SCHEDULE 14A
(RULE 14a-101)
INFORMATION REQUIRED IN PROXY STATEMENT
SCHEDULE 14A INFORMATION
PROXY STATEMENT PURSUANT TO SECTION 14(a) OF THE SECURITIES
EXCHANGE ACT OF 1934 (AMENDMENT NO. )
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[ ] Confidential, for Use of the Commission Only (as permitted by Rule
14a-6(e)(2))
[ ] Definitive Proxy Statement
[ ] Definitive Additional Materials
[ ] Soliciting Material Pursuant to Rule 14a-12
Comfort Systems USA, Inc.
(Name of Registrant as Specified in its Charter)
(Name of Person(s) Filing Proxy Statement, if Other Than the Registrant)
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and 0-11.
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was paid previously. Identify the previous filing by registration
statement number, or the Form or Schedule and the date of its filing.
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COMFORT SYSTEMS USA, INC.
777 POST OAK BOULEVARD, SUITE 500
HOUSTON, TEXAS 77056
April , 2003
To Our Stockholders:
You are cordially invited to attend the annual meeting of the stockholders
of Comfort Systems USA, Inc., which will be held on Thursday, May 22, 2003 at
the Sheraton Suites, 2400 West Loop South, Houston, Texas, 77027, at 11:00 a.m.
At this meeting stockholders are being asked to elect three Class III
directors, to approve an amendment to the Certificate of Incorporation to end
the classification of our Board and provide for the annual election of
directors, and to vote on one stockholder proposal.
Please read the proxy statement, which describes the proposals to be voted
on and also presents other important information. When you have finished reading
the statement, please promptly mark, sign, and return your proxy card in the
enclosed envelope so that your shares will be represented.
We hope that many of you will be able to attend the meeting in person. I
look forward to seeing you there.
Sincerely yours,
/s/ WILLIAM F. MURDY
WILLIAM F. MURDY
Chairman of the Board, and
Chief Executive Officer
COMFORT SYSTEMS USA, INC.
777 POST OAK BOULEVARD, SUITE 500
HOUSTON, TEXAS 77056
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD MAY 22, 2003
Notice is hereby given that the 2003 Annual Meeting of Stockholders (the
"Meeting") of Comfort Systems USA, Inc. (the "Company") will be held at Sheraton
Suites, 2400 West Loop South, Houston, Texas, 77027, at 11:00 a.m., on Thursday,
May 22, 2003 for the following purposes:
1. To elect three Class III directors to serve until the 2006 Annual
Meeting of Stockholders.
2. To approve a proposal to amend the Certificate of Incorporation to
eliminate the classification of the Board of Directors.
3. To vote on a stockholder proposal.
4. To transact any other business that may properly come before the
meeting.
Stockholders of record at the close of business on April 8, 2003 are
entitled to notice of and to vote at the Meeting. A list of stockholders
entitled to vote at the Meeting will be open to examination by stockholders at
the Meeting and during normal business hours from May 1, 2003 to the date of the
Meeting at the principal executive offices of the Company located at 777 Post
Oak Boulevard, Suite 500, Houston, Texas 77056.
If you are unable to attend, please sign and date the enclosed proxy and
return it promptly in the enclosed envelope.
By Order of the Board of Directors
/s/ WILLIAM GEORGE
WILLIAM GEORGE
Senior Vice President, General Counsel
and Secretary
April , 2003
IT IS IMPORTANT THAT YOUR STOCK BE REPRESENTED AT THE MEETING. PLEASE SIGN AND
RETURN THE ENCLOSED PROXY CARD AS PROMPTLY AS POSSIBLE WHETHER OR NOT YOU PLAN
TO ATTEND THE MEETING IN PERSON.
COMFORT SYSTEMS USA, INC.
---------------------
ANNUAL MEETING OF STOCKHOLDERS
MAY 22, 2003
---------------------
PROXY STATEMENT
The Annual Report to Stockholders, which includes the Company's Annual
Report on Form 10-K for the Company's fiscal year ended December 31, 2002,
accompanies this proxy statement. This proxy statement and the enclosed proxy
are being mailed to stockholders on or about April , 2003.
The enclosed proxy is solicited by and on behalf of the Board of Directors
of Comfort Systems USA, Inc. (the "Company"), to be voted at the Annual Meeting
of Stockholders (the "Meeting") to be held at Sheraton Suites, 2400 West Loop
South, Houston, Texas, 77027, at 11:00 a.m. on Thursday, May 22, 2003, and at
any adjournments thereof. A proxy may be revoked by a stockholder at any time
before it is voted by (i) returning to the Company another properly signed proxy
bearing a later date, (ii) delivering a written revocation to the Secretary of
the Company or (iii) attending the Meeting or any adjourned session thereof and
voting the shares covered by the proxy in person. Shares represented by the
enclosed form of proxy properly executed and returned, and not revoked, will be
voted at the Meeting by the person named in the proxy for the proposals set
forth below.
The Company will pay the expense of soliciting proxies. In addition to the
solicitation of proxies by use of the mails, the Company may use the services of
its officers and regular employees as well as brokerage houses and other
stockholders to solicit proxies personally and by mail and telephone. The
Company will reimburse brokers and other persons for their reasonable charges
and expenses in forwarding soliciting materials to their principals. Officers
and employees of the Company will receive no compensation in addition to their
regular salaries to solicit proxies.
The holders of record of shares of the common stock, $.01 par value per
share (the "Common Stock"), and of the restricted common stock, $.01 par value
per share (the "Restricted Common Stock"), of the Company at the close of
business on April 8, 2003 (the "Record Date") are entitled to receive notice of
and to vote at the Meeting. As of the Record Date, the Company had issued and
outstanding 36,795,882 shares of Common Stock and 1,127,612 shares of Restricted
Common Stock, for a total of 37,923,494 shares outstanding. Each share of Common
Stock is entitled to one vote on each matter before the Meeting, except for the
election of one director designated to be elected solely by holders of the
Restricted Common Stock. Each share of Restricted Common Stock is entitled to
..55 of one vote on each matter before the Meeting; except that holders of
Restricted Common Stock are not eligible to vote for any directors other than
the one Class II director designated to be elected by them and who is not being
presented for election this year.
Consistent with Delaware law and the Company's Bylaws, a majority of the
voting power of shares entitled to be cast on a particular matter, present in
person or represented by proxy, constitutes a quorum as to such matter. Votes
cast by proxy or in person at the meeting will be counted by two persons
appointed by the Company to act as election inspectors for the meeting. In the
absence of contrary instructions, the persons named as proxies will vote FOR all
nominees listed in Proposal 1, FOR Proposal 2 and AGAINST Proposal 3.
Unless they receive instruction from you, brokers and nominees who hold
shares in street name, upon meeting the requirements of the New York Stock
Exchange rules, may vote your shares of our common stock in connection with
Proposals 1 and 2. However, in accordance with New York Stock Exchange rules,
brokers and nominees who hold shares in street name for customers may not
exercise their voting discretion with respect to Proposal 3. As a result, absent
specific instructions from the beneficial owner of these shares, brokers and
nominees may not vote such shares with respect to the approval of Proposal 3.
This lack of voting is referred to as a "broker non-vote."
The three nominees for election as Class III directors receiving the
greatest number of votes properly cast at the annual meeting will be elected. An
abstention from or a failure to vote in the election will have no effect on the
election except to the extent the total votes received by any particular nominee
is affected.
The affirmative vote of a majority of the outstanding votes properly cast
is required to approve the amendment to the certificate of incorporation. As a
result, an abstention from or a failure to vote on the amendment will have the
effect of a vote against the amendment.
PROPOSAL NUMBER 1
ELECTION OF CLASS III DIRECTORS
The Board of Directors is divided into three classes, as nearly equal in
number as possible, with each class serving a three-year term. At each Annual
Meeting of Stockholders, one class of directors will be elected for a full term
of three years to succeed that class of directors whose terms are expiring. The
terms of the current Class I and II directors expire at the Annual Meeting of
Stockholders in 2004 and 2005, respectively. All officers serve at the
discretion of the Board of Directors.
The three nominees for election at the 2003 Annual Meeting of Stockholders
as Class III Directors are Norman C. Chambers, Vincent J. Costantini, and Alfred
J. Giardinelli (collectively the "Nominees"). The Nominees presently serve as
the three directors designated as Class III directors and their current terms
expire at the Meeting. The enclosed proxy cannot be voted for more than three
persons by holders of Common Stock.
If elected, each nominee would serve for a term of three years expiring at
the 2006 Annual Meeting of Stockholders, and until his or her respective
successor is elected and qualified to serve. It is expected that all of the
Nominees will be able to serve, but if any Nominee is unable to serve, the
proxies reserve discretion to vote, or refrain from voting, for a substitute
nominee.
NOMINEES
Set forth below is certain information concerning each of the Nominees:
NORMAN C. CHAMBERS, 53
Director and President
Norman C. Chambers has been a director and President of the Company since
November 2002, and has also served as Chief Operating Officer since February
2003. Prior to joining the Company, Mr. Chambers was Chief Operating Officer of
Capstone Turbine Corporation, a distributive generation technology company. From
April 2000 to September 2001, Mr. Chambers served as President and Chief
Executive Officer of Petrocosm Corporation, a privately held e-commerce business
serving as a procurement portal for the energy industry. From June 1985 to April
2000, Mr. Chambers served in various positions with the Halliburton Companies.
His responsibilities included construction, service, and business development at
the Halliburton Company, including President of Halliburton Energy Development,
Senior Vice President of the Halliburton Company and Managing Director of Brown
& Root. Mr. Chambers is a graduate of Springfield College and the Graduate
School of Business at Boston College.
VINCENT J. COSTANTINI, 46
Director
Vincent J. Costantini is a Class III director of the Company. Mr.
Costantini is founder and managing partner of Roseview Capital Partners LLC, a
real estate, merchant banking and investment advisory company. Prior to forming
Roseview Capital Partners, from March to December 2000 Mr. Costantini served as
Partner and Group Chief Executive Officer of The O'Neill Companies, one of the
largest privately held commercial real estate development firms in the nation.
Prior to joining The O'Neill Companies, he served as a member of the management
committee of Lend Lease Real Estate Investments Inc., the largest real estate
investment advisor in the world, following their purchase of Boston Financial.
From 1995 to the first quarter of 2000,
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Mr. Costantini was President and Chief Operating Officer of Boston Financial.
Prior to that time Mr. Costantini served as Chief Financial Officer and head of
acquisitions for General Investment & Development Co., a privately held real
estate operating company. Mr. Costantini is a graduate of St. Joseph's
University.
ALFRED J. GIARDINELLI, JR., 55
Director
Alfred J. Giardinelli, Jr. is a Class III director of the Company. He has
been the President of Eastern Heating & Cooling, Inc., a New York corporation
that is a wholly owned subsidiary of the Company, since 1982, and has been a
director of the Company since 1997. Mr. Giardinelli is a graduate of Florida
State University.
OTHER DIRECTORS
Following is certain information concerning each of the other persons who
currently serve as directors. Messrs. Murdy, Bulls and Schultz serve as Class I
directors whose terms expire in 2004. Messrs. Beittenmiller, Wagner and Harter
serve as Class II directors whose terms expire in 2005.
WILLIAM F. MURDY, 61
Director, Chairman of the Board and Chief Executive Officer
William F. Murdy is a Class I director of the Company. Mr. Murdy, has
served as Chairman of the Board and Chief Executive Officer of Comfort Systems
since June 2000. Prior to joining the Company he served as Interim President and
Chief Executive Officer of Club Quarters, a privately owned chain of membership
hotels. From January 1998 through July 1999, Mr. Murdy served as President,
Chief Executive Officer and Chairman of the Board of LandCare USA, a publicly
traded commercial landscape and tree services company. He was primarily
responsible for the organization of LandCare USA and its listing as a publicly
traded company on the New York Stock Exchange in July 1998. LandCare USA was
acquired in July 1999 by another publicly traded company specializing in
services to homeowners and commercial facilities. From 1989 through December
1997, Mr. Murdy was President and Chief Executive Officer of General Investment
& Development Co., a privately held real estate operating company. From 1981 to
1989, Mr. Murdy served as the Managing General Partner of the Morgan Stanley
Venture Capital Fund. From 1974 to 1981, Mr. Murdy served as the Senior Vice
President and Chief Operating Officer, among other positions, of Pacific
Resources, Inc., a publicly traded company involved primarily in petroleum
refining and marketing. Mr. Murdy also serves as director of UIL Holdings Corp.
Mr. Murdy is a graduate of the United States Military Academy at West Point and
of the Harvard Business School.
J. GORDON BEITTENMILLER, 44
Director, Chief Financial Officer and Executive Vice President
J. Gordon Beittenmiller, has served as Executive Vice President, Chief
Financial Officer and a director of Comfort Systems since May 1998, and was
Senior Vice President, Chief Financial Officer and a director of Comfort Systems
from February 1997 to April 1998. From 1994 to February 1997, Mr. Beittenmiller
was Corporate Controller of Keystone International, Inc. ("Keystone"), a
publicly traded manufacturer of industrial valves and actuators, and served
Keystone in other financial positions from 1991 to 1994. From 1987 to 1991, he
was Vice President -- Finance of Critical Industries, Inc., a publicly traded
manufacturer and distributor of specialized safety equipment. From 1982 to 1987,
he held various positions with Arthur Andersen LLP. Mr. Beittenmiller is a
Certified Public Accountant. Mr. Beittenmiller is a graduate of The Pennsylvania
State University.
HERMAN E. BULLS, 47
Director
Herman E. Bulls is a Class I director of the Company. Since September 2001,
Mr. Bulls has served as Chief Executive Officer and President of Bulls Advisory
Group, a real estate consulting and advisory firm, and serves as Managing
Director and Chief Executive Officer Public Institutions of Jones Lang LaSalle,
an
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international full service real estate firm. From September 2000 until August
2001, Mr. Bulls served as Executive Vice President and Chief Operating Officer
of Green Park Financial, one the nation's largest Fannie Mae multi-family
lenders. From March 1998 to September 2000, Mr. Bulls was a Managing Director
for Jones Lang LaSalle, an international full service real estate firm. From
1989 until 1998 he held several positions with the predecessor organization,
LaSalle Partners. Prior to his employment with Jones Lang LaSalle he served over
eleven years of active duty service with the United States Army. Mr. Bulles
currently holds the rank of Colonel in the Army reserve. Mr. Bulls is a graduate
of the United States Military Academy at West Point and of the Harvard Business
School.
STEVEN S. HARTER, 40
Director
Steven S. Harter has been a director of the Company since December 1996 and
is the Class II director elected by the holders of the Restricted Common Stock.
Mr. Harter is Chairman and President of Notre Capital Ventures III, LLC
("Notre"), a consolidator of highly fragmented industries. Prior to becoming
President of Notre, Mr. Harter was President of Notre Capital Ventures II, LLC
from August 1995 to March 1999, and Senior Vice President of Notre Capital
Ventures, Ltd. from June 1993 through July 1995. From April 1989 to June 1993,
Mr. Harter was Director of Mergers and Acquisitions for Allwaste, Inc. From May
1984 to April 1989, Mr. Harter was a certified public accountant with Arthur
Andersen LLP. Mr. Harter is a graduate of Mount Union College.
JAMES H. SCHULTZ, 54
Director
James H. Schultz is a Class I director of the Company. He retired from the
American Standard Companies in 2001, where he had worked for 31 years. Mr.
Schultz had been President of the Trane Commercial Air Conditioning Group, a
division of the American Standard Companies, since 1998 and prior to that time
he had served in various other capacities, including Executive Vice President.
Mr. Schultz has been Chair and a Board member of the Air Conditioning and
Refrigeration Institute. Mr. Schultz is a graduate of Iowa State University.
ROBERT D. WAGNER, JR., 61
Director
Robert D. Wagner, Jr. is a Class II director of the Company. From May 1999
to March 2001, he served as a Managing Director of Arthur Andersen's Global
Energy Corporate Finance Group. Prior to joining Arthur Andersen, from July 1998
to April 1999 Mr. Wagner was a Managing Director and Partner of M2 Capital
Partners, a merchant banking firm specializing in private equity investment and
financial advisory with the exploration and production sector. From 1989 to June
1998, Mr. Wagner was a Managing Director of Bankers Trust/BT Alex Brown in their
Energy Corporate Finance Group. Prior to his employment with Bankers Trust/BT
Alex Brown, Mr. Wagner was Executive Vice President of First City National Bank
of Houston's energy division, and later, the special loans division. Mr. Wagner
also serves as director of Blue Dolphin Energy Company and Electric City
Corporation. Mr. Wagner is a graduate of Holy Cross College and the Graduate
School of Business at New York University.
BOARD OF DIRECTORS AND COMMITTEES
During the year ended December 31, 2002, the Board of Directors of the
Company held four meetings. Each director attended at least 75% of the meetings
of the Board and the Board Committees of which he is a member that took place
during his term of office.
The Board of Directors has established an Audit Committee, a Compensation
Committee, a Finance Committee, a Governance and Nominating Committee and Equity
Plans Committee. The members of the Audit Committee are Messrs. Costantini,
Bulls, Harter and Wagner. The members of the Compensation Committee are Messrs.
Bulls, Costantini, Harter, and Schultz. The members of the Finance Committee are
Messrs. Murdy, Beittenmiller, Harter and Wagner. The members of the Governance
and Nominating
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Committee are Messrs. Wagner, Bulls, and Costantini. The members of the Equity
Plans Committee are Messrs. Bulls, Costantini and Schultz. None of the Audit or
Compensation Committee members is an executive officer or employee of the
Company, nor has any been such at any time while serving on those committees.
The Audit Committee, which held six meetings during 2002, reviews with
management and the independent public accountants the Company's annual financial
statements, the scope of the audit, any comments made by the independent public
accountants and such other matters as the Audit Committee deems appropriate. In
addition, the Audit Committee reviews the performance and retention of the
Company's independent auditors and reviews with management such matters relating
to compliance with corporate policies, as the Audit Committee deems appropriate.
Each member of the Audit Committee is "independent" as defined in Sections
303.01(B)(2)(a) and (3) of The New York Stock Exchange's listing standards. In
addition, each member of the Audit Committee is financially literate, as
determined by our Board of Directors in its business judgment. Also, Messrs.
Costantini, Harter and Wagner have accounting or related financial management
expertise, as determined by our Board of Directors in their business judgment.
The Board of Directors has adopted a written charter for the Audit Committee,
which is attached as Exhibit A to this proxy statement. The Audit Committee
reviews and reassesses the adequacy of its charter every year, and it has done
so for 2002.
The Compensation Committee, which held five meetings during 2002,
establishes and administers the Company's executive compensation program and
reviews and advises the Board of Directors with respect to major organizational
changes, leadership development and leadership succession issues. The Committee
establishes and regularly reviews the compensation levels of executive officers
and other key managers, and reviews incentive awards.
The Finance Committee, which held one meeting during 2002, is empowered by
the Board to consult with management and give guidance to the Board on all
matters pertaining to the Company's capital structure.
The Governance and Nominating Committee, which held no formal meetings
during 2002, is empowered by the Board to evaluate the structure and membership
of the Board, evaluate new members as appropriate with an emphasis on diversity
of viewpoint and background, review the compensation structure and meeting
frequency and content, and to make recommendations to the Board on all such
matters. Stockholders may contact the Committee in care of the Company's General
Counsel's office with suggestions regarding governance or board membership.
Directors are nominated or elected by the Board of Directors, and Stockholders
may nominate directors in conformity with the Bylaws and as set forth hereafter
under the caption "Stockholder Proposals".
The Equity Plans Committee, which is responsible for approving equity
grants under the Company's equity incentive plans, held no formal meetings
during 2002.
DIRECTOR COMPENSATION
Directors who are also employees of the Company or one of its subsidiaries
are not entitled to receive additional compensation for serving as directors.
Each director who is not an employee of the Company or one of its subsidiaries
receives a quarterly retainer of $2,500 ($3,000 for the Audit Chair). The
meeting attendance fees are $2,000 for attendance at each Board of Directors
meeting, $1,000 for each committee meeting (unless held on the same day as a
Board of Directors meeting), and $500 for each telephonic meeting or telephonic
attendance at a meeting. Directors are also reimbursed for out-of-pocket
expenses incurred in attending meetings of the Board of Directors or committees
thereof. Beginning April 1, 2003, consistent with certain voluntary salary
reductions taken by the senior management of the Company in light of difficult
economic and industry conditions, the Board reduced all of its fees and retainer
compensation by 12.5%.
In addition, the Company's 1997 Non-Employee Directors' Stock Plan, as
amended (the "Directors' Plan"), which was adopted by the Board of Directors and
approved by the Company's stockholders in March 1997, and which was amended on
May 23, 2002, currently provides for (i) the automatic grant to each non-
employee director of an option to purchase 10,000 shares upon such person's
initial election as a director and
5
(ii) an automatic annual grant to each non-employee director of an option to
purchase 10,000 shares at each annual meeting of stockholders thereafter at
which such director is re-elected or remains a director, unless such annual
meeting is held within three months of such person's initial election as a
director. All options have an exercise price per share equal to the fair market
value of the Common Stock on the date of grant, are immediately vested and
expire on the earlier of ten years from the date of grant or one year after
termination of service as a director. The Directors' Plan also permits
non-employee directors to elect to receive, in lieu of cash directors' fees,
shares or credits representing "deferred shares" at future settlement dates, as
selected by the director. The number of shares or deferred shares received will
equal the number of shares of Common Stock which, at the date the fees would
otherwise be payable, will have an aggregate fair market value equal to the
amount of such fees. Of the 500,000 shares of Common Stock available under the
Directors' Plan, 315,000 shares remained available as of the date of this proxy
statement.
The three nominees for election as Class III directors receiving the
greatest number of votes properly cast on behalf of holders of Common Stock for
the election of directors at the Meeting will be elected. The persons named in
the enclosed proxy intend to vote each share as to which a proxy has been
properly executed and returned (and not revoked) in favor of the election as a
Class III director of each of the nominees named below, unless authority to vote
for the election of any of such nominees is withheld by marking the proxy to
that effect. The election inspectors will count shares of Common Stock
represented by proxies that withhold authority to vote for one or more nominees
for election as a director only as shares that are present and entitled to vote
on the matter for purposes of determining the presence of a quorum, but
withholding authority to vote for one or more nominees will not have any effect
on the outcome of voting on this proposal.
THE BOARD OF DIRECTORS RECOMMENDS ELECTION OF THE NOMINEES
DESCRIBED IN PROPOSAL NUMBER 1.
PROPOSAL NUMBER 2
AMENDMENT TO CERTIFICATE OF INCORPORATION
ELIMINATING THE CLASSIFICATION OF THE BOARD OF DIRECTORS
Article Five of the Company's Certificate of Incorporation provides for the
classification of the Board of Directors into three classes, with each class
being elected every three years, and contains provisions relating to such
classification concerning the filling of Director vacancies and the removal of
Directors. The Board of Directors has determined that the Certificate of
Incorporation should be amended to repeal these provisions of Article Five and
to make certain conforming changes as appropriate, and has unanimously adopted a
resolution approving the amendment, declaring its advisability and recommending
such amendment to our stockholders.
If the proposed amendment is approved by our stockholders, the classified
Board will be eliminated, the current term of office of each Director will end
at the 2004 Annual Meeting of Stockholders, and Directors will thereafter be
elected for one-year terms at each Annual Meeting of Stockholders. Furthermore,
any Director chosen as a result of the newly created directorship or to fill a
vacancy on the Board of Directors will hold office until the next Annual Meeting
of Stockholders.
A classified board of directors has the effect of making it more difficult
for a substantial stockholder to gain control of a board of directors without
the approval or cooperation of incumbent directors and therefore may deter
unfriendly and unsolicited takeover proposals and proxy contests. On the other
hand, a classified board of directors makes it more difficult for stockholders
to change a majority of directors even where a majority of stockholders are
dissatisfied with the performance of incumbent directors. Many institutional
investors believe that the election of directors is the primary means for
stockholders to influence corporate governance policies and to hold management
accountable for implementing these policies.
The Board of Directors examined the arguments for and against continuation
of the classified Board and determined that the classified Board should be
eliminated. The Board believes that all Directors should be equally accountable
at all times for the Company's performance and that the will of the majority of
stockholders should not be impeded by a classified board.
6
The proposed amendment will allow stockholders to review and express their
opinions on the performance of all Directors each year. Because there is no
limit to the number of terms an individual may serve, the continuity and
stability of the Board's membership and our policies and long-term strategic
planning should not be affected.
The text of the proposed amendment to the Certificate of Incorporation is
attached as Exhibit B to this Proxy Statement.
THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS A VOTE "FOR" THE APPROVAL
OF PROPOSAL NUMBER 2 TO ELIMINATE THE CLASSIFICATION OF THE BOARD OF
DIRECTORS AND RELATED AMENDMENTS FOR THE CERTIFICATE OF INCORPORATION.
PROPOSAL NUMBER 3
The Sheet Metal Workers' International Association, 1750 New York Avenue
NW, Washington, DC 20006, owner of 1,400 shares of the Company's stock as of
November 18, 2002, has given notice of its intention to introduce the following
resolution at the Annual Meeting.
TEXT OF PROPOSAL
Shareholders request the Board ensure that any performance goal for stock
awards to officers based on earnings be calculated after deductions for
interest, taxes, depreciation, and amortization, not before such deductions.
This proposal shall not affect grants previously awarded.
STOCKHOLDER'S STATEMENT IN SUPPORT OF THE PROPOSAL
The Board awarded stock to an executive using a performance goal based on
earnings before deductions for interest, taxes, depreciation, and amortization.
Our proposal asks the Board to instead look at earnings after such standard
business expenses -- for we feel the latter is a better measure of real profits.
PREVIOUS AWARDS DEMONSTRATE A NEED FOR THE PROPOSAL
In March 2002, the Board awarded Comfort Systems CEO William Murdy 200,000
shares of restricted stock, which will be free-of-charge if the company meets a
certain performance goal. However, that goal merely requires that between April
1, 2002 and March 31, 2003 the company have positive earnings from continuing
operations -- determined before deductions for interest taxes, depreciation, and
amortization. (EBITDA)
A company may show earnings before these deductions, yet experience both
substantial losses and a significant decline in shareholder equity. We believe
EBITDA is not a good measure of company profit, and is inadequate as the sole
standard for performance stock awards to executives.
PREVIOUS FINANCIAL RESULTS DEMONSTRATE A NEED FOR THE PROPOSAL
Comfort Systems' 2000 results demonstrate the problem of using EBITDA as a
measure of company performance. The company had a gross profit after deductions
for SGA of $58.4 million.
However, the company actually lost $16.9 million because of the following
charges:
- $12.6 million: goodwill amortization
- $25.3 million: restructuring charges
- $25.6 million: other expense net [all the costs in this item were
interest]
- $5.9 million: reductions in non-operating assets and liabilities
- $5.8 million: taxes
7
The loss was reflected in a 67% drop in shareholder equity for the year.
- The average closing stock price for March 2000 [the month in which annual
results for 1999 were reported] was $7.57
- The average closing stock price for March 2001 [the month in which annual
results for 2000 were reported] was $2.50
However, even with a loss of $16.9 million and a 67% drop in shareholder
equity, the results for that year would meet the performance goal established by
the Board for the current CEO William Murdy to receive 200,000 shares.
COMPENSATION COMMITTEE PHILOSOPHY
The Compensation Committee stated in the 2001 proxy that the company's
executive compensation program
- "is designed to provide advantageous levels of incentives and stock-based
returns as the Company improves its profitability."
The committee also stated that stock options awards
- "are the primary tool that the committee employs to align the long-term
financial incentives of its executive officers with those if its
shareholders'
We wish both statements were true. However, we do not believe that stock
awards based on earnings calculated before deductions for such standard business
expenses can accomplish these goals.
WE URGE A YES VOTE ON THE PROPOSAL
BOARD OF DIRECTORS' STATEMENT IN OPPOSITION TO THE PROPOSAL
The Board believes that earnings before interest, taxes, depreciation and
amortization ("EBITDA") is an appropriate measure for executive performance
because it is a valuable metric to determine the capacity of the Company's
operating entities to generate cash. This is important because cash is the
critical element by which the Company has reduced debt, in the past, and by
which the Company will invest in, and grow, its operating entities, in the
future. This process results in the growth of net earnings, retained equity,
and, most importantly, of shareholder value.
The Board notes that the Company's senior lenders (past and present) have
insisted upon minimum EBIDTA covenants in every credit agreement since the
Company was formed. In fact, such covenants are now and have always been the
primary determinant of debt covenant compliance and borrowing availability. The
Board believes that institutions and many individuals that analyze the Company's
results and prospects view EBITDA as a primary measure of the Company's
performance. The Board believes that it would not be in the interest of the
company or its stockholders to eliminate the use of a performance metric that
(i) is relied upon by its lenders and (ii) has a high correlation to cash flow
and debt reduction.
The Board feels that it is imperative that its independent compensation
committee retain the flexibility to determine the emphasis and standards for
earning compensation. Such judgment is necessary to support and induce the
difficult actions necessary for the Company to continue to grow stronger. This
proposal ignores the fact that the stock awards referenced only vest over four
years, and thus greatly enhance retention of the executive receiving the grant.
The proponent of this proposal's reference to 2000 results omits the fact that
in that year the Company achieved significant positive net cash flows and total
debt reduction of $31 million. Strengthening the balance sheet was the Board's
primary objective for that period.
The Board believes that if the Company had concentrated on reported
earnings since 2000, as the Sheet Metal Workers' International Association seems
to prefer, the Company would not have been able to reduce its total debt from
over $300 million in 2000 to under $30 million as of the end of 2003. Without
such
8
reduction, the Company would most likely be in the same dire economic
circumstances faced by a number of its more highly-leveraged competitors.
THE BOARD OF DIRECTORS THEREFORE UNANIMOUSLY RECOMMENDS
A VOTE "AGAINST" THIS STOCKHOLDER PROPOSAL.
CHANGES IN OUR CERTIFYING ACCOUNTANT
On May 23, 2002, our Audit Committee of our board of directors decided,
with the approval of our board of directors, that effective May 24, 2002 we
would no longer engage Arthur Andersen LLP as our independent public accountants
and that as of May 24, 2002 Ernst & Young LLP, certified public accountants,
would be appointed as our independent public accountants for 2002.
The reports of Arthur Andersen LLP on our consolidated financial statements
for the past two years did not contain an adverse opinion or disclaimer of
opinion, nor were they qualified or modified as to uncertainty, audit scope or
accounting principles.
During our two most recent fiscal years and through May 24, 2002, there
were no disagreements with Arthur Andersen LLP on any matter of accounting
principles or practices, financial statement disclosure, or auditing scope or
procedure which, if not resolved to Arthur Andersen LLP's satisfaction, would
have caused it to make reference thereto in connection with its report on our
consolidated financial statements for such years; and there were no reportable
events as such term is used in Item 304(a)(1)(v) of Regulation S-K.
We provided Arthur Andersen LLP with a copy of the foregoing disclosures.
Arthur Andersen's letter dated May 24, 2002, stating its agreement with such
statements was filed as Exhibit 16 to our Current Report on Form 8-K dated May
24, 2002.
During our two most recent fiscal years and through May 24, 2002, we did
not consult Ernst & Young LLP with respect to the application of accounting
principles to a specified transaction, either completed or proposed, or the type
of audit opinion that might be rendered on our consolidated financial
statements, or any other matters or reportable events as set forth in Items
304(a)(2)(i) and (ii) of Regulation S-K.
9
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information with respect to the
beneficial ownership of shares of Common Stock and Restricted Common Stock as of
April , 2003 (i) individually by the Chief Executive Officer, each of the four
other most highly paid executive officers of the Company in 2002 as named in the
Summary Compensation Table (the "Named Executive Officers") and all other
executive officers, directors and nominees of the Company and (ii) by all
executive officers and directors of the Company as a group. The following table
also sets forth certain information with respect to the beneficial ownership of
shares of Common Stock as reported on schedules filed with the Securities and
Exchange Commission ("SEC") and includes each person known to the Company to be
the beneficial owner of more than five percent of the outstanding Common Stock
or Restricted Common Stock. Except as noted below, each of the persons listed
has sole investment and voting power with respect to the shares indicated.
RESTRICTED COMMON COMMON STOCK
STOCK SHARES SHARES
BENEFICIALLY OWNED BENEFICIALLY OWNED(2)
------------------- ---------------------
NAME AND ADDRESS OF BENEFICIAL OWNER(S)(1) NUMBER PERCENT NUMBER PERCENT
------------------------------------------ -------- -------- ---------- --------
William F. Murdy(3)............................. 585,833 1.1%
Steven S. Harter(4)............................. 827,034 73.3% 95,000 *
Alfred J. Giardinelli, Jr.(5)................... 314,816 *
J. Gordon Beittenmiller(6)...................... 305,500 *
William George III(7)........................... 167,251 *
Milburn Honeycutt(8)............................ 140,649 *
Norman Chambers(9).............................. 75,000 *
David Lanphar(10)............................... 36,500 *
Herman E. Bulls(11)............................. 25,000 *
Vincent J. Costantini(11)....................... 25,000 *
Robert D. Wagner, Jr.(11)....................... 20,000 *
James Schultz(11)............................... 10,000 *
All executive officers and directors as a group
(12 persons).................................. 827,034 73.3% 1,800,549 4.7%
Dimensional Fund Advisors Inc. ................. 2,884,600 7.61%
1299 Ocean Avenue, 11th Floor
Santa Monica, CA 90401(12)
---------------
* Less than 1%.
(1) Except as noted, the address of each person is c/o Comfort Systems USA,
Inc., 777 Post Oak Boulevard, Suite 500, Houston, Texas 77056.
(2) Shares shown include shares that could be acquired upon exercise of
previously vested options, or options that vest within 60 days.
(3) Includes (i) 200,000 shares issued pursuant to a restricted stock grant,
which remain subject to tenure vesting, and (ii) 345,833 shares issuable
upon exercise of currently exercisable options.
(4) Includes 827,034 shares of Restricted Common Stock held in a partnership as
to which Mr. Harter is a general partner and 40,000 shares of Common Stock
issuable upon exercise of options granted under the Directors' Plan.
(5) Includes 1,600 shares held in a trust for Giardinelli's children.
(6) Includes 188,500 shares issuable upon exercise of currently exercisable
options.
(7) Includes 130,750 shares issuable upon exercise of currently exercisable
options.
(8) Includes 105,750 shares issuable upon exercise of currently exercisable
options.
10
(9) Reflects 75,000 shares issued pursuant to a restricted stock grant, all of
which remain subject to performance and tenure vesting.
(10) Includes 36,500 shares issuable upon exercise of currently exercisable
options.
(11) Represents shares of Common Stock issuable upon exercise of options granted
under the Directors' Plan.
(12) As stated in the Schedule 13G/A it filed with the Securities and Exchange
Commission on February 12, 2003, Dimensional Fund Advisors Inc. may be
deemed to be the beneficial owner of these shares by virtue of its voting
and/or investment power over these shares in connection with its role as an
investment advisor or manager. However, Dimensional Fund Advisors Inc.
disclaims beneficial ownership of these shares.
11
COMPENSATION OF EXECUTIVE OFFICERS
The following tables set forth information with respect to compensation
paid to or accrued on behalf of the Named Executive Officers for 2000 and 2001
and for 2002, unless otherwise noted. All of the Named Executive Officers have
been granted stock options.
SUMMARY COMPENSATION TABLE
LONG TERM
COMPENSATION AWARDS
--------------------------
ANNUAL COMPENSATION RESTRICTED SECURITIES
------------------- STOCK UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS OTHER AWARD(S) OPTIONS/SARS COMPENSATION
--------------------------- ---- -------- -------- ------- ---------- ------------ ------------
William F. Murdy,........... 2002 $400,000 $ 50,000(1) $ 5,700(2) $778,000(3) -- $ 5,500(4)
Chairman of the Board, and 2001 $400,000 $107,526 $ 5,700(2) -- 50,000 $ 994(4)
Chief Executive Officer 2000 $208,000 -- $50,000(5) -- 500,000 --
J. Gordon Beittenmiller,.... 2002 $250,000 $ 40,000(1) -- -- -- $ 4,054(4)
Executive Vice President, 2001 $250,000 $ 80,483 -- -- 20,000 $ 3,501(4)
Chief Financial Officer, 2000 $250,000 -- -- -- 125,000 $ 2,691(4)
Treasurer and Director
William George,............. 2002 $200,000 $ 75,000(6) -- -- -- $ 5,500(4)
Senior Vice President and 2001 $198,750 $ 66,881 -- -- 15,000 $ 4,820(4)
General Counsel 2000 $190,000 $ 47,500 -- -- 75,000 $ 3,164(4)
David Lanphar,.............. 2002 $200,000 $ 15,000 $25,100(7) -- -- $ 2,408(4)
Chief Operating Officer 2001 $175,000 $ 66,634 $ 9,000(8) -- 10,000 $ 2,178(4)
2000 $150,000 $ 75,000 $ 9,000(8) -- 50,000 $ 1,503(4)
Milburn Honeycutt,.......... 2002 $168,750 $ 65,000(6) -- -- -- $ 2,625(4)
Senior Vice President -- 2001 $150,000 $ 50,161 -- -- 15,000 $ 4,877(4)
Finance 2000 $136,667 $ 37,500 -- -- 75,000 $ 2,175(4)
---------------
(1) Reflects payment in the second quarter of 2002 of bonuses in connection with
the Emcor transaction. Neither of Messrs. Murdy or Beittenmiller received an
annual bonus with respect to 2002.
(2) Reflects car expense of $5,700 for each year.
(3) Reflects 200,000 restricted shares of common stock granted to Mr. Murdy
valued at the market price on date of grant (March 22, 2002). The value of
these shares as of December 31, 2002 was $670,000, based on the market price
on that date. Although the company does not currently pay dividends, if
dividends were paid with respect to these shares, Mr. Murdy would be
entitled to receive them.
(4) Reflects amounts received under our matching of contributions made by that
person to his 401(k) retirement plan.
(5) Reflects a signing and relocation bonus of $50,000 to Mr. Murdy.
(6) Includes payment in the second quarter of 2002 of bonuses in connection with
the Emcor transaction of $50,000 to Mr. George and $40,000 to Mr. Honeycutt.
(7) Reflects a car allowance of $9,000 and $16,100 paid for temporary housing in
connection with a Company requested relocation.
(8) Reflects a car allowance.
12
AGGREGATED FISCAL YEAR-END OPTION VALUES
The following table sets forth information concerning the fiscal year-end
value of unexercised stock options held by the Named Executive Officers during
the last fiscal year. There were no option exercises by Named Executive Officers
during 2002.
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS AT
OPTIONS AT FISCAL YEAR-END FISCAL YEAR-END(1)
--------------------------- ---------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- ----------- ------------- ----------- -------------
William F. Murdy...................... 345,833 204,167 $13,750 $41,250
J. Gordon Beittenmiller............... 188,500 76,500 $23,313 $34,313
William George........................ 130,750 59,250 $16,000 $24,250
Milburn Honeycutt..................... 105,750 59,250 $16,000 $24,250
David Lanphar......................... 36,500 43,500 $12,250 $17,750
---------------
(1) These numbers are based upon the fair market value of one share of the
Common Stock on December 31, 2002 ($3.35), less the exercise price of
in-the-money options at December 31, 2002.
EQUITY COMPENSATION PLAN INFORMATION
The following table sets forth information about the Company's equity
compensation plans as of December 31, 2002:
NUMBER OF SECURITIES
NUMBER OF SECURITIES REMAINING AVAILABLE FOR
TO BE ISSUED UPON WEIGHTED-AVERAGE FUTURE ISSUANCE UNDER
EXERCISE OF EXERCISE PRICE OF EQUITY COMPENSATION PLANS
OUTSTANDING OPTIONS, OUTSTANDING OPTIONS, (EXCLUDING SECURITIES
PLAN CATEGORY WARRANTS AND RIGHTS WARRANTS AND RIGHTS REFLECTED IN COLUMN (A))
------------- -------------------- -------------------- -------------------------
Equity compensation plans
approved by security
holders..................... 5,518,301 $8.26 2,709,102
Equity compensation plans not
approved by security
holder...................... -- -- --
--------- -------------- --------------
Total.................... 5,518,301 $8.26 2,709,102
========= ============== ==============
13
EMPLOYMENT AGREEMENTS; COVENANTS NOT TO COMPETE;
CHANGE OF CONTROL; INDEMNIFICATION
During 2002, the Company's five most highly compensated executive officers
were Messrs. Murdy, Beittenmiller, Lanphar, George and Honeycutt.
On June 27, 2000 Mr. Murdy entered into an employment agreement with the
Company. Mr. Murdy's employment agreement provides for an annual base salary of
$400,000. Mr. Murdy's employment agreement will expire on March 22, 2006, and
unless terminated or not renewed by the Company or the employee, the term will
continue thereafter on a year-to-year basis on the same terms. The current term
renews or expires in June 2006. The agreement provides that, in the event of a
termination of employment by the Company without cause, Mr. Murdy would receive
from the Company an amount equal to the greater of base salary for the remaining
term or for one year. In the event of a change in control of the Company (as
defined in the employment agreement) the Employee may elect to terminate his
employment and receive an amount equal to two times his annual base salary then
in effect. The employment agreement contains a covenant not to compete with the
Company for two years immediately following termination of employment. In the
event of a change in control, the non-competition provisions apply for a period
of one year immediately following the effective date of termination.
On June 27, 1997, Mr. Beittenmiller and Mr. George entered into an
employment agreement with the Company providing for an annual base salary of
$150,000 and Mr. Honeycutt entered into an employment agreement with the Company
on January 21, 1998 providing for an annual base salary of $110,000. Each
employment agreement is for a term of three years, and unless terminated or not
renewed by either the Company or the employee, the term will continue thereafter
on a year-to-year basis on the same terms. The current term for all three
individuals will renew or expire in June 2004. The agreement provides that, in
the event of a termination of employment by the Company without cause, the
employee will receive an amount equal to base salary for one year. In the event
of a change in control of the Company, if the employee is not given at least
five days' notice of the successor's intent to continue the employee's
employment after such change in control, the employee may elect to terminate his
employment and receive an amount equal to three times the amount he would
receive pursuant to a termination without cause. The non-competition provisions
of the employment agreement do not apply to a termination without such notice.
In the event the employee is given at least five days' notice of the successor's
intent to continue the employee's employment after such change in control, the
employee may elect to terminate his employment and receive two times the amount
he would receive pursuant to a termination without cause. In such event, the
non-competition provisions of the employment agreement would apply for two years
from the effective date of termination. Each employment agreement contains a
covenant not to compete with the Company for two years immediately following
termination of employment or, in the case of a termination by the Company
without cause, for one year.
On September 1, 2001, Mr. Lanphar entered into an employment agreement with
the Company providing for an annual base salary of $175,000. The agreement is
for a term of two years, unless terminated. On the second anniversary, the
agreement will renew for consecutive one-year terms unless either party gives
notice at least 30 days prior such anniversary. The agreement provides that, in
the event of a termination of employment by the Company without cause, the
employee will receive an amount equal to base salary for one year. In the event
of a change in control of the Company, the Company will pay the employee a bonus
equal to one year's base salary. The employment agreement contains a covenant
not to compete with the Company for one year immediately following termination
of employment for any reason whatsoever.
14
REPORT OF THE AUDIT COMMITTEE
The Audit Committee of the Board of Directors of the Company (the "Audit
Committee") oversees the Company's financial reporting process on behalf of the
Board of Directors. Management has the primary responsibility for the financial
statements and the reporting process including the Company's internal controls.
In fulfilling its oversight responsibilities, the Audit Committee has reviewed
the audited financial statements in the Annual Report with management. The
discussion explored the quality, not just the acceptability, of the accounting
principles, the reasonableness of significant judgments, and the clarity of each
of the key disclosures in the financial statements.
The Audit Committee reviewed with the independent auditors, who are
responsible for expressing an opinion on the conformity of those audited
financial statements with generally accepted accounting principles, their
judgments as to the quality, not just the acceptability, of the Company's
controls, reporting and accounting principles and such other matters as are
required to be discussed with the Audit Committee under generally accepted
auditing standards. The Audit Committee has discussed with the independent
auditors the matters required to be discussed by SAS 61 (Codification of
Statement on Auditing Standards, AU 380), as may be modified or supplemented. In
addition, the Audit Committee has received the written disclosures and the
letter from the independent accountants required by Independence Standards Board
Standard No. 1 (Independence Standards Board Statement No. 1, Independent
Discussions with Audit Committees), as may be modified or supplemented, and has
discussed with the independent accountant the independent accountant's
independence. The Committee has also considered whether the provision of other
non-audit professional services provided to the Company by the independent
auditors is compatible with maintaining the auditors' independence and has
discussed with the auditors the auditors' independence.
The Audit Committee discussed with the Company's internal and independent
auditors the overall scope and plans for their respective audits. The Audit
Committee meets regularly with the external auditors, with and without
management present, to discuss the results of their examinations, their
evaluations of the Company's internal controls, and the content and quality of
the Company's financial reporting. Based on the review and discussions discussed
above, the Audit Committee recommended to the Board of Directors that the
audited financial statements be included in the Annual Report of Form 10-K for
the fiscal year ended December 31, 2002 and for filing with the Securities and
Exchange Commission.
The members of the Audit Committee have been determined to be independent
and financially literate (as independence and financial literacy is defined by
the New York Stock Exchange listing standards) by the Board of Directors.
Vincent J. Costantini (Chairman)
Herman E. Bulls
Steven S. Harter
Robert D. Wagner
15
REPORT OF THE COMPENSATION COMMITTEE ON EXECUTIVE COMPENSATION
The Compensation Committee establishes and administers the Company's
executive compensation program and reviews and advises the Board of Directors
with respect to major organizational changes, leadership development and
leadership succession issues. The Committee establishes and regularly reviews
the compensation levels of executive officers and other key managers, and
reviews incentive awards.
The central objectives of the Company's executive compensation program are
to:
- Retain and attract competent leaders by providing reasonable but
competitive compensation;
- Provide incentives for achieving and exceeding the Company's performance
goals; and
- Align the financial interests of the Company's executives with those of
its stockholders.
The Company's executive compensation program is designed to provide
advantageous levels of incentive and stock-based returns as the Company improves
its profitability. When the Company's stockholders observe improved Company
results through improving balance sheet strength and earnings, the Company's
executives will be appropriately compensated.
Three main elements comprise the Company's compensation program: base
salary, annual bonus incentives, and long-term incentives.
Base Salary -- Individual executive salaries and the aggregate salary
expense for the executive officers are reviewed annually by the Committee. The
Committee considers individual performance, labor market conditions, the
Company's results, and salary levels as compared to market levels of
compensation. For 2002, the Chief Executive, Chief Operating and Chief Financial
Officers did not receive a salary increases. Certain other executive officers
received modest increases from their 2001 compensation levels. Following
year-end, as a result of difficult economic and industry conditions and in order
to conserve cash and expense for the Company, the Chief Executive Officer
voluntarily accepted a decrease in his base salary of $50,000, or 12.5% and all
of the remaining executive officers voluntarily accepted a decrease of 10% in
their respective base salaries.
Annual Bonus Incentives -- Annual bonus incentives for executive officers
are based upon objectives that may include earnings, cash flow, growth,
strategic initiatives and individual performance. In 2002, the Bonus Plan for
Executive Officers was based upon objective measurement of the lesser of
operating income and cash flow. Under the plan, if the target levels were met,
the three most highly compensated officers were eligible to receive a bonus of
up to 100% of their base salary, and the remaining officers were eligible to
receive a bonus of up to 75% of base salary. For all executive officers except
the three most highly compensated, 25% of their maximum bonus potential of 75%
of base salary was also subject to the accomplishment of individual objectives
as determined by the Compensation Committee with the advice of the Chief
Executive Officer. Under the relevant measures, performance fell short of the
minimum targets and thus no annual bonuses were paid except that three executive
officers below the level of the Chief Executive, Chief Operating and Chief
Financial officers received a $15,000 bonus based on the accomplishment of
certain individual objectives.
During the second quarter of 2002, the committee awarded certain individual
bonuses in connection with the completion of the sale of a substantial portion
of the Company's operations for cash in a major transaction that greatly
strengthened the Company's balance sheet. These bonus amounts are included in
the "Summary Compensation Table".
Long-Term Incentives (Restricted Stock and Stock Options) -- Stock-based
awards are the primary tools that the Committee employs to align the long-term
financial incentives of its executive officers with those of its stockholders.
In determining the nature and amount of the awards, the Committee considers the
executive's position, individual performance and the executive's prospects for
sustained contribution to the success of the Company. During 2002 no options
were issued to the named executive officers. In the first quarter of 2002, Mr.
Murdy was granted a total of 200,000 shares of restricted stock subject to
performance and tenure vesting. The Committee felt that this share grant was
desirable in order to provide a positive incentive and a means to insure the
long-term retention of his services. In addition, in the fourth quarter of
16
2002 and in connection with his recruitment, Mr. Chambers was granted options to
purchase 100,000 shares of common stock vesting over a four year period at the
market price on his date of hire, and was also granted 75,000 shares of
restricted stock subject to the same tenure and performance vesting requirements
as the shares that were granted to Mr. Murdy.
Policy on Deductibility of Compensation -- Section 162(m) of the Internal
Revenue Code limits the tax deduction to $1 million for compensation paid to
executive officers, unless certain requirements are met. One of these
requirements is that compensation over $1 million must be based upon Company
attainment of performance goals approved by the stockholders. The Company's
plans relating to stock based incentives, which were approved by stockholders,
are designed to meet these requirements. Compensation levels at the Company do
not generally exceed the limitations contained in Section 162(m). It is the
Committee's policy to comply with the requirements of Section 162(m) except
where the Committee determines that compliance is not in the best interests of
the Company or its stockholders.
Compensation of the CEO -- On June 27, 2000, Mr. Murdy entered into an
employment agreement with the Company providing for a base salary of $400,000
and a hiring bonus of $50,000. In 2002, pursuant to Mr. Murdy's employment
agreement, he received a base salary of $400,000. In determining Mr. Murdy's
base salary under the employment agreement, the Committee considered
performance, labor market conditions, our results and budget and salary levels
as compared to market levels of compensation. Mr. Murdy's bonus is based on
objectives that include earnings, cash flow, growth, strategic initiatives and
individual performance. In 2002, the Bonus Plan for Executive Officers was based
upon objective measurement of the lesser of operating income and cash flow.
Since operating income did not meet the minimum criteria established for 2002,
Mr. Murdy did not receive an annual bonus for 2002. During the second quarter of
2002, as detailed above, he did receive a bonus of $60,000 in connection with
the completion of the sale of a substantial portion of the Company's operations
for cash in a major transaction that significantly strengthened the Company's
balance sheet. Following year-end, as a result of difficult economic and
industry conditions and in order to conserve cash and expense for the Company,
Mr. Murdy voluntarily accepted a decrease in his base salary of $50,000, or
12.5%
The Committee believes that in order for the Company to be successful in
the future it will need to retain its most talented officers and attract
additional high quality leaders. The Committee will continue to use Company
performance as its most significant criteria for determining incentive
compensation.
Submitted by the
COMPENSATION COMMITTEE
Herman E. Bulls, CHAIRMAN
Vincent J. Costantini
Steven S. Harter
James H. Schultz
17
STOCK PERFORMANCE GRAPH
The following stock price performance graph compares the cumulative total
return on the Common Stock with the cumulative total return of the Standard &
Poor's Composite 500 Index and of a peer group consisting of the companies in
the Russell 2000, from December 31, 1997 through December 31, 2002, assuming a
$100 initial investment in each case.
(PERFORMANCE CHART)
-------------------------------------------------------------------------------------------------
12/31/97 12/31/98 12/31/99 12/31/00 12/31/01 12/31/02
-------------------------------------------------------------------------------------------------
Comfort Systems USA,
Inc. FIX 100.00 90.51 37.34 10.76 18.73 16.96
S&P 500 100.00 128.58 155.64 141.46 124.65 97.10
RUSSELL 2000 100.00 97.45 118.17 114.60 117.45 93.39
NOTE: Performance is reported annually, assumes $100 invested on December 31,
1997, and includes reinvestment of dividends through the end of fiscal year
2002.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Messrs. Bulls, Costantini, Harter, and Schultz, none of whom is or was an
officer or employee of the Company or any of our subsidiaries during 2000, 2001,
or 2002, served on the Compensation Committee during 2002. The Board of
Directors has constituted an Equity Plans Committee composed of Messrs. Bulls,
Costantini, and Schultz.
18
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934, as amended, requires
the Company's directors, officers and persons who own more than ten percent of a
registered class of the Company's equity securities to file with the SEC initial
reports of ownership and reports of changes in ownership with the SEC and the
New York Stock Exchange. Officers, directors and greater-than-ten-percent
stockholders are required by SEC regulation to furnish the Company with copies
of all Section 16(a) forms they file. To our knowledge, based on our review of
copies of such forms and amendments, we believe directors, officers and greater
than 10 percent beneficial owners complied with all filing requirements during
the year ended December 31, 2002.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
See the previous section entitled "COMPENSATION COMMITTEE INTERLOCKS AND
INSIDER PARTICIPATION" for other information required to be disclosed here.
Any future transactions with directors, officers, employees or affiliates
of the Company or its subsidiaries are anticipated to be under $60,000 and will
be approved in advance by a majority of disinterested members of the Board of
Directors.
AUDIT FEES
Ernst & Young was our independent auditor during 2002 and billed us
consolidated audits fees of $895,000 for the audit of our financial statements
that were required in our 2002 reports, including (i) an aggregate of $445,000
in fees and expenses for professional services rendered in connection with the
audit of our financial statements for 2002 and the reviews of the financial
statements included in each of our Quarterly Reports on Form 10-Q in 2002 after
their engagement and (ii) an aggregate of $450,000 for audits of our 2000 and
2001 results that were made necessary by the Company's discontinued operations.
Arthur Andersen was our independent auditor during 2001 and billed the Company
an aggregate of $671,478 in fees and expenses for professional services rendered
in connection with the audit of our financial statements for 2001 and the
reviews of the financial statements included in each of our Quarterly Reports on
Form 10-Q in 2001.
AUDIT RELATED FEES
Ernst & Young billed us $10,000 in 2002 for assurance and related services
that are reasonably related to the audit of our financial statements for the
filing of our 2002 reports and its reviews of the financial statements included
in each of our Quarterly Reports on Form 10-Q in 2002 that are not recorded
under the caption "Audit Fees" above. Those services represented fees for audit
related consultation.
Before Arthur Andersen LLP was replaced as our independent auditor in the
second quarter of 2002, Arthur Andersen LLP billed us $27,675 in 2002 for its
reviews of the financial statements included in each of our Quarterly Reports on
Form 10-Q in 2002 and $66,311 for audit related consultation composed primarily
of advice in connection with the Company's significant disposition of
operations.
Arthur Andersen LLP billed us $481,969 in 2001 for assurance and related
services that are reasonably related to the audit of our financial statements
for 2001 and its reviews of the financial statements included in each of our
Quarterly Reports on Form 10-Q in 2001 that are not recorded under the caption
"Audit Fees" above. Those services were composed of audit-related services
pertaining to divested companies, employee benefits and accounting research.
TAX FEES
Ernst & Young billed us $3,000 in 2002 for tax compliance, tax advice and
tax planning services. Arthur Andersen LLP billed us $77,910 in 2001 for tax
compliance, tax advice and tax planning services.
19
ALL OTHER FEES
Ernst & Young provided no services and billed no fees in 2002 other than
those described under the captions "Audit Fees," "Audit Related Fees" and "Tax
Fees." Arthur Andersen LLP billed us $57,000 in 2001 for products and services
other than products and services other than those described under the captions
"Audit Fees," "Audit Related Fees" and "Tax Fees." Those services were composed
of valuation analysis and advice regarding the Company's goodwill assets in
connection with SFAS No. 142 adoption.
OTHER ACCOUNTANT MATTERS
The audit committee of our board of directors requires that any engagement
of our independent accountant to render non-audit services must be approved in
advance by the Audit Committee. To date, there have been no such engagements.
STOCKHOLDER PROPOSALS
The Company's Bylaws establish procedures, including advance notice
procedures, with regard to the nomination other than by or at the direction of
the Board of Directors, of candidates for election as directors and with regard
to certain matters to be brought before meetings of stockholders of the Company.
In accordance with the Company's Bylaws, a proposal submitted for consideration
at the 2004 Annual Meeting of Stockholders will be considered untimely if it has
not been received by the Company at its principal executive offices by the close
of business on the 60th day prior to the first anniversary of the Meeting. The
Bylaws also contain procedures for regulation of the order of business and
conduct of stockholder meetings, the authority of the presiding officer and
attendance at such meetings.
Proposals of stockholders submitted for consideration at the 2004 Annual
Meeting of Stockholders must be received by the Company at its principal
executive offices not later than December 16, 2003 in order to be considered for
inclusion in the Company's proxy material for that meeting.
OTHER BUSINESS
The Board of Directors knows of no business to be brought before the
Meeting that is not referred to in the accompanying Notice of Annual Meeting.
Should any such matters be presented, the persons named in the proxy intend to
take such action in regard to such matters as in their judgment seems advisable.
FORM 10-K AND ANNUAL REPORT TO STOCKHOLDERS
A copy of the Company's Annual Report to Stockholders, which includes the
Annual Report on Form 10-K, filed with the SEC, accompanies this proxy
statement.
20
EXHIBIT A
AUDIT COMMITTEE CHARTER
The Audit Committee shall have the authority to select, direct, evaluate,
and, if appropriate, replace the independent public accountants (the
"independent accountants") and the Company's ranking internal audit officer,
each of whom shall each be directly accountable to the Company's Board of
Directors through the Audit Committee.
The duties and responsibilities of the Audit Committee of this Board of
Directors, acting as representatives of the Company's shareholders, are as
follows:
1. To review with the Chief Executive Officer, Chief Financial Officer and
the principal financial and accounting personnel of the Company, as appropriate:
A. The quality of services provided by the independent public
accountants; any non-audit services provided by the independent accountants
and their fees for such services; the fees of the independent accountants
for audit services; the scope of the audit; and the views of such personnel
as to the continuation of the independent accountants.
B. The general policies and procedures utilized by the Company with
respect to internal accounting controls.
C. Any proposed changes in significant accounting methods or
practices.
D. The staffing of the Company's financial and accounting functions,
including, where necessary, the internal auditing function.
2. To review with the independent accountants:
A. The scope of their audit, its conformity with generally accepted
auditing standards, and the cost of the audit.
B. Any significant variations in the accounting policies followed by
the Company from those generally followed by companies in a similar or
generally similar business.
C. The adequacy of the Company's internal accounting controls.
D. Any limitations placed upon the independent accountants by Company
personnel and the degree of cooperation.
E. Any communications received by the independent accountants from
Company personnel during the audit.
F. Any proposed changes in significant accounting methods or
practices; and any significant new accounting practices or rules as they
relate to the Company.
G. The Company's staffing of its financial and accounting functions
including, where appropriate, the internal auditing function.
3. To report to the full Board of Directors as to the activities of the
Audit Committee, including:
A. The results of its discussions with personnel of the Company and
the independent accountants.
B. The recommendations of the Audit Committee regarding the
independent accountants to be selected by the Board, fees to be paid to the
independent accountants for their audit and non-audit services and the
independence of the auditors.
4. To review with appropriate Company personnel and the independent
accountants the audit results and any management letter submitted by the
independent accountants, including any exceptions, any significant year-end
adjustments, any significant transactions not a normal part of the Company's
business, any detected weaknesses and any corrective actions taken or
recommended to be taken.
A-1
5. To review with appropriate Company personnel and the independent
accountants the procedures to be followed by the independent accountants in
reviewing the Company's quarterly financial statements.
6. To review the financial statements contained in the Quarterly and Annual
Reports to Stockholders before they are submitted for distribution to the
stockholders; and to review the financial statements contained in Forms 10-Q and
10-K before their filing with the SEC.
A-2
EXHIBIT B
PROPOSED AMENDMENT TO THE CERTIFICATE OF INCORPORATION
If proposal number 2 is approved, the Company would amend Article Five,
Section 1 of its Certificate of Incorporation as follows:
ARTICLE FIVE
1. BOARD OF DIRECTORS.
The Directors shall be classified with respect to the time for which they
shall severally hold office into three classes as nearly equal in number as
possible. The Class I directors shall be elected to hold office for an initial
term expiring at the 1998 annual meeting of stockholders, the Class II Directors
shall be elected to hold office for an initial term expiring at the 1999 annual
meeting of stockholders and the Class III Directors shall be elected to hold
office for an initial term expiring at the 2000 annual meeting of stockholders,
with the members of each class of directors to hold office until their
successors have been duly elected and qualified. At each annual meeting of
stockholders, the successors to the class of directors whose term expires at
that meeting shall be elected to hold office for a term expiring at the annual
meeting of stockholders held in the third year following the year of their
election and until their successors have been duly elected and qualified. At
each annual meeting of stockholders at which a quorum is present, the persons
receiving a plurality of the votes cast shall be directors. No director or class
of directors may be removed from office by a vote of the stockholders at any
time except for cause. Election of directors need not be by written ballot
unless the Bylaws of the Corporation so provide.
At each annual meeting of stockholders at which a quorum is present, the
persons properly nominated and receiving a plurality of the votes cast shall be
directors. No director may be removed from office by a vote of the stockholders
at any time except for cause. Election of directors need not be by written
ballot unless the Bylaws of the Corporation so provide.
Notwithstanding the foregoing, the holders of Restricted Voting Common
Stock voting as a class shall be entitled to elect one member of the Board of
Directors, and only the holders of the Restricted Voting Common Stock shall be
entitled to remove such member from the Board of Directors.
B-1
ANNUAL MEETING OF STOCKHOLDERS OF
COMFORT SYSTEMS USA, INC.
MAY 22, 2003
Please date, sign and mail
your proxy card in the
envelope provided as soon
as possible.
* Please detach and mail in the envelope provided. *
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THE BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR" THE ELECTION OF DIRECTORS AND "FOR" PROPOSAL 2 AND "AGAINST" PROPOSAL 3.
PLEASE SIGN, DATE AND RETURN PROMPTLY IN THE ENCLOSED ENVELOPE. PLEASE MARK YOUR VOTE IN BLUE OR BLACK INK AS SHOWN HERE [x]
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PROPOSAL 1: ELECTION OF THREE CLASS III FOR AGAINST ABSTAIN
DIRECTORS FOR TERMS EXPIRING IN 2006,
2. Approval to propose an amendment of the [ ] [ ] [ ]
NOMINEES Certificate of Incorporation to eliminate
[ ] FOR ALL NOMINEES ( ) Alfred J. Giardinelli the classification of the Board of
( ) Vincent J. Costantini Directors.
[ ] WITHHOLD AUTHORITY ( ) Norman C. Chambers
FOR ALL NOMINEES 3. Stockholder proposal against Company's [ ] [ ] [ ]
use of EBITDA for "performance-based"
[ ] FOR ALL EXCEPT compensation.
(See instructions below)
You hereby revoke all previous proxies given. You may
revoke this proxy at any time prior to a vote
thereon. Receipt of the accompanying Proxy Statement,
INSTRUCTION: To withhold authority to vote for any individual and the Annual Report of Comfort Systems USA, Inc.,
nominee(s), mark "FOR ALL EXCEPT" and fill in which includes the Annual Report on Form 10-K, for
the circle next to each nominee you wish to the fiscal year ended December 31, 2002 is hereby
withhold, as shown here: (X) acknowledged.
PLEASE COMPLETE, SIGN, AND PROMPTLY MAIL IN THE
ENCLOSED ENVELOPE.
To change the address on your account, please check [ ]
the box at right and indicate your new address in the
address space above. Please note that changes to the
registered name(s) on the account may not be
submitted via this method.
Signature of Stockholder Date: Signature of Stockholder Date:
--------------------- -------------- --------------------- -----------
NOTE: This proxy must be signed exactly as the name appears hereon. When shares are held jointly, each holder should sign. When
signing as executor, administrator, attorney, trustee or guardian, please give full title as such. If the signer is a
corporation, please sign full corporate name by duly authorized officer, giving full title as such. If signer is a
partnership, please sign in partnership name by authorized person.
COMFORT SYSTEMS USA, INC.
ANNUAL MEETING OF STOCKHOLDERS
SOLICITED BY THE BOARD OF DIRECTORS OF COMFORT SYSTEMS USA, INC.
The undersigned hereby appoints William F. Murdy and William George, and each of
them individually, as proxies with full power of substitution, to vote, as
designated on the reverse, all shares of Common Stock and Restricted Common
Stock of Comfort Systems USA, Inc. that the undersigned is entitled to vote at
the Annual Meeting of Stockholders thereof to be held on May 22, 2003, or at any
adjournment or postponement thereof.
ALL SHARES WILL BE VOTED AS DIRECTED HEREIN AND, UNLESS OTHERWISE DIRECTED, WILL
BE VOTED "FOR" PROPOSAL 1 (ALL NOMINEES), "FOR" PROPOSAL 2, AND "AGAINST"
PROPOSAL 3, AND IN ACCORDANCE WITH THE DISCRETION OF THE PERSON VOTING THIS
PROXY WITH RESPECT TO ANY OTHER BUSINESS PROPERLY BROUGHT BEFORE THE MEETING.
ANY EXECUTED PROXY WHICH DOES NOT DESIGNATE A VOTE SHALL BE DEEMED TO GRANT
AUTHORITY FOR ANY ITEM NOT DESIGNATED.
(TO BE SIGNED ON REVERSE SIDE)