repaid in quarterly installments over five years. The amount of each
quarterly installment increases annually. These scheduled payments are recapped
below under Amounts Outstanding, Capacity and Maturities.

The Facility requires prepayments of the Term Loan in certain
circumstances. Approximately half of any free cash flow (as defined in the
Facility agreement -- primarily cash from operations less capital expenditures)
in excess of scheduled principal payments and voluntary prepayments must be used
to pay down the Term Loan. This requirement is measured annually based on
full-year results. We did not have any prepayments of the Term Loan due as of
December 31, 2002 under this requirement, primarily as a result of our
significant amount of voluntary prepayments of debt during 2002. In addition,
proceeds in excess of $250,000 from any individual asset sales, or in excess of
$1 million for a full year's asset sales, must be used to pay down the Term
Loan. Proceeds from asset sales that are less than these individual transaction
or annual aggregate levels must also be used to pay down the Term Loan unless
they are reinvested in long-term assets within six months of the receipt of such
proceeds.

All prepayments under the Term Loan, whether required or voluntary, are
applied to scheduled principal payments in inverse order, i.e. to the last
scheduled principal payment first, followed by the second-to-last, etc. All
principal payments under the Term Loan permanently reduce the original $15
million capacity under this portion of the Facility. As of September 30, 2003,
$13.3 million was outstanding under the Term Loan.

The Facility also includes a three-year $40 million revolving credit
facility, the Revolving Loan. Subject to capacity limitations as described
below, $20 million of the $40 million revolving facility is available for
borrowings, with the other $20 million available for letters of credit. Capacity
under the Revolving Loan is also limited by the leverage and fixed charge
coverage covenants described below under Restrictions and Covenants and Amounts
Outstanding, Capacity, and Maturities. As noted in the latter section, under the
most restrictive of these capacity provisions, our current borrowing capacity,
on a month-end measurement basis, is $6.4 million. Borrowing capacity can be
greater than this amount on an intra-month basis. Letters of credit currently
outstanding are $19.1 million.

Interest Rates and Fees -- We have a choice of two interest rate options
for borrowings under the Facility. Under one option, the interest rate is
determined based on the higher of the Federal Funds Rate plus 0.5% or the prime
rate of at least 75% of the U.S.'s 30 largest banks, as published each business
day by the Wall Street Journal. An additional margin of 2.25% is then added to
the higher of these two rates for borrowings under the Revolving Loan, while an
additional margin of 2.75% is added to the higher of these two rates for
borrowings under the Term Loan.

Under the other interest rate option, borrowings bear interest based on
designated rates that are described in various general business media sources as
the London Interbank Offered Rate or "LIBOR." Revolving Loan borrowings using
this interest rate option then have 3.25% added to LIBOR, while Term Loan
borrowings have 3.75% added to LIBOR.

Commitment fees of 0.5% per annum are payable on the unused portion of the
Revolving Loan.

We incurred certain financing and professional costs in connection with the
arrangement and the closing of the Facility. These costs are being amortized to
interest expense over the term of the Facility in the amount of approximately
$0.4 million per quarter. To the extent prepayments of the Term Loan are made or
the size of the Facility is reduced, we may have to accelerate amortization of
these deferred financing and professional costs. During the first quarter of
2003, we charged approximately $0.8 million of deferred financing costs to
interest expense that were associated with previously higher levels of capacity
under the Facility.

The weighted average interest rate that we currently pay on borrowings
under the Facility is 5.3% per annum. This reflects a combination of borrowings
under both interest rate options described above, as well as the swap of
floating rates to a fixed rate described below. This rate does not include
amortization of debt financing and arrangement costs, or mark-to-market
adjustments for derivatives.
32

Interest Rate Derivative -- The rates underlying the interest rate terms of
the Facility are floating interest rates determined by the broad financial
markets, meaning they can and do move up and down from time to time. The
Facility required that we convert these floating interest rate terms on at least
half of the original Term Loan to fixed rates for at least a one-year term. In
January 2003, we converted $10 million of principal value to a fixed rate of
5.62% for an eighteen-month term. This was done via a transaction known as a
"swap" under which we agreed to pay fixed interest rate payments on $10 million
for eighteen months to a bank in exchange for receiving from the bank floating
LIBOR interest rate payments on $10 million for the same term.

This transaction is a derivative and has been designated a cash flow
hedging instrument under applicable generally accepted accounting principles.
Changes in market interest rates in any given period may increase or decrease
the valuation of our obligations to the bank under this swap versus the bank's
obligations to us. So long as the instrument remains "effective" as defined
under applicable generally accepted accounting principles, such changes in
market valuation are reflected in stockholders' equity as other comprehensive
income (loss) for that period, and not in our results of operations. If the swap
is terminated earlier than its eighteen-month term, any gain or loss on
settlement will be reflected in our statement of operations. The swap was
effective as a hedge for accounting purposes from its inception through
September 30, 2003, and we expect it to continue to be effective throughout its
term.

During the nine months ended September 30, 2003, a reduction to
stockholders' equity of less than $0.1 million, net of tax, was recorded through
other comprehensive income (loss) in connection with this swap and is included
in other current liabilities in our consolidated balance sheet.

The counterparty to the above derivative agreement is a major bank. Based
on our continuing review of the financial position of this bank, we believe
there is minimal risk that it will not meet its obligations to us under this
swap.

Warrant -- In connection with the Facility, we granted GE a warrant to
purchase 409,051 shares of our common stock for nominal consideration. In
addition, GE may "put," or require us to repurchase, these shares at the higher
of market price, appraised price or book value per share, during the fifth and
final year of the Facility -- October 11, 2006 to October 11, 2007. This put may
be accelerated under certain circumstances including a change of control of our
company, full repayments of amounts owing under the Facility, or a public
offering of shares by us. This warrant and put are discussed in greater detail
in Note 8, "Stockholders' Equity," to the Consolidated Financial Statements.

The value of this warrant and put as of the start of the Facility of $2.9
million, less amortization to date of $0.5 million, is reflected as a discount
of our obligation under the Facility and is being amortized over the term of the
Facility, as described above.

This warrant and put obligation are also recorded as a liability in the
Company's balance sheet. The value of the warrant and put will change over time,
principally in response to changes in the market price of our common stock.

The warrant and put qualify as a derivative for financial reporting
purposes. Accordingly, such changes in the value of the warrant and put in any
given period will be reflected in interest expense for that period, even though
the warrant and put may not have been terminated and settled in cash during the
period. Such adjustments are known as mark-to-market adjustments. The loss
included in interest expense related to the warrant's mark-to-market obligation
during the nine months ended September 30, 2003 was $0.2 million.

33

The table below provides an indication of the potential effect on the
valuation of this derivative that might result from changes in the market price
of our stock. In this table, the value of the warrant has been calculated based
upon the stock price being $1 lower and $1 higher than our closing stock price
at September 30, 2003 (value of warrant and put obligation in thousands).

- ---------------

(a) This was our closing stock price on September 30, 2003.

Restrictions, Covenants and Potential Refinancing -- Borrowings under the
Facility are specifically limited by our ratio of total debt to earnings before
interest, taxes, depreciation, and amortization ("EBITDA") also known as the
leverage covenant, and by our ratio of EBITDA less taxes and capital
expenditures to interest expense and scheduled principal payments, also known as
the fixed charge coverage ratio. The Facility's definition of debt for purposes
of the ratio of total debt to EBITDA includes aggregate letters of credit
outstanding less $10 million and excludes cash balances in certain of our bank
accounts.

The definition of EBITDA under the Facility excludes certain items,
generally non-cash amounts and transactions reported in Other Income and
Expense, that are otherwise included in the determination of earnings under
generally accepted accounting principles in our financial statements. As such,
EBITDA as determined under the Facility's definition could be less than EBITDA
as derived from our financial statements in the future.

The Facility prohibits us from paying dividends, repurchasing shares, and
making acquisitions. It also limits annual lease expense and non-Facility debt,
and restricts outlays of cash by us relating to certain investments and
subordinate debt.

34

The financial covenants under the Facility are summarized below. Covenant
compliance is measured on a monthly basis. EBITDA amounts are in thousands:

Our trailing twelve months' EBITDA as of December 31, 2002 as determined
under the Facility did not comply with the covenant then in effect. Our lenders
waived this violation and agreed to modify most of our minimum EBITDA, leverage
and fixed charge covenants for 2003. Our trailing twelve months' EBITDA as of
September 30, 2003 as determined under the Facility did not comply with the
covenant then in effect. Our lenders waived this violation and agreed to modify
most of our minimum EBITDA, leverage and fixed charge covenants for the
remainder of 2003 and 2004. While we believe we will comply with these modified
covenants as provided above, these covenants leave only moderate room for
variance based on our recent performance.

We are in the process of refinancing our current credit facility with a new
senior lending facility of at least $45 million. As of November 12, 2003, we
have received lending commitments in excess of this amount toward a facility
with more flexible terms and more available credit capacity than our current
facility. Such commitments are subject to customary closing conditions which the
Company believes it will be able to meet. We expect to complete this refinancing
during the fourth quarter, although there can be no guarantee that we will be
successful in doing so.

If we do not complete the refinancing on which we are currently working,
and we again violate a covenant under our current facility, we may have to
negotiate new borrowing terms under our current facility or obtain new
financing. While we believe that our levels of debt in comparison to our EBITDA
and our cash flows would enable us to negotiate new borrowing terms under our
current facility or to obtain new financing from other sources if necessary,
there can be no assurance that we would be successful in doing so.

35

If we complete the refinancing on which we are currently working, the
remaining deferred financing costs and discount associated with our current
facility will be written off in our results of operations in the period in which
the refinancing is completed. The current amount of such deferred financing
costs and discount is $4.7 million, which would be written off as a non-cash
charge in the fourth quarter of this year if we complete our refinancing during
that period as expected.

As discussed above, if the Facility is repaid in full, GE has the right to
put to us, or require us to repurchase, the warrant it received in connection
with establishing the Facility. The repurchase price per warrant share would be
the higher of market value, appraised value, or book value per share. If we
complete the refinancing on which we are currently working, and if, as a result,
GE exercises its put, we estimate we would pay approximately $2.2 million to GE.
This amount would be charged against the warrant and put obligation in Other
Long-Term Liabilities on our balance sheet, and thus would not be charged to our
results of operations in the period in which the put is paid. If $2.2 million is
paid to discharge the put, the remaining amount of $1.2 million in the warrant
and put accrual would be credited to the statement of operations as a non-cash
item in the same period that the put payment is made.

Other Commitments -- As is common in our industry, we have entered into
certain off-balance sheet arrangements in the ordinary course of business that
result in risks not directly reflected in our balance sheets. Our most
significant off-balance sheet transactions include liabilities associated with
noncancelable operating leases. We also have other off-balance sheet obligations
involving letters of credit and surety guarantees.

We enter into noncancelable operating leases for many of our facility,
vehicle and equipment needs. These leases allow us to conserve cash by paying a
monthly lease rental fee for use of facilities, vehicles and equipment rather
than purchasing them. At the end of the lease, we have no further obligation to
the lessor. We may decide to cancel or terminate a lease before the end of its
term. Typically we are liable to the lessor for the remaining lease payments
under the term of the lease.

Certain of our vendors require letters of credit to ensure reimbursement
for amounts they are disbursing on our behalf, such as to beneficiaries under
our self-funded insurance programs. Some customers also require us to post
letters of credit to guarantee performance under our contracts and to ensure
payment to our subcontractors and vendors under those contracts. Such letters of
credit are generally issued by a bank or similar financial institution. The
letter of credit commits the issuer to pay specified amounts to the holder of
the letter of credit if the holder demonstrates that we have failed to perform
specified actions. If this were to occur, we would be required to reimburse the
issuer of the letter of credit. Depending on the circumstances of such a
reimbursement, we may also have to record a charge to earnings for the
reimbursement. To date we have not had a claim made against a letter of credit
that resulted in payments by the issuer of the letter of credit or by us. We
believe that it is unlikely that we will have to fund claims under a letter of
credit in the foreseeable future.

Many customers, particularly in connection with new construction, require
us to post performance and payment bonds issued by a financial institution known
as a surety. These bonds provide a guarantee to the customer that we will
perform under the terms of a contract and that we will pay subcontractors and
vendors who provided goods and services under a contract. If we fail to perform
under a contract or to pay subcontractors and vendors, the customer may demand
that the surety make payments or provide services under the bond. We must
reimburse the surety for any expenses or outlays it incurs. To date, we are not
aware of any losses to our surety in connection with bonds the surety has posted
on our behalf, and we do not expect such losses to be incurred in the
foreseeable future.

In cooperation with our lenders, we have granted our surety a secured
interest in assets such as receivables, costs incurred in excess of billings,
and equipment specifically identifiable to projects for which bonds are
outstanding as collateral for potential obligations under bonds. As of September
30, 2003, the amount of these assets was approximately $42.6 million. We have
also posted a $5 million letter of credit as collateral for potential
obligations under bonds.

36

Surety market conditions are currently difficult as a result of significant
losses incurred by many sureties in recent periods, both in the construction
industry as well as in certain larger corporate bankruptcies. As a result, less
bonding capacity is available in the market and terms have become more
restrictive. Further, under standard terms in the surety market, sureties issue
bonds on a project-by-project basis, and can decline to issue bonds at any time.
Historically, approximately 25% of our business has required bonds. While we
have enjoyed a longstanding relationship with our surety, current market
conditions as well as changes in our surety's assessment of our operating and
financial risk could cause our surety to decline to issue bonds for our work. If
that were to occur, our alternatives include doing more business that does not
require bonds, posting other forms of collateral for project performance such as
letters of credit or cash, and seeking bonding capacity from other sureties. We
would likely also encounter concerns from customers, suppliers and other market
participants as to our creditworthiness. While we believe our general operating
and financial performance would enable us to ultimately respond effectively to
an interruption in the availability of bonding capacity, such an interruption
would likely cause our revenues and profits to decline in the near term.

Amounts Outstanding, Capacity and Maturities -- Apart from the Term Loan,
our available credit capacity under the Facility is governed by the nominal
limits of the Facility, and by calculated limits based on the leverage and fixed
charge coverage covenants described above. Available credit capacity is limited
to the most restrictive of these measures. The nominal limits are in effect at
all times. The leverage provision limits borrowings that can be outstanding at
month end. The fixed charge provision limits amounts that can be outstanding at
month end, or at any other time that GE requests that this covenant be measured.
Even though available credit capacity under the leverage provision is only
measured at month end, it is presented below because it is the most restrictive
of these limitations as of recent month ends. Available capacity under the
Revolving Loan can be greater than the amount below on an intra-month basis.

The following recaps the Company's debt amounts outstanding and capacity
(in thousands):

37

The following recaps the future maturities of this debt along with other
contractual obligations. Debt maturities in this recap are based on amounts
outstanding as of November 7, 2003 while operating lease maturities are based on
amounts outstanding as of September 30, 2003 (in thousands).

As of September 30, 2003, we also have $19.7 million of letter of credit
commitments, of which $19.2 million expire in 2003 and the remaining $0.5
million expire in 2004.

Outlook -- As noted above, we have generated positive free cash flow in
most recent periods, and we currently have a moderate level of debt. We
anticipate that free cash flow from operations and credit capacity under the
Facility will provide us with sufficient liquidity to fund our operations for
the foreseeable future. However, we do not have a significant amount of excess
credit capacity under our current credit facility in comparison to expected
working capital requirements over the next year. In addition, as described
above, the financial covenants under our current facility leave only moderate
room for variance based on our recent performance. Also as described above, we
are in the process of refinancing our current facility with a new facility with
more flexible terms and more available credit capacity than our current
facility. We expect to complete this refinancing during the fourth quarter,
although there can be no guarantee that we will be successful in doing so.

If we do not complete the refinancing on which we are currently working,
and we again violate a covenant or we encounter borrowing limitations under our
current facility, we may have to negotiate new borrowing terms under our current
facility or obtain new financing. We believe that our levels of debt in
comparison to our EBITDA and our cash flows would enable us to obtain new
financing if necessary, but there can be no assurance that we would be
successful in doing so.

We currently have $19.1 million in letters of credit outstanding, against a
limit of $20 million under the Facility. We self-insure a significant portion of
our worker's compensation, auto liability and general liability risks. We use
third parties to manage this self-insurance and to retain some of these risks.
As is customary under such arrangements, these third parties require letters of
credit as security for amounts they fund or risks they might potentially absorb
on our behalf. Under our current self-insurance arrangements, we have posted
$13.2 million in letters of credit. In connection with our renewal of our self-
insurance program as of November 1, 2003, we must post an additional $4.1
million in letters of credit as follows: $0.5 million in November, 2003, $0.5
million in February, 2004, $1.0 million in May, 2004, and $2.1 million in
August, 2004. If we are unable to retire any of our other outstanding letters of
credit, or if we receive other letter of credit requests in the ordinary course
of business, then our letter of credit needs will exceed the letter of credit
capacity limit under the Facility not later than February, 2004. The new senior
credit facility on which we are working, as described above, would provide
sufficient letter of credit capacity to meet our expected letter of credit
needs. If we do not complete this new facility, then we may have to seek
additional letter of credit capacity or post different forms of security such as
bonds or cash in lieu of letters of credit. We believe that our levels of debt
in comparison to our EBITDA and our cash flows would enable us to obtain
additional letter of credit capacity or to otherwise meet financial security

38

requirements of third parties if necessary, but there can be no assurance that
we would be successful in doing so.

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 (the first quarter of the year) 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, we expect our revenues
and operating results generally will be lower in the first and fourth calendar
quarters.

Historically, the construction industry has been highly cyclical. As a
result, our volume of business may be adversely affected by declines in new
installation projects in various geographic regions of the United States.

NEW ACCOUNTING PRONOUNCEMENTS

In July 2002, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 146, "Accounting for
Costs Associated with Exit or Disposal Activities" ("SFAS No. 146"). SFAS No.
146 addresses financial accounting and reporting for costs associated with exit
or disposal activities, such as restructurings, involuntarily terminating
employees, and consolidating facilities, where those activities were initiated
after December 31, 2002. The implementation of SFAS No. 146 does not require the
restatement of previously issued financial statements. See Note 5 of the
Consolidated Financial Statements for a discussion of restructuring charges
recorded during 2003 in accordance with SFAS No. 146.

In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation -- Transition and Disclosure" ("SFAS 148"). SFAS 148 amends FASB
Statement No. 123, "Accounting for Stock-Based Compensation" ("SFAS 123") to
provide alternative methods of transition for a voluntary change to the fair
value-based method of accounting for stock-based employee compensation. In
addition, SFAS 148 amends the disclosure requirements of SFAS 123 to require
prominent disclosures in both annual and interim financial statements of the
method of accounting for stock-based employee compensation and the effect of the
method used on reported results. SFAS 148 is effective for fiscal years ending
after December 15, 2002. We adopted the footnote disclosure provisions in the
fourth quarter of 2002.

In January 2003, the FASB issued Interpretation No. 46, "Consolidation of
Variable Interest Entities" ("FIN 46"). FIN 46 expands upon and strengthens
existing accounting guidance that addresses when a company should include in its
financial statements the assets, liabilities and activities of another entity. A
variable interest entity is a corporation, partnership, trust, or any other
legal structure used for business purposes that either (a) does not have equity
investors with voting rights or (b) has equity investors that do not provide
sufficient financial resources for the entity to support its activities. FIN 46
requires a variable interest entity to be consolidated by a company if that
company is subject to a majority of the risk of loss from the variable interest
entity's activities or is entitled to receive a majority of the entity's
residual returns or both. FIN 46 is effective for all new variable interest
entities created or acquired after January 31, 2003. For variable interest
entities created or acquired prior to February 1, 2003, the provisions of FIN 46
must be applied for the first interim or annual period ending after December 15,
2003. Our preliminary assessment is that the adoption of FIN 46 will not have a
significant effect on our consolidated financial condition or results of
operations. However, our evaluation of this impact is not yet complete, and
therefore, could change.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

We are exposed to market risk primarily related to potential adverse
changes in interest rates. Management is actively involved in monitoring
exposure to market risk and continues to develop and
39

utilize appropriate risk management techniques. In January 2003, we converted
$10 million of our Term Loan to a fixed rate of 5.62% for an eighteen-month
term. This was done via a transaction known as a "swap" under which we agree to
pay fixed LIBOR-based interest rate payments on $10 million for eighteen months
to a bank in exchange for receiving from the bank floating LIBOR-based interest
rate payments on $10 million for the same term. This transaction is a derivative
and qualifies for hedge accounting treatment. We are 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.

ITEM 4. CONTROLS AND PROCEDURES

Within 90 days before the date of this report on Form 10-Q, under the
supervision and with the participation of our management, including our Chairman
of the Board and Chief Executive Officer (our principal executive officer) and
our Chief Financial Officer (our principal financial officer), we evaluated the
effectiveness of our disclosure controls and procedures (as defined under Rule
13a-14(c) of the Securities Exchange Act of 1934, as amended (the "Exchange
Act")). Based on this evaluation, our Chairman of the Board and Chief Executive
Officer and our Chief Financial Officer believe that our disclosure controls and
procedures are effective to ensure that information we are required to disclose
in the reports that we file or submit under the Exchange Act fairly represents,
in all material respects, our financial condition, results of operations and
cash flows.

There were no significant changes in our internal controls or in other
factors that could significantly affect these controls subsequent to the date of
such evaluation.

40

COMFORT SYSTEMS USA, INC.

PART II -- OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

The Company is subject to certain claims and lawsuits arising in the normal
course of business and maintains various insurance coverages to minimize
financial risk associated with these claims. The Company has estimated and
provided accruals for probable losses and legal fees associated with certain of
these actions in its consolidated financial statements. In the opinion of
management, uninsured losses, if any, resulting from the ultimate resolution of
these matters will not have a material adverse effect on the Company's financial
position or results of operations.

ITEM 2. RECENT SALES OF UNREGISTERED SECURITIES

None.

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

(a) Exhibits

10.1 Employment Agreement dated as of June 14, 2002 by and among
Comfort Systems USA (Texas), L.P. and Thomas N. Tanner.
(Filed herewith).
10.2 Form of Amendment No. 5, Limited Waiver and Limited Consent,
dated as of November 12, 2003 by and among the Company, the
other credit parties, and General Electric Capital
Corporation, as Agent for the Lenders. (Filed herewith).
31.1 Certification of William F. Murdy pursuant to Section 302 of
the Sarbanes-Oxley Act Of 2002. (Filed herewith).
31.2 Certification of J. Gordon Beittenmiller pursuant to Section
302 of the Sarbanes-Oxley Act Of 2002. (Filed herewith).
32.1 Certification of William F. Murdy, pursuant to Section 1350,
Chapter 63 of Title 18, United States Code, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act Of 2002.
(Filed herewith).
32.2 Certification of J. Gordon Beittenmiller, pursuant to
Section 1350, Chapter 63 of Title 18, United States Code, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act Of
2002. (Filed herewith).

(b) Reports on Form 8-K

(i) The Company filed a report on Form 8-K with the Securities and Exchange
Commission on August 6, 2003. Under Item 7 of that report the Company announced
that on August 5, 2003, the Company issued a press release, reporting Comfort's
financial results for the second quarter of 2003.

41

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.

COMFORT SYSTEMS USA, INC.

/s/ WILLIAM F. MURDY
--------------------------------------
William F. Murdy
Chairman of the Board and
Chief Executive Officer

November 12, 2003

/s/ J. GORDON BEITTENMILLER
--------------------------------------
J. Gordon Beittenmiller
Executive Vice President,
Chief Financial Officer and Director

November 12, 2003

42

INDEX TO EXHIBITS

10.1 Employment Agreement dated as of June 14, 2002 by and among
Comfort Systems USA (Texas), L.P. and Thomas N. Tanner.
(Filed herewith).
10.2 Form of Amendment No. 5, Limited Waiver and Limited Consent,
dated as of November 12, 2003 by and among the Company, the
other credit parties, and General Electric Capital
Corporation, as Agent for the Lenders. (Filed herewith).
31.1 Certification of William F. Murdy pursuant to Section 302 of
the Sarbanes-Oxley Act Of 2002. (Filed herewith).
31.2 Certification of J. Gordon Beittenmiller pursuant to Section
302 of the Sarbanes-Oxley Act Of 2002. (Filed herewith).
32.1 Certification of William F. Murdy, pursuant to Section 1350,
Chapter 63 of Title 18, United States Code, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act Of 2002.
(Filed herewith).
32.2 Certification of J. Gordon Beittenmiller, pursuant to
Section 1350, Chapter 63 of Title 18, United States Code, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act Of
2002. (Filed herewith).