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FORM 10-K
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1999 Commission file Number 0-2315
EMCOR GROUP, INC.
(Exact name of registrant as specified in its charter)
Delaware 11-2125338
---------------------------- -----------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) identification number)
101 Merritt Seven Corporate Park 06851-1060
Norwalk, Connecticut -------------------
- ------------------------------------ (zip code)
(Address of principal executive offices)
------------------------------------------------
Registrant's telephone number, including area code (203) 849-7800
Securities registered pursuant to section 12(b) of the act:
None
Securities registered pursuant to section 12(g) of the act:
Common Stock, par value $.01 per share
(Title of each class)
------------------------------------------------
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 if disclosure of delinquent filings pursuant to Item
405 Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in Part III of this Form 10-K to be filed as an
amendment hereto. | |
Indicate by check mark whether the Registrant has filed all documents and
reports required to be filed by Section 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court. Yes | | No |_|
The aggregate market value of the Registrant's voting stock held by
non-affiliates of the Registrant on December 31, 1999 was approximately
$179,660,000.
Number of shares of Common Stock outstanding as of the close of business
on February 18, 2000: 10,427,682 shares.
TABLE OF CONTENTS
PAGE
----
PART I
Item 1. Business
General..................................................................................... 1
The Business................................................................................ 1
Competition................................................................................. 4
Employees................................................................................... 5
Backlog..................................................................................... 5
Item 2. Properties.................................................................................... 6
Item 3. Legal Proceedings............................................................................. 9
Item 4. Submission of Matters to a Vote of Security Holders........................................... 9
PART II
Item 5. Market for the Registrant's Common Equity and Related Stockholder Matters..................... 11
Item 6. Selected Financial Data....................................................................... 12
Item 7. Management's Discussion and Analysis of Results of Operations and Financial Condition......... 13
Item 8. Financial Statements and Supplementary Data................................................... 20
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.......... 46
PART III
Item 10. Directors and Executive Officers of the Registrant............................................ 46
Item 11. Executive Compensation........................................................................ 46
Item 12. Security Ownership of Certain Beneficial Owners and Management................................ 46
Item 13. Certain Relationships and Related Transactions................................................ 46
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K............................... 47
PART I
Item 1. Business
General
EMCOR Group, Inc. ("EMCOR") is the largest mechanical and electrical
construction and facilities services firm in the United States and Canada and
one of the largest in the United Kingdom and the world. In 1999 EMCOR had
revenues of more than $2.89 billion. EMCOR provides services to a broad range of
commercial, industrial, utility, and institutional customers through
approximately 40 principal operating subsidiaries. Its subsidiaries have offices
in 21 states and the District of Columbia in the United States, seven provinces
in Canada and ten primary locations in the United Kingdom. In the United Arab
Emirates, Saudi Arabia, Hong Kong and South Africa, EMCOR carries on business
through subsidiaries and joint ventures. EMCOR's executive offices are located
at 101 Merritt Seven Corporate Park, Norwalk, Connecticut 06851-1060, and its
telephone number at those offices is (203) 849-7800.
EMCOR specializes in the design, installation, integration, start-up,
operation and maintenance of:
o Distribution systems for electrical power;
o Lighting systems;
o Low-voltage systems, such as fire alarm, security, communications and
process control systems;
o Voice and data communications systems;
o Heating, ventilation, air conditioning, refrigeration and clean-room
process ventilation systems; and
o Plumbing, process and high-purity piping systems.
EMCOR also provides services needed to support the operation of customers'
facilities, which services are not related to customers' construction programs.
These services, frequently referred to as facilities services, include site
based operations and maintenance, mobile maintenance and service, small
modification and retrofit projects, consulting, program development and
management for energy systems, and maintenance of facilities. Facilities
services are provided to a wide range of commercial, industrial, utility and
institutional facilities, including those at which EMCOR provided construction
services and others at which construction services were provided by other
contractors. EMCOR's varied facilities services are frequently combined to
provide integrated service packages which include mechanical and electrical
services.
EMCOR provides mechanical and electrical construction services and
facilities services directly to corporations, municipalities and other
governmental entities, owners/developers and tenants of buildings. It also
provides these services indirectly by acting as a subcontractor to construction
managers, general contractors, systems suppliers and other subcontractors.
Worldwide, EMCOR employs approximately 20,000 people.
EMCOR's revenues are derived from many different customers in numerous
industries with operations in several different geographical areas. Of EMCOR's
1999 revenues, approximately 74% was generated in the United States and
approximately 26% was generated internationally. In 1999, approximately 46% of
revenues was derived from new construction projects and approximately 54% of
revenues was derived from renovation and retrofit of customers' existing
facilities and from EMCOR's facilities services operations (renovation and
retrofit work and facilities services operations are sometimes referred to by
stock analysts as maintenance, repair and replacement or "MRR"). Approximately
80% of 1999 revenues was generated from both new construction and renovation
and retrofit projects and approximately 20% of 1999 revenues was generated from
facilities services operations. For the period 1996 through 1999, revenues and
EBITDA grew at compound annual growth rates of 20.4% and 42.3%, respectively.
The Business
The broad scope of EMCOR's operations are more particularly described
below.
1
Mechanical and Electrical Construction Services and Facilities Services
EMCOR believes that the mechanical and electrical construction services and
facilities services business is highly fragmented, consisting of thousands of
small companies across the United States and around the world. Because EMCOR has
total assets, annual revenues, net worth, and expertise significantly greater
than most of its competitors, EMCOR believes it has a significant competitive
advantage. The mechanical and electrical construction services industry has a
higher growth rate than the overall construction industry, due principally to
the increase in content and complexity of mechanical and electrical systems in
all types of projects. This increased content and complexity is, in part, a
result of the expanded use of computers and more technologically advanced voice
and data communications, lighting, and environmental control systems in all
types of facilities. For these reasons, buildings of all types consume more
electricity per square foot than in the past and thus need more extensive
electrical distribution systems. In addition, advanced voice and data
communication systems require more sophisticated power supplies and extensive
low voltage and fiber-optic communications cabling. Moreover, the need for
greater environmental controls within a building, such as the heightened need
for climate control to maintain extensive computer systems at optimal
temperatures, and the growing demand for environmental control in individual
spaces, have created expanded opportunities for the mechanical and electrical
construction services and facilities services business.
Mechanical and electrical construction services primarily involve the
design, integration, installation and start-up of: (1) distribution systems for
electrical power, including power cables, conduits, distribution panels,
transformers, generators, uninterruptible power supply systems and related
switch gear and controls; (2) lighting systems, including fixtures and controls;
(3) low-voltage systems, including fire alarm, security, and process control
systems; (4) voice and data communications systems, including fiber-optic and
low voltage copper cabling; (5) heating, ventilation, air conditioning
(collectively, "HVAC"), refrigeration and clean-room process ventilation
systems; and (6) plumbing, process and high-purity piping systems.
Mechanical and electrical construction services generally fall into one of
two categories: (1) large installation projects with contracts often in the
multi-million dollar range that involve construction of industrial and
commercial buildings and institutional and public works facilities or the
fit-out of large blocks of space within commercial buildings and (2) smaller
installation projects typically involving fit-out, renovation and retrofit work.
EMCOR's mechanical and electrical construction services operations
accounted for about 80% of its 1999 revenues, of which revenues approximately
57% was related to new construction and approximately 43% was related to
renovation and retrofit projects. EMCOR provides mechanical and electrical
construction services for both large and small installation and renovation
projects. Its largest projects include those (1) for institutional use (such as
water and wastewater treatment facilities, hospitals, correctional facilities,
schools and research laboratories); (2) for industrial use (such as
pharmaceutical factories, steel, pulp and paper mills, chemical, automotive and
semiconductor plants, and oil refineries); (3) for transportation systems (such
as airports and transit systems); and (4) for commercial use (such as office
buildings, data centers, hotels, casinos, convention centers, sports stadiums,
shopping malls and resorts). EMCOR's largest projects, typically in excess of
$10.0 million, are usually multi-year projects and range in size up to, and
occasionally in excess of, $50.0 million. These projects represented about 23%
of EMCOR's construction services revenues in 1999.
EMCOR's projects of less than $10.0 million accounted for approximately 77%
of 1999 construction services revenues. These projects are typically completed
in less than a year. They usually involve mechanical and electrical construction
services when an end-user or owner undertakes construction or modification of a
facility to accommodate a specific use. These projects frequently require
mechanical and electrical systems to meet special needs such as redundant power
supply systems, special environmental controls and high-purity air systems,
sophisticated electrical and mechanical systems for data centers, including
those associated with internet service providers and electronic commerce,
trading floors in financial services businesses, new production lines in
manufacturing plants and office arrangements in existing office buildings. These
types of projects are not usually dependent upon the new construction market.
Demand for them is often prompted by the expiration of leases, changes in
technology or changes in the customer's plant or office layout in the normal
course of a customer's business.
EMCOR performs its services pursuant to contracts with owners, such as
corporations, municipalities and other governmental entities, general
contractors, systems suppliers, construction managers, developers, other
subcontractors and tenants of commercial properties. Institutional and public
works projects are frequently long-term, complex projects that require
significant technical and management skills and the financial strength to, among
other things,
2
obtain bid and performance bonds, which are often a condition to bidding for,
and award of, these projects.
EMCOR also installs and maintains street, highway, bridge and tunnel
lighting, traffic signals, computerized traffic control systems and signal and
communication systems for mass transit systems in several metropolitan areas. In
addition, in the United States, EMCOR manufactures and installs sheet metal air
handling systems for both its own mechanical construction operations and for
unrelated mechanical contractors. EMCOR also maintains welding and pipe
fabrication shops for some of its own mechanical operations.
EMCOR also provides customers with facility support services which are not
related to construction projects. These services, frequently referred to as
facilities services, generated approximately 20% of 1999 revenues. Following
completion of construction projects, EMCOR has historically provided technical
support services to many of its customers, involving maintenance and service of
mechanical and electrical systems and small modification and retrofit projects
that support their day-to-day needs. In addition, EMCOR provides other services
to owners, operators, tenants and managers of all types of facilities both on a
contract basis for a specified period of time and on an individual task order
basis.
Facilities services include customer-based operations and maintenance,
mobile maintenance service, small modification and retrofit projects,
consulting, program development and management for energy systems and
maintenance activities. These services are provided to a wide range of
commercial, industrial and institutional facilities, including both those for
which EMCOR provided construction services and those for which construction
services were provided by others. The services are frequently bundled to provide
integrated service packages and may include services in addition to EMCOR's core
mechanical and electrical services.
EMCOR has experienced an expansion in the demand for its facilities
services which it believes is driven by customers' downsizing programs and their
focus on their own core competencies, the increasing technical complexity of
their facilities and their mechanical, electrical, voice and data and other
systems, and the need for increased reliability, especially in mechanical and
electrical systems. These trends have led to outsourcing and privatization
programs whereby customers in both the private and public sectors seek to
contract out those activities that support but are not directly involved in the
customer's business.
In the early 1990's the market for facilities services grew rapidly in the
United Kingdom as a result of government initiatives. EMCOR's United Kingdom
subsidiary expanded its traditional technical service business in response to
these opportunities and established a dedicated unit to focus on the facilities
services business. This unit currently provides a full range of facilities
services to public and private sector customers under multi-year agreements,
including maintaining British Airways' facilities at Heathrow and Gatwick
Airports, the new British Library, the Department of Trade and Industry offices
in London, and the new Jubilee Line Extension of the London Underground. In the
United Kingdom, EMCOR also provides facilities services at several automotive
manufacturing plants for the Rover Group and various British Aerospace
facilities. In addition, the United Kingdom operations provide on-call and
mobile service support on a task-order or contract basis, small renovation
project work, data communications, security system installation, and maintenance
services.
EMCOR, by virtue of its construction and facilities services expertise, is
involved with teams for several private finance initiatives ("PFIs") sponsored
by the British government. The PFIs, which involve the governmental bodies
responsible for the national healthcare system, social security, and air traffic
control, among others, seek to transfer ownership and management of United
Kingdom government facilities, such as office buildings and hospitals, to teams
of financial institutions, consulting service groups, construction groups and
facilities services providers, which competitively bid for PFI contracts. During
1998 EMCOR was awarded a contract to provide mechanical and electrical services,
ground maintenance and other ancillary services for five to seven years to
approximately 300 buildings which were formerly owned and managed by the United
Kingdom Department of Social Services. These facilities were privatized as part
of the PFI program. EMCOR has built on its United Kingdom experience to market
its facilities services business to international markets and currently provides
facilities services through joint ventures to several companies in South Africa.
In 1997, EMCOR established a new subsidiary to expand its facilities
services operations in North America patterned on its United Kingdom business.
This unit seeks to build on existing mechanical and electrical services
capabilities, facilities services activities at existing subsidiaries, and
EMCOR's client relationships in order to expand the scope of services currently
offered and to develop packages of services for customers on a regional,
national and global basis. EMCOR's North American facilities services strategy
includes initiation and expansion of facilities
3
services operations at subsidiaries that provide mechanical and electrical
construction services, including the offering of bundled facilities services
programs, integrating two or more services, and development of facilities
services business independent of construction services through an acquisition
program. In addition, management also has targeted growth in facilities services
opportunities arising from the deregulation of the electric utility industry,
deregulation and expansion of the telecommunications industry and the
REIT-driven consolidation of the commercial real estate industry.
The deregulation of, and increased competition in, the utility industry,
along with government mandates calling for reduced energy consumption by
government entities, have led to renewed focus on energy costs and conservation
measures. These measures typically include energy assessments and engineering
studies, retrofit construction to implement energy savings measures, and the
long-term operation and maintenance of energy savings measures to ensure
continued performance. Various subsidiaries of EMCOR have participated in energy
savings programs in the past. EMCOR's facilities services subsidiary has
established strategic alliances with, among others, DukeSolutions, Inc., a
subsidiary of Duke Energy Corp., to provide energy assessment, design,
installation, and operations and maintenance services for various Department of
Defense facilities located in 46 states, the District of Columbia and Puerto
Rico. EMCOR expects additional similar programs to be undertaken as the
deregulation of electric utilities continues in the United States, and believes
that because it has the ability to be a single source provider of construction
and facilities services it will have a significant advantage in obtaining this
type of work.
As part of its expansion of its facilities services business, during 1998,
EMCOR acquired a Bakersfield, California based maintenance program consulting
service firm, a Los Angeles, California area based mobile, mechanical services
firm and a Richmond, Virginia based industrial facilities services firm to
expand its capabilities in this field. In 1999, EMCOR acquired a Boston,
Massachusetts based firm that provides mobile services in the New England area
and site based operations and maintenance services throughout the Eastern United
States. These acquisitions permit EMCOR to offer integrated construction and
operations and maintenance services.
The deregulation and expansion of the telecommunications industry have led
to a rapid expansion of installed infrastructure, including wireless
communication systems and long distance networks, much of which has been built
by companies that do not have existing maintenance operations and which seek to
contract out such services. EMCOR has provided construction services for the
infrastructure of telecommunications companies and facilities services to
support their operations. In this industry, EMCOR has worked on facilities owned
by such service providers as Sprint, AT&T, and MCI, has installed and maintained
equipment for suppliers such as Lucent, Nortel, and Seimens, and has provided
construction and maintenance services to competitive local service providers,
such as Teleport Communications Group, now part of AT&T, and to users who
maintain their own systems.
EMCOR has also provided construction and maintenance services to many
internet service providers in support of their data center facilities. These
customers include Metromedia Fiber Network, Exodus Communications, Level 3
Communications, and Qwest Communications International.
EMCOR offers facilities services to customers on single-task and multi-task
bases depending on a customer's needs, under either short-term or multi-year
agreements. EMCOR's services often require that its employees be permanently
assigned to customer premises around the clock.
EMCOR believes mechanical and electrical construction services and
facilities services activities are complementary, permitting it to offer
customers a comprehensive package of services. The ability to offer both
construction and facilities services should enhance EMCOR's competitive position
with customers. Furthermore, EMCOR's facilities services operations tend to be
less cyclical than its construction operations because facilities services are
more responsive to the needs of an industry's operations requirements rather
than its construction requirements.
Competition
EMCOR believes that the mechanical and electrical construction services
business is highly fragmented and competitive. A majority of EMCOR's revenues
are derived from jobs requiring competitive bids; however, an invitation to bid
is often conditioned upon prior experience, technical capability and financial
strength. EMCOR competes with national, regional and local companies, many of
which are small, owner-operated entities that operate in a limited geographic
area. There are few public companies focused on providing mechanical and
electrical construction services, although in the last three years more public
national and regional firms have been established.
4
EMCOR is the largest provider of mechanical and electrical construction services
in the United States and Canada and one of the largest in the United Kingdom and
the world. In the future, significant competition may be encountered from public
utilities and companies attempting to consolidate mechanical and electrical
construction services companies. Competitive factors in the mechanical and
electrical construction services business include: (1) the availability of
qualified and/or licensed personnel; (2) reputation for integrity and quality;
(3) safety record; (4) cost structure; (5) relationships with customers; (6)
geographic diversity; (7) the ability to control project costs; (8) experience
in specialized markets; (9) the ability to obtain bonding; and (10) adequate
working capital.
While the facilities services business is also highly fragmented, a number
of large corporations such as Johnson Controls, Inc. and Fluor Corp. are engaged
in this field, and there are other companies seeking to consolidate facilities
services businesses. EMCOR's facilities services operations are well established
in the United Kingdom and are being developed through the combination of
acquisitions and growth of EMCOR's existing operations in the United States.
Employees
EMCOR presently employs approximately 20,000 people, approximately 78% of
whom are represented by various unions pursuant to collective bargaining
agreements between EMCOR's individual subsidiaries and local unions. EMCOR
believes that its employee relations are generally good.
Backlog
EMCOR had backlog as of December 31, 1999 of approximately $1.77 billion,
compared with backlog of approximately $1.33 billion as of December 31, 1998.
Backlog includes facilities services revenues to be derived during the
immediately succeeding 12 months pursuant to then-existing contracts. Backlog
increased by $440.3 million as of December 31, 1999 compared to December 31,
1998 due to $48.1 million of increased United States electrical construction and
facilities services backlog; $292.5 million of increased United States
mechanical construction and facilities services backlog; $43.4 million of
increased Canada construction and facilities services backlog; and $14.7 million
of increased United Kingdom construction and facilities services backlog. The
increase in United States backlog was due to backlog of companies acquired in
1999 of $316.0 million, plus increases in backlog related to the balance of
EMCOR's United States operations. The increase in Canada backlog was due to
several large contract awards. For the year ended December 31, 1999, EMCOR had
more than $2.89 billion in revenues compared to more than $2.21 billion in
revenues for the year ended December 31, 1998.
5
Item 2. Properties
The operations of EMCOR are conducted primarily in leased properties. The
following table lists major facilities:
Lease Expiration
Approximate Date, Unless
Square Feet Owned
--------------- ----------------
Corporate Headquarters
101 Merritt Seven Corporate Park
Norwalk, Connecticut ............................ 20,805 4/7/05
Operating Facilities
1200 North Sickles Road
Tempe, Arizona .................................. 29,000 Owned
1000 N. Kraemer Place 20,220 6/30/02
Anaheim, California .............................
3208 Landco Drive
Bakersfield, California ......................... 49,875 6/30/02
25601 Clawiter Road
Hayward, California ............................. 34,800 6/30/03
3100-3120 Diablo Avenue
Hayward, California ............................. 23,641 5/31/01
5 Vanderbilt
Irvine, California .............................. 18,000 7/31/04
4462 Corporate Center Drive
Los Alamitos, California ........................ 41,400 12/31/00
825 Howe Road
Martinez, California ............................ 109,800 12/31/02
4464 Alvarado Canyon Road
San Diego, California ........................... 40,000 10/31/07
414 Brannan Street
San Francisco, California ....................... 10,283 3/31/01
4405 and 4420 Race Street
Denver, Colorado ................................ 16,890 9/30/01
345 Sheridan Boulevard
Lakewood, Colorado .............................. 63,000 Owned
367 Research Parkway
Meriden, Connecticut ............................ 23,500 7/31/04
1781 N.W. North River Drive
Miami, Florida .................................. 11,285 Owned
5697 New Peachtree Road
Atlanta, Georgia ................................ 27,200 11/30/00
6
Lease Expiration
Approximate Date, Unless
Square Feet Owned
--------------- ----------------
2100 South York Road
Oak Brook, Illinois ............................. 77,700 5/31/08
2655 Garfield Road
Highland, Indiana ............................... 48,027 7/08/01
4530 Hollins Ferry Road
Baltimore, Maryland ............................. 26,792 Owned
306 Northern Avenue
Boston, Massachusetts ........................... 47,456 6/30/05
70-70D Hawes Way
Stoughton, Massachusetts ........................ 24,400 12/31/00
22925-22931 Industrial Drive West
St. Clair Shores, Michigan ...................... 19,000 4/30/05
1100 Combermere
Troy, Michigan .................................. 9,500 12/31/00
6060 Hix Road
Westland, Michigan .............................. 23,000 12/31/03
3555 W. Oquendo Road
Las Vegas, Nevada ............................... 90,000 11/30/03
6325 South Valley Boulevard
Las Vegas, Nevada ............................... 23,190 12/31/01
6754 W. Washington Avenue
Pleasantville, New Jersey ....................... 45,400 1/14/02
26 West Street
Brooklyn, New York .............................. 15,000 Owned
111-01 14th Avenue
College Point, New York ......................... 77,000 2/28/06
305 Suburban Avenue
Deer Park, New York ............................. 33,535 3/31/00
111 West 19th Street
New York, New York .............................. 26,885 5/31/03
Two Penn Plaza
New York, New York .............................. 57,200 2/01/06
4906 Barrow Avenue
Cincinnati, Ohio ................................ 16,300 9/30/03
4914 Ridge Avenue
Cincinnati, Ohio................................. 25,500 9/30/03
7
Lease Expiration
Approximate Date, Unless
Square Feet Owned
--------------- ----------------
2300-2310 International Street
Columbus, Ohio .................................. 25,500 8/30/01
5550 Airline Road
Houston, Texas .................................. 77,483 6/30/01
515 Norwood Road
Houston, Texas .................................. 26,676 6/30/01
1574 South West Temple
Salt Lake City, Utah ............................ 38,800 12/31/02
2925-2941 Space Road
Richmond, Virginia .............................. 26,000 8/19/03
22930 Shaw Road
Dulles, Virginia ................................ 32,600 7/31/06
109-D Executive Drive
Dulles, Virginia ................................ 19,000 8/31/04
1 Thameside Centre
Kew Bridge Road
Kew Bridge, Middlesex, United Kingdom ........... 14,000 12/22/12
86 Talbot Road
Old Trafford, Manchester, United Kingdom ........ 24,300 12/24/06
2116 Logan Avenue
Winnipeg, Manitoba, Canada ...................... 19,800 Owned
3455 Landmark Boulevard
Burlington, Ontario, Canada ..................... 16,100 Owned
305 Milner Avenue
Scarborough, Ontario, Canada .................... 16,500 5/31/00
EMCOR believes that all of its property, plant and equipment are well
maintained, in good operating condition and suitable for the purposes for which
they are used.
See Note K to the consolidated financial statements for additional
information regarding lease costs. EMCOR utilizes substantially all of its
leased facilities and believes there will be no difficulty either in negotiating
the renewal of its real property leases as they expire or in finding alternative
space, if necessary.
8
Item 3. Legal Proceedings
The Company's subsidiary Dynalectric Company ("Dynalectric") had been a
party to an arbitration proceeding arising out of Dynalectric's participation in
a joint venture with Computran Systems Corp. ("Computran"). The proceeding,
which was instituted in 1988 in the Superior Court of New Jersey, Bergen County
("Superior Court") by Computran, a participant in, and a subcontractor to, the
joint venture, alleged that Dynalectric wrongfully terminated its subcontract,
fraudulently diverted funds due to it, misappropriated its trade secrets and
proprietary information, fraudulently induced it to enter into the joint venture
and conspired with others to commit certain acts in violation of the New Jersey
Racketeering Influence and Corrupt Organization Act. The Superior Court ordered
that the matter in dispute between Dynalectric and Computran be resolved by
binding arbitration in accordance with an original agreement between the
parties. Following a decision by the arbitrator, the parties decided to settle
all matters regarding the dispute and exchange general releases and as a
consequence, Dynalectric paid Computran $1,000,000.
In February 1995 as part of an investigation by the New York County
District Attorney's office into the business affairs of Herbert Construction
Company ("Herbert"), a general contractor that did business with EMCOR'S
subsidiary, Forest Electric Corp. ("Forest"), a search warrant was executed at
Forest's executive offices. At the time, EMCOR was informed that Forest and
certain of its officers are targets of the continuing investigation. Neither
EMCOR nor Forest has been advised of the precise nature of any suspected
violation of law by Forest or its officers. On April 7, 1997, Ted Kohl, a
principal of Herbert, pled guilty to one count of money laundering, one count of
offering a false instrument for filing and one count of filing a false New York
State Resident Income Tax Return. DPL Interiors, Inc., a company allegedly owned
by Mr. Kohl, also pled guilty to one count of failing to file New York City
General Income Tax Returns. Mr. Kohl and DPL Interiors, Inc. have not yet been
sentenced.
On July 31, 1998 a former employee of a subsidiary of EMCOR filed a
class-action complaint on behalf of the participants in two employee benefit
plans sponsored by EMCOR against EMCOR and other defendants for breach of
fiduciary duty under the Employee Retirement Income Security Act. All of the
claims relate to alleged acts or omissions which occurred during the period May
1, 1991 to December 1994. The principal allegations of the complaint are that
the defendants breached their fiduciary duties by causing the plans to purchase
and hold stock of EMCOR when it was then known as JWP INC. and when the
defendants knew or should have known it was imprudent to do so. The plaintiff
has not made claim for a specific dollar amount of damages but generally seeks
to recover for the benefit plans the loss in value of JWP stock held by the
plans. EMCOR and the other defendants intend to vigorously defend the case.
Insurance coverage may be applicable under an EMCOR pension trust liability
insurance policy for EMCOR and those present and former employees of EMCOR who
are defendants in the action.
Substantial settlements or damage judgements arising out of these matters
could have a material adverse effect on EMCOR'S business, operating results and
financial conditions.
In addition to the above, EMCOR is involved in other legal proceedings and
claims asserted by and against EMCOR, which have arisen in the ordinary course
of business. EMCOR believes it has a number of valid defenses to these actions,
and EMCOR intends to vigorously defend or assert these claims and does not
believe that a significant liability will result. However, EMCOR cannot predict
the outcome thereof or the impact that an adverse result of the matters
discussed above will have upon EMCOR'S financial position or results of
operations.
Item 4. Submission of Matters to a Vote of Security Holders.
None.
9
EXECUTIVE OFFICERS OF THE REGISTRANT
Frank T. MacInnis, Age 53; Chairman of the Board and Chief Executive
Officer of the Company since April 1994 and President of the Company from April
1994 to April 1997. From April 1990 to April 1994 Mr. MacInnis served as
President and Chief Executive Officer, and from August 1990 to April 1994 as
Chairman of the Board, of Comstock Group, Inc., a nationwide electrical
contracting company. From 1986 to April 1990, Mr. MacInnis was Senior Vice
President and Chief Financial Officer of Comstock Group, Inc. In addition, from
1986 to April 1994 Mr. MacInnis was also President of Spie Group Inc., which
had interests in Comstock Group, Inc., Spie Construction Inc., a Canadian
pipeline construction company, and Spie Horizontal Drilling Inc., a U.S. company
engaged in underground drilling for the installation of pipelines and
communications cable.
Jeffrey M. Levy, Age 47; President of the Company since April 1997 and
Chief Operating Officer of the Company since February 1994, Executive Vice
President of the Company from November 1994 to April 1997, Senior Vice President
of the Company from December 1993 to November 1994. From May 1992 to December
1993, Mr. Levy was President and Chief Executive Officer of the Company's
subsidiary EMCOR Mechanical/Electrical Services (East) Inc. From January 1991 to
May 1992 Mr. Levy served as Executive Vice President and Chief Operating Officer
of Lehrer McGovern Bovis, Inc., a construction management and construction
company.
Sheldon I. Cammaker, Age 60; Executive Vice President and General Counsel
of the Company since September 1987 and Secretary of the Company since May 1997.
Prior to September 1987, he was a senior partner of the New York City law firm
of Botein, Hays, & Sklar.
Leicle E. Chesser, Age 53; Executive Vice President and Chief Financial
Officer of the Company since May 1994. From April 1990 to May 1994 Mr. Chesser
served as Executive Vice President and Chief Financial Officer of Comstock
Group, Inc. and from 1986 to May 1994 he was also Executive Vice President and
Chief Financial Officer of Spie Group, Inc.
R. Kevin Matz, Age 41: Vice President and Treasurer of the Company since
April 1996 and Staff Vice President - Financial Services of the Company from
March 1993 to April 1996. From March 1991 to March 1993, Mr. Matz was Treasurer
of Sprague Technologies Inc., a manufacturer of electronic components.
Mark A. Pompa, Age 35; Vice President and Controller of the Company since
September 1994. From June 1992 to September 1994, Mr. Pompa was an Audit and
Business Advisory Manager of Arthur Andersen LLP, an accounting firm.
10
PART II
Item 5. Market For The Registrant's Common Equity and Related Stockholder
Matters
Market Information. EMCOR's common stock trades on the Nasdaq
National Market tier of the Nasdaq Stock Market under the symbol "EMCG".
The following table sets forth high and low sales prices for the common
stock for the periods indicated as reported by the Nasdaq National Market:
1999 High Low
---- ---- ---
First Quarter ....................................... $17 5/8 $16 1/16
Second Quarter ...................................... $26 $16 1/2
Third Quarter ....................................... $25 1/4 $19
Fourth Quarter ...................................... $20 1/8 $16 7/8
1998 High Low
---- ---- ---
First Quarter ....................................... $23 1/8 $19 1/4
Second Quarter ...................................... $22 1/8 $19 1/8
Third Quarter ....................................... $20 1/4 $12 1/2
Fourth Quarter ...................................... $16 11/16 $13 3/8
Holders. As of February 18, 2000 there were 167 shareholders of record and,
as of that date, EMCOR estimates there were approximately 1,100 beneficial
owners holding stock in nominee or "street" name.
Dividends. EMCOR did not pay dividends on its common stock during
1999 or 1998, and it does not anticipate that it will pay dividends on its
common stock in the foreseeable future. EMCOR's working capital credit
facility limits the payment of dividends on its common stock.
11
Item 6. Selected Financial Data (in thousands, except per share data)
The following selected financial data has been derived from audited
financial statements and should be read in conjunction with the consolidated
financial statements, the related notes thereto and the report of independent
public accountants thereon, included elsewhere in this Form 10-K and in
previously filed annual reports on Form 10-K of EMCOR.
Income Statement Data
Year Ended December 31,
-----------------------------------------------------------------------------
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
Revenues ........................................ $2,893,962 $2,210,374 $1,950,868 $1,669,274 $ 1,588,744
Gross profit .................................... 295,907 223,287 182,183 160,788 143,147
Operating income ................................ 58,091 37,224 27,414 17,114 5,893
Income (loss) before extraordinary items......... 27,821 17,092 8,581 9,437 (10,853)
Extraordinary items - loss on early
extinguishment of debt, net of income taxes... -- (4,777) (1,004) -- --
-----------------------------------------------------------------------------
Net income (loss) ............................... $ 27,821 $ 12,315 $ 7,577 $ 9,437 $ (10,853)
=============================================================================
Basic earnings (loss) per share: (a)
Income (loss) before extraordinary items......... $ 2.86 $ 1.67 $ 0.90 $ 1.00 $ (1.13)
Extraordinary items - loss on early
extinguishment of debt, net of income taxes... -- (0.47) (0.11) -- --
-----------------------------------------------------------------------------
Basic earnings (loss) per share ................. $ 2.86 $ 1.20 $ 0.79 $ 1.00 $ (1.13)
=============================================================================
Diluted earnings (loss) per share: (a)
Income (loss) before extraordinary items......... $ 2.21 $ 1.46 $ 0.84 $ 0.96 $ (1.13)
Extraordinary items - loss on early
extinguishment of debt, net of income taxes... -- (0.35) (0.10) -- --
-----------------------------------------------------------------------------
Diluted earnings (loss) per share ............... $ 2.21 $ 1.11 $ 0.74 $ 0.96 $ (1.13)
=============================================================================
Balance Sheet Data
As of December 31,
---------------------------------------------------------------- ------------
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
Stockholder's equity (b) ........................ $ 170,249 $ 119,816 $ 95,323 $ 83,883 $ 70,610
Total assets .................................... $1,056,489 $ 801,002 $ 660,654 $ 620,700 $ 710,945
Goodwill......................................... $ 68,009 $ 22,745 $ 927 -- --
Net assets held for sale ........................ -- -- -- -- $ 61,969
Notes payable ................................... $ 1,150 $ 8,314 -- -- $ 14,665
Borrowings under working capital credit lines.... -- -- $ 9,497 $ 14,200 $ 25,000
7% Senior secured notes ......................... -- -- -- -- $ 61,969
Other long-term debt, including current
maturities.................................... $ 116,534 $ 116,086 $ 62,657 $ 72,405 $ 68,989
Capital lease obligations ....................... $ 554 $ 837 $ 1,482 $ 1,007 $ 1,284
- -------------------
(a) Effective December 31, 1997 EMCOR adopted Statement of Financial Accounting
Standards No. 128, "Earnings Per Share". Accordingly, earnings per share
information for years prior to December 31, 1997 has been restated to
conform to current year presentation.
(b) No cash dividends on EMCOR's common stock have been paid during the past
five years.
12
Item 7. Management's Discussion and Analysis of Results of Operations and
Financial Condition
Highlights
Revenues for the year ended December 31, 1999 were $2.89 billion, compared
to $2.21 billion and $1.95 billion for the years ended December 31, 1998 and
1997, respectively. Income before extraordinary items was $27.8 million for
1999, an increase of $10.8 million, or 63.2% from $17.1 million for 1998 and for
1997 income before extraordinary items was $8.6 million. Diluted earnings per
share on income before extraordinary items were $2.21 per share for 1999,
compared to $1.46 per share for 1998 and $0.84 per share for 1997. EMCOR's
increased results of operations for 1999 were attributable to companies acquired
during 1997, 1998 and 1999, as well as the balance of EMCOR'S operations. Growth
from the balance of EMCOR's operations in 1999 resulted in a 9.4% increase in
1999 revenues compared to 1998.
Operating Segments
EMCOR's business consists of the following operating segments: United
States electrical construction and facilities services, United States mechanical
construction and facilities services, United States other services which
consists primarily of operations that provide consulting and maintenance
services, Canada construction and facilities services, United Kingdom
construction and facilities services, and Other international. Other
international represents the Company's operations outside of the United States,
Canada and the United Kingdom, primarily in the Middle East and Asia Pacific,
performing electrical construction, mechanical construction and facilities
services.
Results of Operations
Revenues
Revenues for the year ended December 31, 1999 increased 30.9% to $2.89
billion, compared to $2.21 billion of revenues for 1998. The increase in
revenues for 1999 compared to 1998 was attributable to $476.1 million of
revenues from companies acquired during 1999 and 1998, and revenue growth from
the balance of EMCOR's operations of $207.5 million. Revenues for 1998 of $2.21
billion represented a 13.3% increase over revenues of $1.95 billion for 1997.
Companies acquired during 1998 accounted for approximately $65.0 million of the
increase in 1998 revenues over 1997.
The following table presents EMCOR's revenues by operating segment and the
approximate percentage of total revenues for the years ended December 31, 1999,
1998 and 1997 (in thousands, except for percentages):
% of % of % of
1999 Total 1998 Total 1997 Total
---- ----- ---- ----- ---- -----
Revenues:
United States electrical construction and facilities
services ................................................. $ 993,073 34% $ 888,594 40% $ 744,996 38%
United States mechanical construction and facilities
services.................................................. 1,053,727 36% 599,616 27% 577,590 30%
United States other services .................................. 96,150 3% 14,392 1% 3,019 -
--------------------------------------------------------------------
Total United States Operations ................................ 2,142,950 74% 1,502,602 68% 1,325,605 68%
Canada construction and facilities services ................... 196,694 7% 201,918 9% 179,046 9%
United Kingdom construction and facilities services ........... 553,654 19% 493,278 22% 407,449 21%
Other International............................................ 664 - 12,576 1% 38,768 2%
--------------------------------------------------------------------
Total Worldwide Operations .................................. $2,893,962 100% $2,210,374 100% $1,950,868 100%
====================================================================
Revenues for its United States electrical construction and facilities
services segment for 1999 increased by $104.5 million, or 11.8% compared to
1998. Revenues from companies acquired during 1999 and 1998 contributed $23.0
million of the increase, whereas $81.5 million, or a 9.2% increase, was due to
growth from the balance of EMCOR's United States electrical construction and
facilities services businesses. The growth in revenues from the balance of
EMCOR's operations was due to continuing favorable market conditions for
business units located in the Eastern and Midwest United States, partially
offset by anticipated decreases in certain business activities in the Western
United States. The favorable market conditions were due to increased renovation
projects in these locations, as well as increased new construction spending. The
decreased business activities in the Western United States was primarily
attributable to reduced new construction activity on casinos in Las Vegas. The
$143.6 million, or 19.3%, increase in
13
1998 revenues compared to 1997, was attributable to $19.4 million of revenues
from companies acquired during 1998 as well as from growth from the balance of
other business units located primarily in the Eastern and Midwestern United
States. In particular, 1998 revenues were favorably impacted, compared to 1997,
by increased interior renovation projects in New York City commercial office
buildings associated with corporate relocations.
United States mechanical construction and facilities services revenues
increased $454.1 million, or 75.7%. Revenues from companies acquired during 1999
and 1998 contributed $377.5 million, whereas $76.6 million of the increase in
revenues, or a 12.8% increase, was due to growth from the balance of EMCOR's
United States mechanical construction and facilities services. Eastern and
Western United States based operations were the major contributors to the
increase in revenue due to the continued strong renovation market in New York
City and strengthened new construction markets in Denver and Salt Lake City. A
$22.0 million, or 3.8%, increase in revenues for 1998 compared to 1997 was
attributable to $38.2 million of revenues related to 1998 acquisitions offset by
the anticipated reduction of certain business activities in California.
United States other revenues increased by $81.8 million for 1999 compared
to 1998. The primary source of the increase in 1999 was revenues of $75.6
million from companies acquired during 1999 and 1998. Revenues from the balance
of EMCOR's operations increased by $6.2 million, or 42.7%, compared with 1998
revenues. Revenues for 1998 increased by $11.4 million versus 1997, primarily
attributable to revenues of $7.3 million from companies acquired during 1998 and
increased revenues from the balance of EMCOR's United States other operations.
Revenues of Canada construction and facilities services decreased by $5.2
million, or 2.6%, for 1999 as compared to 1998 revenues. The decrease in
revenues for 1999 compared with 1998 was primarily due to a reduced level of
activities in Eastern Canada and from delays during 1999 in the commencement of
certain projects caused by delays in the bidding process for certain jobs. The
$22.9 million, or 12.8%, increase in revenues for 1998 compared with 1997 was
attributable to the increase in construction and facility services activities in
the Eastern Canadian markets.
United Kingdom construction and facilities services revenues increased
$60.4 million, or 12.2%, for 1999 compared to 1998 revenues principally due to
continued growth in selected construction and facilities markets, combined with
an increase in revenues associated with two major projects. The $85.8 million,
or 21.0%, increase in 1998 revenues compared with 1997 revenues was attributable
to growth in the construction and facilities services market, primarily in the
Southern United Kingdom.
Revenues of the Other international decreased for 1999 to $0.7 million,
compared to $12.6 million for 1998 and $38.8 million for 1997. The decline in
revenues for 1999 compared to 1998 was due to the completion of several large
projects in the Middle East and Asia markets during 1998. The decline for 1998
compared to 1997 was due to a reduction of the level of ownership in, and
related share of revenues, from certain joint venture activities. EMCOR
continues to pursue new business selectively in these markets.
Cost of Sales and Gross Profit
The following table presents EMCOR's cost of sales, gross profit, and
gross profit as a percentage of revenues for the years ended December 1999,
1998 and 1997 (in thousands, except for percentages):
1999 1998 1997
---- ---- ----
Cost of sales $2,598.1 $1,987.1 $1,768.7
Gross profit $ 295.9 $ 223.3 $ 182.2
Gross profit as a percentage of revenues 10.2% 10.1% 9.3%
Gross profit increased $72.6 million, or 32.5%, for 1999 compared to 1998,
primarily due to the increase in 1999 revenues over 1998 revenue levels as
explained above. EMCOR reported gross profit as a percentage of revenues of
10.2% for 1999 compared to 10.1% for 1998. The moderate increase in gross profit
as a percentage of revenues is attributable to the mix of projects completed and
in progress during 1999. Gross profit increased $41.1 million, or 22.6%, for
1998 compared to 1997, and gross profit as a percentage of revenues increased
0.8% for the 1998 period compared with 1997. The increase in gross profit and
gross profit as a percentage of revenues was primarily due to increased
revenues in markets such as New York City, Boston, Washington, D. C., Denver and
Salt Lake City, markets in which higher gross profit projects are more typical
than in other markets.
14
The following table presents EMCOR's selling, general and administrative
expenses, and selling, general and administrative expenses as a percentage of
revenues for the years ended December 31, 1999, 1998 and 1997 (in thousands,
except for percentages):
1999 1998 1997
---- ---- ----
Selling, general & administrative
expenses................................ $237.8 $186.1 $154.8
Selling, general & administrative
expenses as a percentage of revenues.... 8.2% 8.4% 7.9%
Selling, general & administrative
expenses as a percentage of revenues
excluding amortization of goodwill...... 8.1% 8.4% 7.9%
Selling, general and administrative expenses increased $51.7 million, or
27.8%, between 1999 and 1998. As a percentage of revenues, selling, general and
administrative expenses decreased by 0.2% to 8.2% in 1999 as compared to 8.4% in
1998. Selling, general and administrative expenses increased $31.3 million, or
20.2%, between 1998 and 1997. As a percentage of revenues, selling, general and
administrative expenses, increased by 0.5% to 8.4% in 1998 as compared to 7.9%
in 1997. The dollar increase during 1999 as compared to 1998 was attributable
to incremental selling, general and administrative expenses from companies
acquired during 1999 and 1998, as well as the effect of the overall increase in
revenues on variable indirect overhead costs. The decrease in selling, general
and administrative expenses as a percentage of revenues for 1999 compared to
1998 was primarily due to the leveraging of fixed costs over increased revenues
and the generally lower selling, general and administrative expenses as a
percentage of revenues for companies acquired during 1999 and 1998. This
decrease was partially offset by increases in selling, general and
administrative expenses due to the continued development of EMCOR's facilities
services operations, which operations generally require greater selling, general
and administrative expenses than construction services. The increase in selling,
general and administrative expenses for 1998 as compared to 1997 was primarily
attributable to increased revenues and the corresponding increase in variable
selling, general and administrative expenses required to support the increased
revenue base. The increase of 0.5% in selling, general and administrative
expenses as a percentage of revenues was primarily due to the geographic area in
which increased revenues were earned (markets which required a higher level of
selling, general and administrative expense spending to support the revenue
base) and the continued development of EMCOR's facilities services operations.
The following table presents EMCOR's operating income, and operating income
as a percentage of segment revenues, for the years ended December 31, 1999, 1998
and 1997 (in thousands, except for percentages):
% of % of % of
Segment Segment Segment
1999 Revenues 1998 Revenues 1997 Revenues
---- -------- ---- -------- ---- --------
Operating income (loss):
United States electrical construction and facilities
services ........................................... $ 38,485 3.9% $ 36,315 4.1% $ 28,696 3.9%
United States mechanical construction and
and facilities services ........................... 37,815 3.6% 20,955 3.5% 18,627 3.2%
United States other .................................. (4,390) -- (4,783) -- (2,103) --
----------- ------------ -----------
Total United States Operations ........................ 71,910 3.4% 52,487 3.5% 45,220 3.4%
Canada construction and facilities services ........... 3,991 2.0% 5,000 2.5% 4,174 2.3%
United Kingdom construction and facilities
services .......................................... 3,208 0.6% (876) -- (4,859) --
Other International ................................... (355) -- (1,260) -- (1,129) --
Corporate Administration .............................. (20,663) -- (18,127) -- (15,992) --
----------- ------------ -----------
Total Worldwide Operations ............................ 58,091 2.0% 37,224 1.7% 27,414 1.4%
Other Corporate Items:
Interest expense ...................................... (10,520) (11,041) (13,029)
Interest income ....................................... 2,107 3,558 1,077
----------- ------------ -----------
Income before taxes and extraordinary items ........... $49,678 $ 29,741 $ 15,462
=========== ============ ===========
15
Operating income increased for the United States electrical construction
and facilities services operations for 1999 compared to 1998. The dollar
increase in operating income for 1999 of $2.2 million, or 6.0%, as compared to
1998, was attributable to the incremental effect of businesses acquired during
1999 and 1998 as well as growth from the balance of EMCOR's operations. As a
percentage of revenues, operating income decreased by 0.3% for 1999 as compared
to 1998 primarily due to reduced operating income for certain operations which
were only partially offset by a higher percentage of revenues being derived from
markets where higher operating income margins are more typical than in other
EMCOR markets, particularly in Eastern United States cities such as New York
City, Boston and Washington, D.C. Operating income for 1998 for the United
States electrical construction and facilities services operations increased $7.6
million, or 26.6% from 1997 levels due to a similar increase in revenues for
businesses operating in the Eastern United States, particularly in New York City
due to renovation projects.
United States mechanical construction and facilities services operations
operating income increased $16.9 million for 1999, an 80.5% increase over 1998
amounts primarily due to growth of EMCOR's existing businesses and operating
income contributed by businesses acquired during 1999 and 1998. For 1998
compared with 1997, operating income increased $2.3 million, or 12.5%, primarily
due to businesses acquired in 1998. As a percentage of revenues, operating
income increased 0.3% from 1997 to 1998 and 0.1% from 1998 to 1999, principally
due to the continued strong renovation market in New York City and new
construction markets in Denver and Salt Lake City.
United States other operating losses decreased $0.4 million for 1999 as
compared to 1998 primarily due to the continuing development of consulting and
maintenance services operations, offset partially by incremental operating
income from certain businesses acquired during 1999 and 1998. Operating losses
for 1998 compared to 1997 increased by $2.7 million primarily due to costs
associated with the development of the consulting and maintenance services
activities.
Canada construction and facilities services operations operating income
decreased by $1.0 million for 1999 compared to 1998 principally due to the
decrease in revenues derived from Eastern Canada operations and the delay in
commencing certain projects in 1999 caused by delays in the bidding process for
certain jobs. Operating income as a percentage of revenues decreased 0.5% in
1999 compared to 1998 for the same reasons attributable to the dollar decrease
in operating income. The 0.2% increase in operating income as a percentage of
revenues for 1998 compared to 1997 was primarily due to the increase in
construction and facility services activities in the Eastern Canadian markets,
which markets generally have higher operating margin jobs than typical in other
markets in which EMCOR operates.
United Kingdom construction and facilities services operating income of
$3.2 million for 1999 was an improvement compared to an operating loss of $0.9
million for 1998. The improvement was primarily attributable to growth in
selected construction and facilities services markets in the United Kingdom. For
1998, operating losses decreased to $0.9 million, as compared to operating
losses of $4.9 million for 1997. This decrease was attributable to growth in
revenues for EMCOR operations in the Southern United Kingdom.
General corporate expenses for 1999 increased by $2.5 million from 1998
levels, and increased by $2.1 million between 1998 and 1997 periods. The
increases are attributable to increased variable overhead costs associated with
the Company's increased revenues, as well as incremental fixed costs to support
future growth in operations.
Interest expense decreased by $0.5 million for 1999 compared to 1998,
principally due to lower average outstanding borrowings. In addition, EMCOR's
cost of borrowing was lower during 1999 as compared to 1998. The cost of
borrowing was lower due to the 1998 issuance of 5.75% convertible subordinated
notes, a portion of the proceeds from which were used to repay the Series C
notes. These transactions accounted for the decrease in interest expense. In
addition, in December 1998 EMCOR amended its working capital facility which
generally provided for lower costs of borrowing. Interest expense decreased $2.0
million for 1998 compared with 1997 due primarily to the above mentioned Series
C and Convertible Subordinated Notes transactions in March 1998.
Interest income decreased by $1.5 million for 1999 compared with 1998,
primarily due to reduced cash available to invest after approximately $55.8
million was utilized for acquisitions in 1999. Interest income increased by $2.5
million for 1998 compared to 1997. This increase was due to the increase in
available cash balances resulting from the sales proceeds of the 5.75%
convertible subordinated notes and equity offering.
16
Liquidity and Capital Resources
On March 18, 1998, EMCOR sold, pursuant to underwritten public offerings,
$100.0 million principal amount of 5.75% convertible subordinated notes and
1,100,000 shares of its common stock. Interest on the 5.75% convertible
subordinated notes is payable semi-annually. The 5.75% convertible subordinated
notes are unsecured indebtedness of EMCOR and are convertible at any time into
common stock of EMCOR at a conversion price of $27.34 per share.
On March 24, 1998, the underwriter of the 5.75% convertible subordinated
notes offering exercised in full its over-allotment option to purchase an
additional $15.0 million of 5.75% convertible subordinated notes, and
accordingly, an additional $15.0 million principal amount of such notes were
issued.
During the third quarter of 1998, EMCOR's Board of Directors authorized a
stock repurchase program under which EMCOR may repurchase up to $20.0 million of
its common stock. As of December 31, 1999, EMCOR had repurchased 1,131,995
shares of its Common Stock at an aggregate cost of approximately $16.8 million.
Proceeds received from the sale of the 5.75% convertible subordinated notes
along with proceeds from the sale of common stock were used to redeem the Series
C Notes, repay then outstanding borrowings under EMCOR's working capital credit
lines, prepay EMCOR's supplemental sellco note and accrued interest thereon and
for the acquisition of certain businesses through December 31, 1999.
The following table presents EMCOR's net cash provided by operating
activities, net cash provided by financing activities and net cash used in
investing activities for the years ended December 31, 1999 and 1998 (in
thousands):
1999 1998
-------------- --------------
Net cash provided by operating activities $ 35,618 $ 35,312
Net cash used in investing activities $ (60,475) $ (40,231)
Net cash provided by financing activities $ 356 $ 38,596
The Company's consolidated cash balance decreased by $24.5 million from
$83.1 million at December 31, 1998 to $58.6 million at December 31, 1999. Net
cash provided by operating activities for 1999 was $35.6 million, an increase of
$0.3 million from $35.3 million for 1998. The cash provided by operating
activities was primarily due to increased net income, non-cash net income items,
increased contracts in progress accounts payable and accrued expenses, offset
partially by increased accounts receivable. Net cash used in investing
activities for 1999 of $60.5 million consisted primarily of $55.8 million for
acquisitions and $10.7 million for the net purchase of property, plant and
equipment, versus $28.5 million and $10.9 million used for the same activities
for 1998, respectively. Net cash provided by financing activities for 1999 of
$0.4 million was primarily due to net proceeds from the exercise of common stock
warrants of $10.0 million, offset by the purchase of common stock of $2.9
million and repayments of long-term debt and capital lease obligations of $7.0
million. In 1998, net cash provided by financing activities of $38.6 million was
primarily due to the issuance of convertible subordinated notes of $115.0
million, net proceeds from issuance of common stock of $22.5 million, offset
partially by the retirement of Series C notes for $61.9 million, purchases of
common stock for $14.0 million, payment of working capital credit lines of $9.5
million, and retirement of the Supplemental Sellco Note for $5.5 million.
On December 22, 1998, EMCOR and certain of its subsidiaries amended and
restated the June 19, 1996 credit facility; the amended credit facility provides
EMCOR with a credit facility for borrowings of up to $150.0 million. The amended
working capital credit facility, which has an expiration date of June 30, 2002,
is guaranteed by certain direct and indirect subsidiaries of EMCOR. It is
secured by substantially all of the assets of EMCOR and those subsidiaries, and
it provides for borrowing capacity available in the form of revolving loans
and/or letters of credit. The revolving loans bear interest at (1) a rate which
is the prime commercial lending rate announced by Harris Trust and Savings Bank
from time to time (8.5% at December 31, 1999) plus 0% to 0.5%, based on certain
financial tests or (2) at a LIBOR rate (6.0% at December 31, 1999) plus 1.25% to
2.0% based on certain financial tests. The interest rates in effect at December
31, 1999 were 8.5% and 7.25%, respectively. Letters of credit fees issued under
the credit facility ranging from 0.5% to 2.0% are charged based on type of
letters of credit issued and certain financial tests. As of December 31, 1999
and 1998, EMCOR had approximately $17.4 million and $30.2 million of letters of
credit outstanding, respectively.
17
In October 1997, the Company's Canadian subsidiary, Comstock Canada Ltd.,
renewed a credit agreement with a bank providing for an overdraft facility of up
to Cdn. $0.5 million. The facility is secured by a standby letter of credit and
provides for interest at the bank's prime rate (6.5% at December 31, 1999).
There were no borrowings outstanding under this credit agreement at December 31,
1999 and 1998. The Canadian subsidiary may utilize EMCOR's 1998 credit facility
for any future working capital requirements.
In 1998, EMCOR issued notes in connection with the acquisition of two
companies. A principal payment of $1.0 million was made in August 1999 in
respect of one note issued in August 1998, and a principal payment of the
balance of $1.15 million is to be made in respect of that note in August 2000.
Interest on the note is payable together with payments of principal. The other
note, issued in the principal amount of $6.2 million in December 1998, was paid
in full in January 1999.
The Company believes that current cash balances and borrowing capacity
available under lines of credit, combined with cash expected to be generated
from operations, will be sufficient to provide short-term and foreseeable
long-term liquidity and meet expected capital expenditure requirements.
Certain Insurance Matters
As of December 31, 1999, EMCOR was utilizing approximately $17.4 million of
letters of credit obtained under its working capital credit facility as
collateral for its current insurance obligations.
New Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities" ("SFAS No. 133" or "the Statement"). SFAS No. 133, as
amended by SFAS No. 137, establishes for fiscal quarters of fiscal years
beginning after June 15, 2000 accounting and reporting standards requiring
derivative instruments, as defined, to be measured in the financial statements
at fair value. The Statement also requires that changes in the derivative
instruments' fair value be recognized currently in earnings unless certain
accounting criteria are met. EMCOR does not expect the provision of SFAS No. 133
to have a significant effect on the financial condition or results of operations
of EMCOR.
Quantitative and Qualitative Disclosures about Market Risk
EMCOR is exposed to market risk for changes in interest rates for
borrowings under its working capital credit facility. The working capital credit
facility bears interest at variable rates, and the fair value of this borrowing
is not significantly affected by changes in market interest rates. EMCOR is
exposed to market risk on a forward contract that is designated as, and is
effective as, an economic hedge. The amount of this forward contract is not
material to the consolidated financial statements and it is not believed that a
change in foreign exchange rates would have a significant effect on the fair
value of this forward contract.
Amounts invested in EMCOR's foreign operations are translated into U. S.
dollars at the exchange rates in effect at year end. The resulting translation
adjustments are recorded as accumulated other comprehensive income, a component
of stockholders' equity, in the consolidated balance sheets.
Year 2000
The Year 2000 issue concerned the inability of information systems to
properly recognize and process date sensitive information beyond January 1,
2000.
EMCOR has completed the required modifications to its information
technology systems. Modification costs have been expensed as SG&A as incurred
and costs of new software have been capitalized and will be amortized over the
expected useful life of the related software.
Since the inception of EMCOR's efforts to address the Year 2000 issue,
approximately $1.0 million has been expensed as incurred. EMCOR does not
anticipate additional material expenses related to the Year 2000 issue.
18
Additionally, EMCOR has not been notified or become aware of any
significant Year 2000 related incidents which could materially impact
operations. However, management will continue to monitor the Year 2000 issue in
the event such incidents become evident.
This Annual Report on Form 10-K contains certain forward-looking statements
within the meaning of the Private Securities Reform Act of 1995, particularly
statements regarding market opportunities, market share growth, competitive
growth, gross profit, and selling, general and administrative expenses. These
forward-looking statements involve risks and uncertainties, that could cause
actual results to differ materially from those in any such forward-looking
statements. Such factors include, but are not limited to adverse changes in
general economic conditions, including changes in the specific markets for the
Company's services, adverse business conditions, decreased or lack of growth, in
the mechanical and electrical construction and facilities services industries,
increased competition, pricing pressures, risk associated with foreign
operations and other factors.
19
Item 8. Financial Statements and Supplementary Data
EMCOR Group, Inc.
and Subsidiaries
CONSOLIDATED BALANCE SHEETS
(In thousands)
December 31,
------------------------------
1999 1998
---- ----
ASSETS
Current assets:
Cash and cash equivalents ................................................ $ 58,552 $83,053
Accounts receivable, less allowance for doubtful accounts of $31,083
and $24,006, respectively ........................................... 713,593 538,457
Costs and estimated earnings in excess of billings on uncompleted contracts 137,048 91,569
Inventories .............................................................. 9,776 7,188
Prepaid expenses and other ............................................... 9,018 11,702
------------- -----------
Total current assets .................................................... 927,987 731,969
Investments, notes and other long-term receivables ............................ 17,411 6,974
Property, plant and equipment, net ............................................ 36,509 32,098
Goodwill, less accumulated amortization of $4,204 and $786, respectively....... 68,009 22,745
Other assets .................................................................. 6,573 7,216
------------- -----------
Total assets .................................................................. $1,056,489 $801,002
============= ===========
The accompanying notes to consolidated financial statements are an integral
part of these statements.
20
EMCOR Group, Inc.
and Subsidiaries
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
December 31,
------------------------------
1999 1998
---- ----
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term debt and capital lease obligations ....... $ 2,235 $ 7,963
Accounts payable ......................................................... 342,917 246,856
Billings in excess of costs and estimated earnings on uncompleted contracts 216,152 135,094
Accrued payroll and benefits ............................................. 84,496 62,008
Other accrued expenses and liabilities ................................... 71,782 59,996
------------- ------------
Total current liabilities ............................................ 717,582 511,917
Long-term debt and capital lease obligations .................................. 116,003 117,274
Other long-term obligations ................................................... 52,655 51,995
------------- ------------
Total liabilities ............................................................. 886,240 681,186
------------- ------------
Stockholders'equity:
Preferred Stock, $0.10 par value, 1,000,000 shares authorized, zero issued and
outstanding .............................................................. -- --
Common Stock, $0.01 par value, 13,700,000 shares authorized, 10,427,690 and
9,830,603 shares issued and outstanding, respectively .................... 117 109
Warrants ...................................................................... -- 2,154
Capital surplus ............................................................... 142,894 114,867
Accumulated other comprehensive loss .......................................... (2,223) (1,822)
Retained earnings ............................................................. 46,297 18,476
Treasury stock, at cost, 1,131,995 and 957,900 shares, respectively ........... (16,836) (13,968)
------------- ------------
Total stockholders' equity ............................................... 170,249 119,816
------------- ------------
Total liabilities and stockholders' equity .................................... $1,056,489 $801,002
============= ============
The accompanying notes to consolidated financial statements are an integral
part of these statements.
21
EMCOR Group, Inc.
and Subsidiaries
CONSOLIDATED STATEMENTS OF OPERATIONS
For The Years Ended December 31,
(In thousands, except per share data)
1999 1998 1997
------------- ------------- -------------
Revenues ................................................... $2,893,962 $2,210,374 $1,950,868
Costs and expenses:
Cost of sales ........................................ 2,598,055 1,987,087 1,768,685
Selling, general and administrative ................... 237,816 186,063 154,769
------------- ------------- -------------
2,835,871 2,173,150 1,923,454
------------- ------------- -------------
Operating income ........................................... 58,091 37,224 27,414
Interest expense ........................................... (10,520) (11,041) (13,029)
Interest income ............................................ 2,107 3,558 1,077
------------- ------------- -------------
Income before income taxes and extraordinary items ......... 49,678 29,741 15,462
Income tax provision ....................................... 21,857 12,649 6,881
------------- ------------- -------------
Income before extraordinary items .......................... 27,821 17,092 8,581
Extraordinary items - loss on early extinguishment of debt,
net of income taxes.................................... -- (4,777) (1,004)
------------- ------------- -------------
Net income ................................................. $27,821 $ 12,315 $ 7,577
============= ============= =============
Basic earnings per share:
Income before extraordinary items...................... $ 2.86 $ 1.67 $ 0.90
Extraordinary items - loss on early extinguishment of
debt, net of income taxes ........................ -- (0.47) (0.11)
------------- ------------- -------------
Basic earnings per share ................................... $ 2.86 $ 1.20 $ 0.79
============= ============= =============
Diluted earnings per share:
Income before extraordinary items...................... $ 2.21 $ 1.46 $ 0.84
Extraordinary items - loss on early extinguishment of
debt, net of income taxes ........................
-- (0.35) (0.10)
------------- ------------- -------------
Diluted earnings per share ................................. $ 2.21 $ 1.11 $ 0.74
============= ============= =============
The accompanying notes to consolidated financial statements are an integral part
of these statements.
22
EMCOR Group, Inc.
and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
For The Years Ended December 31,
(In thousands)
1999 1998 1997
----------- ----------- -----------
Cash flows from operating activities:
Net income ..................................................... $27,821 $ 12,315 $ 7,577
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization .............................. 10,675 9,846 8,140
Amortization of goodwill ................................... 3,418 734 52
Provision for doubtful accounts ............................ 5,967 3,508 4,300
Non-cash expense for amortization of debt issuance costs ... 1,236 408 1,319
Provision in lieu of income taxes .......................... 15,645 8,151 5,587
Non-cash portion of extraordinary items .................... -- 3,152 533
Other, net ................................................. -- 416 612
----------- ----------- -----------
64,762 38,530 28,120
Change in operating assets and liabilities excluding effect of businesses
acquired:
Increase in accounts receivable ............................ (96,875) (27,219) (41,885)
Decrease in inventories and contracts in progress .......... 14,654 1,236 3,029
Increase in accounts payable, accrued payroll and benefits
and accrued expenses and liabilities .................... 47,706 16,841 31,740
Changes in other assets and liabilities, net ............... 5,371 5,924 4,613
----------- ----------- -----------
Net cash provided by operating activities ...................... 35,618 35,312 25,617
----------- ----------- -----------
Cash flows from investing activities:
Proceeds from sale of assets ............................... 347 308 750
Purchase of property, plant and equipment .................. (10,737) (10,946) (9,753)
Payments for acquisitions of businesses .................... (55,782) (28,520) (1,500)
Net proceeds (disbursements) for other investments ......... 5,697 (1,073) (164)
------------ ------------ -----------
Net cash used in investing activities .......................... (60,475) (40,231) (10,667)
------------ ------------ -----------
Cash flows from financing activities:
Proceeds from working capital credit lines ................. 306,400 -- 136,862
Repayments of working capital credit lines ................. (306,400) (9,497) (141,565)
Net (repayments of) proceeds from long-term debt and
capital lease obligations ............................... (7,012) (1,840) 221
Repayment and redemption of Series C Notes ................. -- (61,854) (11,920)
Net proceeds from exercise of stock options ................ 221 518 427
Premiums paid on early extinguishment of debt .............. -- (2,437) --
Repayment and redemption of Supplemental SellCo Note ....... -- (5,464) --
Issuance of convertible subordinated notes ................. -- 115,000 --
Net proceeds from exercise of common stock warrants ........ 10,015 -- --
Net proceeds from issuance of common stock ................. -- 22,485 --
Purchase of common stock ................................... (2,868) (13,968) --
Debt issuance costs ........................................ -- (4,347) (304)
----------- ------------ ------------
Net cash provided by (used in) financing activities ............ 356 38,596 (16,279)
----------- ----------- ------------
(Decrease) increase in cash and cash equivalents ............... (24,501) 33,677 (1,329)
Cash and cash equivalents at beginning of year ................. 83,053 49,376 50,705
----------- ----------- -----------
Cash and cash equivalents at end of year ....................... $58,552 $83,053 $49,376
=========== =========== ===========
The accompanying notes to consolidated financial statements are an integral
part of these statements.
23
EMCOR Group, Inc.
and Subsidiaries
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY AND
COMPREHENSIVE INCOME
(In thousands)
Accumulated
Total other (Accumulated
stock- comprehensive deficit)
holders' Common Capital income (loss) retained Treasury Comprehensive
equity stock Warrants surplus (1) earnings stock income
------------------------------------------------------------------------------------------------
Balance, December 31, 1996 $ 83,883 $95 $ 2,154 $81,672 $1,378 $ (1,416) --
Net income 7,577 -- -- -- -- 7,577 -- $ 7,577
Foreign currency translation
adjustments (1,573) -- -- -- (1,573) -- -- (1,573)
-----------
Comprehensive income -- -- -- -- -- -- -- $6,004
===========
Provision in lieu of income
taxes, net of benefit of
extraordinary item of
$578 5,009 -- -- 5,009 -- -- --
Common stock issued under
stock option plans 427 1 -- 426 -- -- --
---------------------------------------------------------------------------------
Balance, December 31, 1997 95,323 96 2,154 87,107 (195) 6,161 --
Net income 12,315 -- -- -- -- 12,315 -- $12,315
Foreign currency translation
adjustments (1,627) -- -- -- (1,627) -- -- (1,627)
------------
Comprehensive income -- -- -- -- -- -- -- $10,688
============
Provision in lieu of income
taxes, net of benefit of
extraordinary item of
$3,381 4,770 -- -- 4,770 -- -- --
Issuance of common stock 22,485 11 -- 22,474 -- -- --
Common stock issued under
stock option plans 518 2 -- 516 -- -- --
Treasury stock, at cost (13,968) -- -- -- -- -- (13,968)
---------------------------------------------------------------------------------
Balance, December 31, 1998 119,816 109 2,154 114,867 (1,822) 18,476 (13,968)
Net income 27,821 -- -- -- -- 27,821 -- $27,821
Foreign currency translation
adjustments (401) -- -- -- (401) -- -- (401)
------------
Comprehensive income -- -- -- -- -- -- -- $27,420
============
Provision in lieu of income
taxes 15,645 -- -- 15,645 -- -- --
Common stock issued
pursuant to warrants
exercised 10,015 7 (1,190) 11,198 -- -- --
Value of expired warrants -- -- (964) 964 -- -- --
Common stock issued under
stock option plans 221 1 -- 220 -- -- --
Treasury stock, at cost (2,868) -- -- -- -- -- (2,868)
---------------------------------------------------------------------------------
Balance, December 31, 1999 $170,249 $117 -- $142,894 $(2,223) $46,297 $(16,836)
=================================================================================
(1) Represents cumulative foreign currency translation adjustments.
The accompanying notes to the consolidated financial statements are an integral
part of these statements.
24
EMCOR Group, Inc.
and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE A - NATURE OF OPERATIONS
EMCOR Group, Inc., a Delaware corporation, and subsidiaries ("EMCOR") is
the largest mechanical and electrical construction and facilities services firm
in the United States and Canada and one of the largest in the United Kingdom.
EMCOR specializes in the design, installation, integration, start-up, operation
and maintenance of: (1) distribution systems for electrical power, including
power cables, conduits, distribution panels, transformers, generators,
uninterruptible power supply systems and related switch gear and controls; (2)
lighting systems, including fixtures and controls; (3) low-voltage systems,
including fire alarm, security and process control systems; (4) voice and data
communications systems, including fiber-optic and low voltage copper cabling;
(5) heating, ventilation, air conditioning, refrigeration and clean room process
ventilation systems; and (6) plumbing, process and high-purity piping systems.
EMCOR provides mechanical and electrical construction services and facilities
services directly to corporations, municipalities and other governmental
entities, owners/developers, and tenants of buildings. It also provides these
services indirectly by acting as a subcontractor to construction managers,
general contractors, systems suppliers and other subcontractors. Mechanical and
electrical construction services often fall into one of two categories: (1)
large installation projects with contracts often in the multi-million dollar
range and (2) smaller installation projects typically involving fit-out
renovations and retrofit work. In addition, EMCOR also provides services needed
to support a customer's facilities not related to construction projects. These
services, frequently referred to as facilities services, include customer based
operations and maintenance, mobile maintenance and service, small modification
and retrofit projects, consulting, program development and management for energy
systems, and maintenance of facilities. These services are provided to a wide
range of commercial, industrial, and institutional buildings including
facilities at which EMCOR provided construction services and at which
construction services were provided by others. Facilities services are
frequently bundled to provide integrated service packages and may include
services in addition to EMCOR's core mechanical and electrical services.
NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The consolidated financial statements include the accounts of EMCOR and its
majority-owned subsidiaries. Significant intercompany accounts and transactions
have been eliminated. Investments over which EMCOR exercises significant
influence, but does not control (generally a 20% to 50% ownership interest), are
accounted for using the equity method of accounting.
Principles of Preparation
The preparation of the consolidated financial statements in conformity with
generally accepted accounting principles requires EMCOR to make estimates and
assumptions that affect the reported amounts of assets and liabilities at the
date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates.
Reclassifications of prior years data have been made in the accompanying
consolidated financial statements where appropriate to conform to the current
presentation.
Revenue Recognition
Revenues from long-term contracts are recognized on the
percentage-of-completion method. Percentage-of-completion is measured
principally by the percentage of costs incurred and accrued to date for each
contract to the estimated total costs for each contract at completion. Certain
of EMCOR's electrical contracting business units measure
percentage-of-completion by the percentage of labor costs incurred to date for
each contract to the estimated total labor costs for such contract.
Provisions for estimated losses on uncompleted contracts are made in the
period in which such losses are determined. In forecasting ultimate
profitability on certain contracts, estimated recoveries are included for work
25
EMCOR Group, Inc.
and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - (Continued)
performed under customer change orders to contracts for which firm prices have
not yet been negotiated. Due to uncertainties inherent in the estimation
process, it is reasonably possible that completion costs, including those
arising from contract penalty provisions and final contract settlements, will be
revised in the near-term. Such revisions to costs and income are recognized in
the period in which the revisions are determined.
Costs and estimated earnings on uncompleted contracts
Costs and estimated earnings in excess of billings on uncompleted contracts
arise when revenues have been recorded but the amounts cannot be billed under
the terms of the contracts. Such amounts are recoverable from customers upon
various measures of performance, including achievement of certain milestones,
completion of specified units or completion of the contract.
Also included in costs and estimated earnings on uncompleted contracts are
amounts EMCOR seeks or will seek to collect from customers or others for errors
or changes in contract specifications or design, contract change orders in
dispute or unapproved as to both scope and price, or other customer-related
causes of unanticipated additional contract costs (claims and unapproved change
orders). These amounts are recorded at their estimated net realizable value when
realization is probable and can be reasonably estimated. No profit is recognized
on the construction costs incurred in connection with these amounts. Unapproved
change orders involve the use of estimates, and it is reasonably possible that
revisions to the estimated recoverable amounts of recorded unapproved change
orders may be made in the near-term. Claims made by EMCOR involve negotiation
and, in certain cases, litigation. EMCOR expenses litigation costs as incurred,
although it may seek to recover these costs as part of the claim. EMCOR believes
that it has established legal basis for pursuing recovery of recorded claims,
and it is management's intention to pursue and litigate these claims, if
necessary, until a decision or settlement is reached. Claims also involve the
use of estimates, and it is reasonably possible that revisions to the estimated
recoverable amounts of recorded claims may be made in the near-term. Claims
against EMCOR are recognized when a loss is considered probable and amounts are
reasonably determinable.
Costs and estimated earnings on uncompleted contracts and related amounts
billed as of December 31, 1999 and 1998 are as follows (in thousands):
1999 1998
------------- -------------
Costs incurred on uncompleted contracts .................... $4,901,702 $2,737,507
Estimated earnings ......................................... 410,755 202,211
------------- -------------
5,312,457 2,939,718
Less: billings to date ..................................... 5,391,561 2,983,243
------------- -------------
$ (79,104) $ (43,525)
============= =============
Such amounts are included in the accompanying Consolidated Balance Sheets
at December 31, 1999 and 1998 under the following captions (in thousands):
1999 1998
------------- -------------
Costs and estimated earnings in excess of billings on
uncompleted contracts .................................... $137,048 $ 91,569
Billings in excess of costs and estimated earnings on
uncompleted contracts .................................... (216,152) (135,094)
------------- -------------
$ (79,104) $ (43,525)
============= =============
26
EMCOR Group, Inc.
and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - (Continued)
As of December 31, 1999 costs and estimated earnings in excess of billings
on uncompleted contracts included unbilled revenues for unapproved change orders
of approximately $22.7 million and claims of approximately $17.8 million. In
addition, accounts receivable as of December 31, 1999 includes claims and
contractually billed amounts related to such contracts of approximately $28.3
million. Claims and related amounts included in accounts receivable aggregated
approximately $29.0 million as of December 31, 1998. Generally, contractually
billed amounts will not be paid by the customer to EMCOR until final resolution
of related claims.
Classification of Contract Amounts
In accordance with industry practice, EMCOR classifies as current all
assets and liabilities related to the performance of long-term contracts. The
contracting cycle for certain long-term contracts may extend beyond one year
and, accordingly, collection or payment of amounts related to these contracts
may extend beyond one year. Accounts receivable at December 31, 1999 and 1998
included $128.7 million and $91.6 million, respectively, of retainage billed
under terms of the contracts. EMCOR estimates that approximately 85% of
retainage recorded at December 31, 1999 will be collected during 2000.
Cash and cash equivalents
For purposes of the consolidated financial statements, EMCOR considers all
highly liquid instruments with original maturities of three months or less to be
cash equivalents. EMCOR maintains a centralized cash management program whereby
its excess cash balances are invested in high quality, short-term money market
instruments which are considered cash equivalents. At times, cash balances in
EMCOR's bank accounts may exceed federally insured limits.
Inventories
Inventories, which consist primarily of construction materials, are stated
at the lower of cost or market. Cost is determined principally using average
cost.
Investments, notes and other long-term receivables
Investments, notes and other long-term receivables at December 31, 1999 was
$17.4 million, representing a $10.4 million increase compared to $7.0 million at
December 31, 1998, and primarily consists of investments in joint ventures
accounted for using the equity method of accounting. The $10.4 million increase
was primarily attributable to such investments of a company acquired by EMCOR in
1999.
Property, plant and equipment
Property, plant and equipment is stated at cost. Depreciation is recorded
principally using the straight-line method over estimated useful lives ranging
from 3 to 40 years.
Property, plant and equipment in the accompanying Consolidated Balance
Sheets consisted of the following amounts as of December 31, 1999 and 1998 (in
thousands):
1999 1998
---------- -----------
Machinery and equipment ...................................... $36,814 $33,894
Furniture and fixtures ....................................... 9,723 6,953
Land, buildings and leasehold improvements ................... 20,510 15,566
---------- -----------
67,047 56,413
Accumulated depreciation and amortization .................... (30,538) (24,315)
---------- -----------
$36,509 $32,098
========== ===========
27
EMCOR Group, Inc.
and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - (Continued)
Goodwill
Goodwill at December 31, 1999 and 1998 primarily consisted of approximately
$68.0 million and $22.8 million, respectively, of the excess of cost over fair
market value of net identifiable assets of companies acquired in purchase
transactions. Goodwill is being amortized using the straight-line method over
periods ranging from 5 to 20 years.
At the end of each quarter, EMCOR reviews events and changes in
circumstances to determine whether the recoverability of the carrying value of
Goodwill should be reassessed. Should events or circumstances indicate that the
carrying value may not be recoverable based on undiscounted future cash flows,
an impairment loss measured by the difference between the discounted future cash
flows (or another acceptable method for determining fair value) and the carrying
value of Goodwill would be recognized by EMCOR. Through December 31, 1999, no
adjustment for the impairment of Goodwill carrying value has been required.
Insurance Reserves
EMCOR's insurance liability is determined actuarially based on claims filed
and an estimate of claims incurred but not yet reported. At December 31, 1999
and 1998, the estimated current portion of the discounted insurance liability
was included in "Other accrued expenses and liabilities" in the accompanying
Consolidated Balance Sheets. The non-current portion of the discounted insurance
liability was included in "Other long-term obligations".
Fair Value of Financial Instruments
EMCOR's financial instruments include accounts receivable, investments,
notes and other long-term receivables, long-term debt, foreign currency
contracts and other financing commitments whose carrying values approximate
their fair values.
At December 31, 1999, the fair value of EMCOR's 5.75% Convertible
Subordinated Notes was $97.8 million compared to the carrying value of $115.0
million. The fair value was estimated based on quoted market prices and market
interest rates as of December 31, 1999.
Foreign Operations
The financial statements and transactions of EMCOR's foreign subsidiaries
are maintained in their functional currency and translated into U.S. dollars in
accordance with Statement of Financial Accounting Standards No. 52, "Foreign
Currency Translation". Translation adjustments have been accumulated as a
separate component of Stockholders' equity as Accumulated other comprehensive
income (loss).
Income Taxes
EMCOR accounts for income taxes in accordance with the provisions of
Statement of Financial Accounting Standards No. 109, "Accounting for Income
Taxes" ("SFAS 109"). SFAS 109 requires an asset and liability approach which
requires the recognition of deferred tax assets and deferred tax liabilities for
the expected future tax consequences of temporary differences between the
carrying amounts and the tax bases of assets and liabilities. Valuation
allowances are established when necessary to reduce net deferred tax assets to
the amount expected to be realized.
28
EMCOR Group, Inc.
and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - (Continued)
Foreign Exchange Contracts
Gains and losses on contracts designated as hedges of net investments in
foreign subsidiaries are recognized in the Consolidated Statements of
Stockholders' Equity and Comprehensive Income as a component of Accumulated
other comprehensive income (loss).
As of December 31, 1999, EMCOR had one forward contract that was designated
as, and was effective as, an economic hedge. The amount of this forward contract
was not material to the Consolidated Financial Statements.
Valuation of Stock Option Grants
EMCOR accounts for its stock option plans under Accounting Principles Board
Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB 25"). See Note
I for pro forma information relating to treatment of EMCOR's stock option plans
under Statement of Financial Accounting Standards No. 123, "Accounting for
Stock-Based Compensation" ("SFAS 123").
New Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities" ("SFAS 133"). SFAS 133, as amended by Statement of
Financial Accounting Standards No. 137, "Accounting for Derivative Instruments
and Hedging Activities-Deferral of the Effective Date of SFAS No. 133",
establishes for fiscal quarters of fiscal years beginning after June 15, 2000
accounting and reporting standards requiring derivative instruments, as defined,
to be measured in the financial statements at fair value. SFAS 133 also requires
that changes in the derivative instruments' fair value be recognized currently
in earnings unless certain accounting criteria are met. EMCOR does not expect
the provision of SFAS 133 to have a significant effect on the financial
condition or results of operations of EMCOR.
NOTE C - ACQUISITIONS OF BUSINESSES
During 1999, EMCOR acquired two businesses and paid additional
consideration by reason of earnouts on prior acquisitions for an aggregate of
$55.8 million in cash. During 1998, EMCOR acquired ten businesses for an
aggregate purchase price of $36.8 million, $28.5 million of which was paid in
cash and $8.3 million was paid in notes made by EMCOR. The purchase price of
certain transactions are subject to finalization based on certain contingencies
provided for in the purchase agreements. These acquisitions were accounted for
by the purchase method, and the purchase price has been allocated to the assets
acquired and liabilities assumed, based upon the estimated fair values of these
assets and liabilities at the dates of acquisition. The purchase prices of these
transactions are of a preliminary basis and are subject to certain purchase
accounting adjustments. Goodwill, representing the excess purchase price over
the fair value of amounts assigned to the net tangible assets acquired, was
$68.0 million and $22.7 million at December 31, 1999 and 1998, respectively, and
is being amortized over periods of 5 to 20 years. Amortization expense for the
year ended December 31, 1999, 1998 and 1997 was $3.4 million, $0.7 million and
$0.1 million, respectively. The pro forma effect on EMCOR's revenues, net income
and earnings per share for 1999, 1998 and 1997, as though the acquisitions
occurred as of January 1 of each year, was not material.
29
EMCOR Group, Inc.
and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
NOTE D - EARNINGS PER SHARE
The following tables summarize EMCOR's calculation of Basic and Diluted
Earnings per Share ("EPS") for the years ended December 31, 1999, 1998 and 1997:
Income Shares Per Share
1999 (Numerator) (Denominator) Amount
---- -------------- --------------- ----------
Basic EPS
Income before extraordinary item available to common
stockholders ........................................... $27,821,000 9,732,930 $2.86
==========
Effect of Dilutive Securities:
Convertible Subordinated Notes, including assumed
interest savings, net of tax............................ 4,099,750 4,206,291
Options .................................................... -- 245,893
Warrants ................................................... -- 259,708
-------------- ---------------
Diluted EPS ................................................ $31,920,750 14,444,822 $2.21
============== =============== ==========
Income Shares Per Share
1998 (Numerator) (Denominator) Amount
---- -------------- --------------- ----------
Basic EPS
Income before extraordinary item available to common
stockholders ........................................... $17,092,000 10,232,527 $1.67
==========
Effect of Dilutive Securities:
Convertible Subordinated Notes including assumed
interest savings, net of tax ........................... 2,785,000 2,952,672
Options .................................................... -- 215,531
Warrants ................................................... -- 228,995
-------------- ---------------
Diluted EPS ................................................ $19,877,000 13,629,725 $1.46
============== =============== ==========
Income Shares Per Share
1997 (Numerator) (Denominator) Amount
---- -------------- --------------- ----------
Basic EPS
Income before extraordinary item available to common
stockholders ........................................... $8,581,000 9,547,869 $0.90
==========
Effect of Dilutive Securities:
Options .................................................... -- 305,336
Warrants ................................................... -- 321,690
-------------- ---------------
Diluted EPS ................................................ $8,581,000 10,174,895 $0.84
============== =============== ==========
The number of EMCOR's options granted, which were excluded from the
computation of Diluted EPS for the years ended December 31, 1999, 1998 and 1997
because they would be antidilutive, were 211,720, 306,785 and none,
respectively.
30
EMCOR Group, Inc.
and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
NOTE E - CURRENT DEBT
1998 Credit Facility
On December 22, 1998, EMCOR and certain of its subsidiaries amended and
restated the June 19, 1996 credit facility; the amended credit facility provides
EMCOR with a credit facility for borrowings of up to $150.0 million. The amended
credit facility, which has an expiration date of June 30, 2002, is guaranteed by
certain direct and indirect subsidiaries of EMCOR. It is secured by
substantially all of the assets of EMCOR and those subsidiaries, and it provides
for borrowing capacity available in the form of revolving loans and/or letters
of credit. The revolving loans bear interest at (1) a rate which is the prime
commercial lending rate announced by Harris Trust and Savings Bank from time to
time (8.5% at December 31, 1999) plus 0% to 0.5%, based on certain financial
tests or (2) at a LIBOR rate (6.0% at December 31, 1999) plus 1.25% to 2.0%
based on certain financial tests. The interest rates in effect at December 31,
1999 were 8.5% and 7.25%, respectively. Letters of credit fees issued under the
credit facility ranging from 0.5% to 2.0% are charged based on type of letters
of credit issued and certain financial tests. As of December 31, 1999 and 1998,
EMCOR had approximately $17.4 million and $30.2 million of letters of credit
outstanding, respectively. No revolving loans were outstanding under the 1998
Credit Facility at December 31, 1999 and 1998.
1996 Credit Facility
On June 19, 1996, EMCOR and its subsidiary Dyn Specialty Contracting, Inc.
entered into a credit agreement with Harris Trust and Savings Bank providing
EMCOR with a working capital credit facility for borrowings up to $100.0 million
for a three-year period. This agreement was amended and restated on December 22,
1998.
Foreign Borrowings
In October 1997, EMCOR's Canadian subsidiary, Comstock Canada Ltd., renewed
a credit agreement with a bank providing for an overdraft facility of up to Cdn.
$0.5 million. The facility is secured by a standby letter of credit and provides
for interest at the bank's prime rate (6.5% at December 31, 1999). There were no
borrowings outstanding under this facility at December 31, 1999 and 1998. The
Canadian subsidiary may utilize EMCOR's 1998 credit facility for any future
working capital requirements.
31
EMCOR Group, Inc.
and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
NOTE F - LONG-TERM DEBT
Long-term debt in the accompanying Consolidated Balance Sheets consisted of
the following amounts as of December 31, 1999 and 1998 (in thousands):
1999 1998
----------- -----------
Convertible Subordinated Notes at 5.75% due 2005 .............................. $115,000 $115,000
Note Payable at 6.0%, due 2000 ................................................ 1,150 2,150
Note Payable, due 1999 ........................................................ -- 6,164
Capitalized Lease Obligations at weighted average interest rates from 2.9% to
11.0%, payable in varying amounts through 2004 ............................. 554 837
Other, at weighted average interest rates of approximately 10.0%, payable in
varying amounts through 2016 ............................................... 1,534 1,086
----------- -----------
118,238 125,237
Less : current maturities .................................................. 2,235 7,963
----------- -----------
$116,003 $117,274
=========== ===========
Convertible Subordinated Notes
On March 18, 1998, EMCOR sold, pursuant to an underwritten public offering,
$100.0 million principal amount of 5.75% Convertible Subordinated Notes
("Subordinated Notes"). On March 24, 1998, the underwriter of the Subordinated
Notes offering exercised in full its over-allotment option to purchase an
additional $15.0 million of Subordinated Notes, and accordingly, Subordinated
Notes in the additional principal amount of $15.0 million were issued. The
Subordinated Notes will mature on April 1, 2005 and are general, unsecured
obligations of EMCOR, subordinated in right to all existing and future Senior
Indebtedness (as defined in the indenture pursuant to which Subordinated Notes
were issued (the "Subordinated Indenture") of EMCOR.
The Subordinated Indenture does not contain any financial covenants or any
restrictions on the payment of dividends, the repurchase of securities of EMCOR
or the incurrence of Indebtedness (as defined in the Subordinated Indenture) or
Senior Indebtedness. Holders of the Subordinated Notes have the right at any
time to convert the Subordinated Notes into Common Stock of EMCOR at a
conversion price of $27.34 per share.
Series C Notes
On December 15, 1994, EMCOR issued approximately $62.8 million principal
amount of Series C Notes. Interest on the Series C Notes was payable
semiannually through June 15, 1996 by the issuance of additional Series C Notes
and was thereafter payable quarterly in cash until redemption. The Series C
Notes were unsecured indebtedness of EMCOR and were subordinate to indebtedness
under EMCOR's 1996 credit facility. The Series C Notes were recorded at a
discount to their face amount to yield an estimated effective interest rate of
14.0%.
On June 3, 1997, EMCOR purchased $1.0 million of Series C Notes and retired
such notes. On June 27, 1997, EMCOR called for the partial redemption of
approximately $10.9 million principal amount of Series C Notes. In accordance
with the Indenture governing the Series C Notes, the redemption price of the
Series C Notes was 105% of the principal amount redeemed. Accordingly, EMCOR
recorded an extraordinary loss of approximately $1.0 million related to the
early retirement of debt. The extraordinary loss consisted primarily of the
write-off of the associated debt discount plus premiums and costs associated
with the redemption, net of income tax benefits of approximately $0.7 million.
32
EMCOR Group, Inc.
and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
NOTE F - LONG-TERM DEBT- (Continued)
On March 18, 1998, EMCOR called for redemption approximately $61.9 million
principal amount of Series C Notes and irrevocably funded such amounts, together
with a redemption premium, with the trustee of the Series C Notes. In accordance
with the Indenture governing the Series C Notes, the redemption price of the
Series C Notes was 104% of the principal amount redeemed. Accordingly, EMCOR
recorded an extraordinary loss of $4.8 million net of income taxes related to
the early retirement of debt. The extraordinary loss consisted primarily of the
write-off of the associated debt discount plus the redemption premium and costs
associated with the redemption, net of income tax benefits.
Supplemental SellCo Note
On December 15, 1994, EMCOR issued to its wholly-owned subsidiary SellCo
Corporation ("SellCo") its 8.0% promissory note in the principal amount of
approximately $5.5 million (the "Supplemental SellCo Note"). The Supplemental
SellCo Note provided that it matured on the earlier of (i) December 15, 2004 or
(ii) one day prior to the date on which the SellCo Notes (hereafter defined) are
deemed canceled. The Supplemental SellCo Note was recorded at a discount to its
face amount to yield an estimated effective interest rate of 14.0%.
In June 1998, EMCOR prepaid in full, including accrued interest thereon,
the Supplemental SellCo Note.
SellCo Notes
On December 15, 1994, SellCo issued approximately $48.1 million principal
amount of 12.0% Subordinated Contingent Payments Notes, due 2004, (the "SellCo
Notes"). Interest was payable semiannually in additional SellCo Notes. Net Cash
Proceeds (as defined in the Indenture pursuant to which the SellCo Notes were
issued) from the sales of stock or assets of SellCo subsidiaries were to be used
to redeem SellCo Notes. The SellCo Notes were not obligations of EMCOR and,
accordingly, were not included in the accompanying Consolidated Balance Sheets
as of December 31, 1999 and 1998. Since the date of issuance, approximately
$20.0 million of the SellCo Notes have been redeemed with proceeds from the sale
of stock and assets of SellCo subsidiaries and the prepayment by EMCOR of the
Supplemental SellCo Note. The SellCo Notes mature on December 15, 2004 if not
deemed canceled at an earlier date pursuant to the Indenture.
Notes Payable for Acquisitions
In 1998, EMCOR issued notes in connection with the acquisition of two
companies. A principal payment of $1.0 million was made in August 1999 in
respect of one note issued in August 1998, and a principal payment of the
balance of $1.15 million is to be made in respect of that note in August 2000.
Interest on the note is payable together with payments of principal. The other
note, issued in the principal amount of $6.2 million in December 1998, was paid
in full in January 1999.
Capitalized Lease Obligations
See Note K in the Notes to Consolidated Financial Statements.
33
EMCOR Group, Inc.
and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
NOTE F - LONG-TERM DEBT- (Continued)
Other Long-Term Debt
Other long-term debt consists primarily of loans for real estate, office
equipment, automobiles and building improvements. As of December 31, 1999 and
1998, respectively, other long-term debt, excluding current maturities, totaling
$1.5 million and $1.1 million was owed by certain of EMCOR's subsidiaries. The
aggregate amount of other long-term debt maturing during the next five years is
approximately: $0.6 million in 2000, $0.2 million in 2001, $0.1 million in each
of 2002, 2003 and 2004, and $0.4 million thereafter.
NOTE G - INCOME TAXES
EMCOR files a consolidated federal income tax return including all its U.S.
subsidiaries. At December 31, 1999, EMCOR had net operating loss carryforwards
("NOLs") for U.S. income tax purposes of approximately $110.0 million, which
expire in the years 2007 through 2012. The NOLs are subject to review by the
Internal Revenue Service. Future changes in ownership of EMCOR, as defined by
Section 382 of the Internal Revenue Code, could limit the amount of NOLs
available for use in any one year.
EMCOR adopted Fresh-Start Accounting in connection with EMCOR's
reorganization in December 1994. As a result, the tax benefit of any net
operating loss carryforwards or net deductible temporary differences which
existed as of December 15, 1994 will result in a charge to the tax provision
(provision in lieu of income taxes) and be allocated to reorganization value in
excess of amounts allocable to identifiable assets established in connection
with EMCOR's emergence from bankruptcy and to capital surplus. For the year
ended December 31, 1996, EMCOR allocated approximately $4.5 million of its tax
provision to reorganization value in excess of amounts allocable to identifiable
assets, thereby reducing this balance to zero. The remaining utilization of NOLs
and other deferred tax assets, approximately $15.6 million, $8.2 million and
$5.6 million for the years ended December 31, 1999, 1998 and 1997, respectively,
have been applied to capital surplus for the years then ended.
34
EMCOR Group, Inc.
and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
NOTE G - INCOME TAXES -(Continued)
The income tax provision in the accompanying Consolidated Statements of
Operations for the years ended December 31, 1999, 1998 and 1997 consists of (in
thousands):
1999 1998 1997
----------- ------------ -----------
Current:
Federal .......................................... $ 2,482 $ 1,549 $ 396
State and local .................................. 2,000 788 580
Foreign .......................................... 630 2,161 1,418
----------- ------------ -----------
5,112 4,498 2,394
----------- ------------ -----------
Deferred:
Foreign .......................................... 1,100 -- (1,100)
----------- ------------ -----------
Provision in lieu of income taxes 15,645 8,151 5,587
----------- ------------ -----------
$21,857 $12,649 $6,881
=========== ============ ===========
Factors accounting for the variation from U.S. statutory income tax rates
relating to continuing operations for the years ended December 31, 1999, 1998
and 1997 are as follows (in thousands):
1999 1998 1997
----------- ------------ -----------
Federal income taxes at the statutory rate ............ $17,387 $10,409 $5,412
State and local income taxes, net of federal tax benefits 2,990 1,058 686
Foreign income taxes .................................. 271 1,247 1,630
Non-deductible goodwill amortization................... 843 101 --
Other ................................................. 366 (166) (847)
----------- ------------ -----------
$21,857 $12,649 $6,881
=========== ============ ===========
The components of the net deferred income tax asset included in "Other
Assets" in the accompanying Consolidated Balance Sheets for the years ended
December 31, 1999, and 1998 are as follows (in thousands):
1999 1998
------------ -------------
Deferred tax assets:
Net operating loss carryforward .............................. $ 42,166 $ 57,998
Excess of amounts expensed for financial statement purposes
over amounts deducted for income tax purposes ............ 64,149 30,177
Other ........................................................ 2,899 2,899
------------ -------------
Total deferred tax asset ..................................... 109,214 91,074
------------ -------------
Deferred tax liabilities:
Cost capitalized for financial statement purposes and deducted
for income tax purposes ................................... 20,433 17,823
------------ -------------
Total deferred tax liability ................................. 20,433 17,823
------------ -------------
Net deferred tax asset before valuation allowance ............ 88,781 73,251
Valuation allowance for net deferred tax asset ............... (88,781) (72,151)
------------ -------------
Net deferred tax asset ....................................... $ -- $ 1,100
============ =============
35
EMCOR Group, Inc.
and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
NOTE G - INCOME TAXES -(Continued)
Income before income taxes and extraordinary items for the years ended
December 31, 1999, 1998, and 1997 consists of the following (in thousands):
1999 1998 1997
---- ---- ----
United States ....................................... $42,714 $ 27,130 $ 19,207
Foreign ............................................. 6,964 2,611 (3,745)
---------- ----------- -----------
$49,678 $ 29,741 $ 15,462
========== =========== ===========
NOTE H - COMMON STOCK
On March 18, 1998, EMCOR sold, pursuant to an underwritten public offering,
1,100,000 of its common stock at a price of $21.875 per share.
As part of a program previously authorized by the Board of Directors, EMCOR
purchased 174,095 and 957,900 shares of its common stock during 1999 and 1998,
respectively. The aggregate amount of $16.8 million paid for those shares has
been classified as "Treasury Stock, at Cost" in the Consolidated Balance Sheet
at December 31, 1999. EMCOR management is authorized to repurchase up to $20.0
million of EMCOR's common stock under this program.
NOTE I - STOCK OPTIONS AND WARRANTS
EMCOR has stock based compensation plans under which employees receive
stock options and outside directors receive stock options or shares of common
stock. During 1999, certain stock options were granted by the board of directors
outside of established stock option plans. A summary of the general terms of the
stock option and stock unit plans, plus other stock option grants follows:
Authorized Exercise
Shares Vesting Expiration Price
--------------- ----------------- ---------------- ---------------
1994 Management Stock Option Plan 1,000,000 Generally, Ten years Fair market
(the "1994 Plan") 33 1/3% on each from grant value of
anniversary of date common stock
grant date on grant date
1995 Non-Employee Directors' Non- 200,000 100% on grant date Ten years Fair market
Qualified Stock Option Plan from grant value of
(the "1995 Plan") date common stock
on grant date
1997 Non-Employee Directors' Non- 300,000 (1) Five years Fair market
Qualified Stock Option Plan from grant value of
(the "1997 Directors' Stock date common stock
Option Plan") on grant date
(3)
1997 Stock Plan for Directors (the 150,000 (2) Five years Fair market
"1997 Directors' Stock Plan") from grant value of
date common stock
on grant
date(4)
Other Stock Option Grants Not applicable Generally, either Ten years Fair market
100% on first from grant value of
anniversary of date common stock
grant date or 33 on grant date
1/3% on each
anniversary of
grant date
36
EMCOR Group, Inc.
and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
NOTE I - STOCK OPTIONS AND WARRANTS -(Continued)
- --------------------
(1) At the election of an individual serving as a Director, the individual may
elect to receive one-third, two-thirds or all of his retainer for a
calendar year in the form of stock options. Such options become exercisable
quarterly over the calendar year. In addition, the individual will receive
additional stock options equal to the product of .5 times the amount of
stock options otherwise issued as a result of his election.
(2) At the election of an individual serving as a Director, the individual may
elect to receive one-third, two-thirds or all of his retainer for a
calendar year in the form of deferred stock units equal in value to the
retainer. In addition, the individual will receive additional deferred
stock units equal to .2 times the amount of deferred stock units otherwise
issued as a result of his election. Following termination of Board service,
the director receives shares of common stock equal to the number of
deferred stock units.
(3) The grant date is the first business day of a calendar year for individuals
who are serving as Directors as of such date, and on the date.
(4) The grant date is the first business day of a calendar year for individuals
who are serving as Directors as of such date.
The following table summarizes EMCOR's stock option activity since December
31, 1996.
1997 Directors' Stock 1997 Directors' Other Stock Option
1994 Plan 1995 Plan Option Plan Stock Plan Grants
-------------------- ------------------- --------------------- ------------------- --------------------
Weighted Weighted Weighted Weighted Weighted
Average Average Average Average Average
Shares Price Shares Price Shares Price Shares Price Shares Price
------ ----- ------ ----- ------ ----- ------ ----- ------ -----
Balance December 31, 1996 628,236 $5.33 52,500 $10.21 -- -- -- -- -- --
Granted............... 366,000 $19.82 18,000 $16.31 -- -- -- -- -- --
Forfeited............. (2,668) $5.13 -- -- -- -- -- -- -- --
Exercised............. (73,191) $5.13 (3,000) $17.13 -- -- -- -- -- --
---------- ---------- --------- --------- --------
Balance December 31, 1997 918,377 $11.12 67,500 $11.53 -- -- -- -- -- --
Granted............... 90,000 $20.06 18,000 $19.63 35,785 $19.94 1,800 $20.00 -- --
Forfeited............. (205,000) $19.73 -- -- -- -- -- -- -- --
Exercised............. (81,676) $5.29 -- -- -- -- -- -- -- --
---------- ---------- --------- --------- --------
Balance December 31, 1998 721,701 $10.44 85,500 $13.24 35,785 $19.94 1,800 $20.00 -- --
Granted............... -- -- 18,000 $22.13 40,968 $16.19 330 $19.63 315,000 $18.49
Forfeited............. -- -- -- -- -- -- -- -- -- --
Exercised............. (16,933) $9.13 (10,500) $6.34 -- -- (1,200) $20.00 -- --
---------- ---------- --------- --------- --------
Balance December 31, 1999 704,768 $10.47 93,000 $15.74 76,753 $17.94 930 $19.87 315,000 $18.49
========== ========== ========= ========= ========
At December 31, 1999, 1998 and 1997, approximately 943,000, 642,000 and
386,000 options were exercisable, respectively. The weighted average exercise
price of exercisable options at December 31, 1999, 1998 and 1997 was
approximately $12.28, $8.43 and $6.46, respectively.
37
EMCOR Group, Inc.
and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
NOTE I - STOCK OPTIONS AND WARRANTS -(Continued)
The following table summarizes information about EMCOR's stock options at
December 31, 1999:
Options Outstanding Options Exercisable
----------------------------------------------------- ---------------------------
Range of Weighted-Average Weighted-Average Weighted-Average
Exercise Prices Number Remaining Life Exercise Price Number Exercise Price
--------------- ------ -------------- -------------- ------ --------------
$4.75-$5.13 450,767 5.26 Years $4.96 450,767 $4.96
$9.38-$9.63 15,000 5.88 Years $9.48 15,000 $9.48
$14.13-$20.00 693,351 7.97 Years $18.77 456,029 $19.15
$20.38-$22.13 31,333 8.94 Years $21.39 21,334 $21.86
The weighted average fair value of options granted during 1999, 1998 and
1997 were $18.41, $15.18 and $14.67, respectively.
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option pricing model with the following weighted-average
assumptions used for grants in 1999, 1998 and 1997: risk-free interest rates of
4.6% to 5.7% (representing the risk-free interest rate at the date of the
grant); expected dividend yields of zero percent; expected terms of 3.3 to 6.5
years; and expected volatility of 56.5% for options granted prior to December
31, 1996, and 73.6%, 87.3% and 79.8% for options granted during 1999, 1998 and
1997, respectively.
EMCOR applies APB 25 and related interpretations in accounting for its
stock option plans. Accordingly, no compensation cost has been recognized in the
accompanying Consolidated Statements of Operations for the years ended December
31, 1999, 1998 and 1997 for options granted during those years. Had compensation
cost for these plans been determined consistent with SFAS 123, EMCOR's net
income, Basic EPS and Diluted EPS would have been reduced from the following as
reported amounts to the following pro forma amounts (in thousands, except per
share amounts):
1999 1998 1997
---- ---- ----
Net income:
As reported.................................................. $27,821 $12,315 $7,577
Pro forma.................................................... $25,597 $10,176 $6,842
Basic EPS:
As reported.................................................. $ 2.86 $ 1.20 $0.79
Pro forma.................................................... $ 2.63 $ 0.99 $0.72
Diluted EPS:
As reported.................................................. $ 2.21 $ 1.11 $0.74
Pro forma.................................................... $ 2.06 $ 0.75 $0.67
Warrants
On December 15, 1994, EMCOR issued to the holders of $7,040,000 principal
amount of its pre-bankruptcy petition 7.75% Convertible Subordinated Debentures
and $9,600,000 principal amounts of its pre-bankruptcy petition 12.0%
Subordinated Notes, their pro rata share of each of two series of five-year
Warrants to purchase shares of Common Stock, namely Series X Warrants and Series
Y Warrants, with an exercise price of $12.55 per share and $17.55 per share,
respectively. In addition, approximately 28,000 Series X Warrants and 28,000
Series Y Warrants, were issued to Belmont Capital Partners II, L. P. as a
portion of additional interest under a debtor-in-possession credit facility.
During November and December 1999, 600,603 Series X and 141,944 Series Y
Warrants were exercised, respectively. All unexercised Series X and Series Y
Warrants expired on December 15, 1999.
38
EMCOR Group, Inc.
and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
NOTE J - RETIREMENT PLANS
EMCOR's United Kingdom subsidiary has a defined benefit pension plan
covering substantially all eligible employees. The benefits under the plan are
based on wages and years of service with the subsidiary. EMCOR's policy is to
fund the minimum amount required by law.
The change in benefit obligation and plan assets for the years ended
December 31, 1999 and 1998 consists of the following components (in thousands):
1999 1998
---- ----
Change in pension benefit obligation
Benefit obligation at beginning of year ......... $87,574 $62,597
Service cost .................................... 6,285 4,994
Interest cost ................................... 5,243 5,554
Changes in actuarial assumptions ................ 3,965 16,679
Benefits paid ................................... (2,881) (2,870)
Foreign currency exchange rate changes .......... (2,969) 620
------------- ------------
Benefit obligation at end of year ............... $97,217 $87,574
------------- ------------
Change in pension plan assets
Fair value of plan assets at beginning of year... $82,428 $69,078
Actual return on plan assets .................... 17,810 9,666
Employer contributions .......................... 4,529 3,763
Plan participants' contributions ................ 2,155 2,107
Benefits paid ................................... (2,881) (2,870)
Foreign currency exchange rate changes .......... (2,794) 684
------------- ------------
Fair values of plan assets at end of year ....... $101,247 $82,428
------------- ------------
Funded status ................................... $ 4,030 $(5,146)
Unrecognized transition amount .................. (383) (480)
Unrecognized prior service cost ................. 518 615
Unrecognized losses/(gains) ..................... (6,338) 3,671
------------- ------------
Net amount recognized ........................... $ (2,173) $(1,340)
============= ============
Amounts recognized in the Consolidated Financial Statements
Employer contributions .......................... $ 4,529 $3,763
Net periodic pension benefit cost ............... (5,408) (3,318)
Accrued pension cost brought forward ............ (1,340) (1,768)
Foreign currency exchange rate changes .......... 46 (17)
------------- ------------
Net amount recognized as accrued pension liability $ (2,173) $(1,340)
============= ============
The assumptions used as of December 31, 1999, 1998 and 1997 in determining
pension cost and liability shown above were as follows:
1999 1998 1997
----------- ---------- ---------
Discount rate ............................... 6.0% 6.0% 8.5%
Annual rate of salary provision ............. 4.0% 6.5% 6.5%
Annual rate of return on plan assets ........ 7.5% 10.0% 10.0%
For measurement purposes, a 2.5% and 5.0% annual rate of increase in the
per capita cost of covered pension benefits was assumed for 1999 and 1998,
respectively.
39
EMCOR Group, Inc.
and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
NOTE J - RETIREMENT PLANS -(Continued)
The components of net periodic pension benefit cost for the years ended
December 31, 1999, 1998 and 1997 were as follows (in thousands):
1999 1998 1997
----------- --------- ----------
Service cost ............................... $6,285 $4,994 $4,224
Interest cost .............................. 5,243 5,554 4,828
Expected return on plan assets ............. (17,810) (9,666) (9,750)
Net amortization of prior service cost and
actuarial (gain)/loss ................... 11,690 2,436 3,988
----------- --------- ----------
Net periodic pension benefit cost .......... $5,408 $3,318 $3,290
=========== ========= ==========
EMCOR contributes to various union pension funds based upon wages paid to
union employees of EMCOR. Such contributions approximated $71.1 million, $57.4
million and $50.8 million for the years ended December 31, 1999, 1998 and 1997,
respectively.
EMCOR has a defined contribution retirement plan that covers its U.S.
non-union eligible employees. Contributions to this plan are based on a
percentage of the employee's base compensation. The expense recognized for the
years ended December 31, 1999, 1998 and 1997, for the defined contribution plan
was $2.2 million, $1.9 million and $2.6 million, respectively.
NOTE K - COMMITMENTS AND CONTINGENCIES
EMCOR and its subsidiaries lease land, buildings and equipment under
various leases. The leases frequently include renewal options and require EMCOR
to pay for utilities, taxes, insurance and maintenance expenses.
Future minimum payments, by year and in the aggregate, under capital
leases, non-cancelable operating leases and related sub-leases with initial or
remaining terms of one or more years at December 31, 1999 are as follows (in
thousands):
Capital Operating Sublease
Lease Lease Income
----------- ----------- -----------
2000............................................... $318 $23,475 $ 574
2001 .............................................. 163 19,055 656
2002 .............................................. 63 14,449 558
2003 .............................................. 50 10,296 523
2004 .............................................. 13 7,607 401
Thereafter ........................................ -- 16,930 1,932
----------- ----------- -----------
Total minimum lease payment ....................... 607 $91,812 $4,644
=========== ===========
Amounts representing interest .....................
(53)
-----------
Present value of net minimum lease payments ....... $554
===========
Rent expense for the years ended December 31, 1999, 1998 and 1997 was $15.1
million, $12.1 million and $9.8 million, respectively. Rent expense for the
years ended December 31, 1999, 1998 and 1997 includes sublease rentals of $0.7
million, $0.1 million and $2.3 million, respectively.
EMCOR has employment agreements with certain of its executive officers and
management personnel. These agreements generally continue until terminated by
the executive or EMCOR and provide for severance benefits if terminated. Certain
of the agreements provide the employees with certain additional rights if a
change of control (as defined) of EMCOR occurs.
40
EMCOR Group, Inc.
and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
NOTE K - COMMITMENTS AND CONTINGENCIES- (Continued)
EMCOR is contingently liable to sureties in respect of performance and
payment bonds issued by the sureties in connection with certain contracts
entered into by EMCOR's subsidiaries in the normal course of their business.
EMCOR has agreed to indemnify the sureties for any payments made by them in
respect of such bonds.
EMCOR is subject to regulation with respect to the handling of certain
materials used in construction which are classified as hazardous or toxic by
Federal, State and local agencies. EMCOR's practice is to avoid participation in
projects principally involving the remediation or removal of such materials.
However, where remediation is a required part of contract performance, EMCOR
believes it complies with all applicable regulations governing the discharge of
material into the environment or otherwise relating to the protection of the
environment.
NOTE L - ADDITIONAL CASH FLOW INFORMATION
The following presents information about cash paid for interest and income
taxes for the years ended December 31, 1999, 1998 and 1997 (in thousands):
1999 1998 1997
----------- ---------- ----------
Cash paid during the year for:
Interest ............................. $ 9,018 $10,849 $9,116
Income taxes ......................... $ 5,418 $ 1,480 $ 521
NOTE M - SEGMENT INFORMATION
EMCOR adopted Statement of Financial Accounting Standards No. 131,
"Disclosures About Segments of an Enterprise and Related Information" ("SFAS
131") in 1998. SFAS 131 changed the way EMCOR reports information about its
operating segments. The accounting policies of the operating segments are the
same as those described in the summary of significant accounting policies. EMCOR
evaluates financial performance based on the operating income of the reportable
business units.
EMCOR has the following reportable segments pursuant to SFAS 131: United
States electrical construction and facilities services, United States mechanical
construction and facilities services, Canada construction and facilities
services and United Kingdom construction and facilities services. United States
other services primarily represents those operations which principally provide
consulting and maintenance services. Other International represents EMCOR's
operations outside of the United States, Canada, and the United Kingdom,
primarily in the Middle East and performing electrical construction, mechanical
construction and facilities services. Inter-segment sales are not material for
any of the periods presented. The Extraordinary items - loss on early
extinguishment of debt, net of income taxes, of $4.8 million and $1.0 million
for the years ended December 31, 1998 and 1997, respectively, are related to
Corporate Administration of EMCOR.
41
EMCOR Group, Inc.
and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
NOTE M - SEGMENT INFORMATION- (Continued)
The following presents information about industry segments and geographic
areas for the years ended December 31, 1999, 1998 and 1997 (in thousands):
1999 1998 1997
---- ---- ----
Revenues:
United States electrical construction and facilities
services ................................................ $ 993,073 $ 888,594 $ 744,996
United States mechanical construction and facilities
services ................................................ 1,053,727 599,616 577,590
United States other services ............................... 96,150 14,392 3,019
------------- ------------- -------------
Total United States Operations ............................. 2,142,950 1,502,602 1,325,605
Canada construction and facilities services................. 196,694 201,918 179,046
United Kingdom construction and facilities services......... 553,654 493,278 407,449
Other International construction and facilities services.... 664 12,576 38,768
------------- ------------- -------------
Total Worldwide Operations ................................. $2,893,962 $2,210,374 $1,950,868
============= ============= =============
Operating income (loss):
United States electrical construction and facilities
services ................................................ $ 38,485 $ 36,315 $ 28,696
United States mechanical construction and facilities
services ............................................... 37,815 20,955 18,627
United States other services ............................... (4,390) (4,783) (2,103)
------------- ------------- -------------
Total United States Operations ............................. 71,910 52,487 45,220
Canada construction and facilities services................. 3,991 5,000 4,174
United Kingdom construction and facilities services......... 3,208 (876) (4,859)
Other International construction and facilities services.... (355) (1,260) (1,129)
Corporate Administration ................................... (20,663) (18,127) (15,992)
------------- ------------- --------------
Total Worldwide Operations ................................. 58,091 37,224 27,414
Other Corporate Items:
Interest expense ........................................... (10,520) (11,041) (13,029)
Interest income ............................................ 2,107 3,558 1,077
------------- ------------- -------------
Income before taxes and extraordinary items ................ $49,678 $ 29,741 $ 15,462
============= ============= =============
Capital expenditures:
United States electrical construction and facilities
services ................................................ $ 3,689 $ 2,928 $ 2,378
United States mechanical construction and facilities
services ................................................ 3,012 2,473 3,507
United States other services ............................... 655 116 95
------------- ------------- -------------
Total United States Operations ............................. 7,356 5,517 5,980
Canada construction and facilities services................. 804 990 575
United Kingdom construction and facilities services......... 2,226 3,928 2,594
Other International construction and facilities services.... 113 48 379
Corporate Administration ................................... 238 463 225
------------- ------------- -------------
Total Worldwide Operations ................................. $10,737 $ 10,946 $ 9,753
============= ============= =============
Depreciation and amortization:
United States electrical construction and facilities
services ................................................ $ 3,284 $ 3,315 $ 2,009
United States mechanical construction and facilities
services ................................................ 5,083 2,664 2,143
United States other services ............................... 2,329 526 36
------------- ------------- -------------
Total United States Operations ............................. 10,696 6,505 4,188
Canada construction and facilities services................. 680 651 1,364
United Kingdom construction and facilities services......... 2,550 3,072 2,203
Other International construction and facilities services.... 60 207 277
Corporate Administration .................................. 107 145 160
------------- ------------- -------------
Total Worldwide Operations ................................. $14,093 $ 10,580 $ 8,192
============= ============= =============
42
EMCOR Group, Inc.
and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
NOTE M - SEGMENT INFORMATION -(Continued)
1999 1998
------------ -------------
Costs and estimated earnings in excess of billings on uncompleted contracts:
United States electrical construction and facilities services.............. $ 40,353 $ 33,346
United States mechanical construction and facilities services.............. 76,628 34,830
United States other services .............................................. 3,417 1,942
------------- ------------
Total United States Operations ............................................ 120,398 70,118
Canada construction and facilities services................................ 7,949 4,346
United Kingdom construction and facilities services........................ 8,675 17,095
Other International construction and facilities services................... 26 10
------------- ------------
Total Worldwide Operations ................................................ $ 137,048 $ 91,569
============= ============
Billings in excess of costs and estimated earnings on uncompleted contracts:
United States electrical construction and facilities services.............. $103,278 $ 74,193
United States mechanical construction and facilities services.............. 79,535 34,977
United States other services .............................................. 1,786 1,341
------------- ------------
Total United States Operations ............................................ 184,599 110,511
Canada construction and facilities services................................ 8,252 6,568
United Kingdom construction and facilities services........................ 18,494 16,896
Other International construction and facilities services................... 4,807 1,119
------------- ------------
Total Worldwide Operations ................................................ $216,152 $ 135,094
============= ============
Total assets:
United States electrical construction and facilities services.............. $343,309 $ 282,580
United States mechanical construction and facilities services.............. 378,813 204,469
United States other services .............................................. 58,950 25,725
------------- ------------
Total United States Operations ............................................ 781,072 512,774
Canada construction and facilities services................................ 62,141 49,463
United Kingdom construction and facilities services........................ 151,414 156,693
Other International construction and facilities services................... 18,295 14,605
Corporate Administration .................................................. 43,567 67,467
------------- ------------
Total Worldwide Operations ................................................ $1,056,489 $ 801,002
============= ============
NOTE N - SELECTED UNAUDITED QUARTLY INFORMATION
(In thousands, Except Per Share Data)
March 31 June 30 Sept. 30 Dec. 31
----------- ------------ ----------- -----------
1999 Quarterly Results
Revenues ............................................ $539,983 $696,489 $810,749 $846,741
Gross profit ........................................ $51,955 $66,628 $78,017 $99,307
Net income .......................................... $ 2,051 $ 5,427 $ 8,638 $11,705
Basic EPS ........................................... $ 0.21 $ 0.56 $ 0.89 $ 1.19
=========== ============ =========== ===========
Diluted EPS.......................................... $ 0.20 $ 0.45 $ 0.66 $ 0.88
=========== ============ =========== ===========
1998 Quarterly Results
Revenues ............................................ $493,923 $ 545,547 $565,964 $604,940
Gross profit ........................................ $ 44,240 $ 52,275 $57,954 $ 68,818
Income before extraordinary item .................... $ 802 $ 3,674 $ 5,760 $ 6,856
Net (loss) income ................................... $ (3,975) $ 3,674 $ 5,760 $ 6,856
Basic EPS before extraordinary item ................. $ 0.08 $ 0.34 $ 0.55 $ 0.69
============ =========== ========== ===========
Basic EPS (loss) .................................... $ (0.41) $ 0.34 $ 0.55 $ 0.69
============ =========== ========== ===========
Diluted EPS.......................................... $ (0.41) $ 0.31 $ 0.45 $ 0.55
============ =========== ========== ===========
43
EMCOR Group, Inc.
and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
NOTE O - LEGAL PROCEEDINGS
EMCOR's subsidiary Dynalectric Company ("Dynalectric") had been a party to
an arbitration proceeding arising out of Dynalectric's participation in a joint
venture with Computran Systems Corp. ("Computran"). The proceeding, which was
instituted in 1988 in the Superior Court of New Jersey, Bergen County ("Superior
Court") by Computran, a participant in, and a subcontractor to, the joint
venture, alleged that Dynalectric wrongfully terminated its subcontract,
fraudulently diverted funds due to it, misappropriated its trade secrets and
proprietary information, fraudulently induced it to enter into the joint venture
and conspired with others to commit certain acts in violation of the New Jersey
Racketeering Influence and Corrupt Organization Act. The Superior Court ordered
that the matter in dispute between Dynalectric and Computran be resolved by
binding arbitration in accordance with an original agreement between the
parties. Following a decision by the arbitrator, the parties decided to settle
all matters relating to the dispute and exchange general releases, and as a
consequence, Dynalectric paid to Computran $1,000,000.
In February 1995 as part of an investigation by the New York County
District Attorney's office into the business affairs of Herbert Construction
Company ("Herbert"), a general contractor that did business with EMCOR's
subsidiary, Forest Electric Corp. ("Forest"), a search warrant was executed at
Forest's executive offices. At that time, EMCOR was informed that Forest and
certain of its officers are targets of the continuing investigation. Neither
EMCOR nor Forest has been advised of the precise nature of any suspected
violation of law by Forest or its officers. On April 7, 1997, Ted Kohl, a
principal of Herbert, pled guilty to one count of money laundering, one count of
offering a false instrument for filing and one count of filing a false New York
State Resident Income Tax Return. DPL Interiors, Inc., a Company allegedly owned
by Mr. Kohl, also pled guilty to one count of failing to file New York City
General Income Tax Returns. Mr. Kohl and DPL Interiors, Inc. have not yet been
sentenced.
On July 31, 1998, a former employee of a subsidiary of EMCOR filed a
class-action complaint on behalf of the participants in two employee benefit
plans sponsored by EMCOR against EMCOR and other defendants for breach of
fiduciary duty under the Employee Retirement Income Security Act. All of the
claims relate to alleged acts or omissions which occurred during the period May
1, 1991 to December 1994. The principal allegations of the complaint are that
the defendants breached their fiduciary duties by causing the plans to purchase
and hold stock of EMCOR when it was then known as JWP, Inc. and when the
defendants knew or should have known it was imprudent to do so. The plaintiff
has not made claim for a specific dollar amount of damages but generally seeks
to recover for the benefit plans the loss in the value of JWP stock held by the
plans. EMCOR and the other defendants intend to vigorously defend the case.
Insurance coverage may be applicable under an EMCOR pension trust liability
insurance policy for EMCOR and those present and former employees of EMCOR who
are defendants in the action.
Substantial settlements or damage judgements against EMCOR arising out of
these matters could have a material adverse effect on EMCOR's business,
operating results and financial condition.
In addition to the above, EMCOR is involved in other legal proceedings and
claims, asserted by and against EMCOR, which have arisen in the ordinary course
of business. EMCOR believes it has a number of valid defenses to these actions
and EMCOR intends to vigorously defend or assert these claims and does not
believe that a significant liability will result. However, EMCOR cannot predict
the outcome thereof or the impact that an adverse result of the matters
discussed above will have upon EMCOR's financial position or results of
operations.
44
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Stockholders of EMCOR Group, Inc.:
We have audited the accompanying consolidated balance sheets of EMCOR Group,
Inc. (a Delaware corporation) and subsidiaries (the "Company") as of December
31, 1999 and 1998, and the related consolidated statements of operations,
stockholders' equity and comprehensive income and cash flows for each of the
three years in the period ended December 31, 1999. These consolidated financial
statements and the schedule referred to below are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements and schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of the Company as of December 31,
1999 and 1998, and the results of their operations and their cash flows for each
of the three years in the period ended December 31, 1999, in conformity with
generally accepted accounting principles.
Our audits were made for the purpose of forming an opinion on the basic
financial statements taken as a whole. The schedule of Valuation and Qualifying
Accounts is presented for purposes of complying with the Securities and Exchange
Commission rules and is not part of the basic financial statements. This
schedule has been subjected to the auditing procedures applied in the audits of
the basic financial statements and, in our opinion, fairly states in all
material respects the financial data required to be set forth therein in
relation to the basic financial statements taken as a whole.
ARTHUR ANDERSEN LLP
Stamford, Connecticut
February 18, 2000
45
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not Applicable
PART III
The Items comprising Part III information will be filed as an amendment to
this Form 10-K no later than 120 days after December 31, 1999, the end of
EMCOR's fiscal year covered by this Form 10-K.
46
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a)(1) The following consolidated financial statements of EMCOR Group,
Inc. and Subsidiaries are included in Part II, Item 8:
Financial Statements:
Consolidated Balance Sheets - December 31, 1999 and 1998
Consolidated Statements of Operations - Years Ended December
31, 1999, 1998 and 1997
Consolidated Statements of Cash Flows - Years Ended December 31,
1999, 1998 and 1997
Consolidated Statements of Stockholders' Equity and
Comprehensive Income - Years Ended December 31, 1999,
1998 and 1997
Notes to Consolidated Financial Statements
Report of Independent Public Accountants
(a)(2) The following financial statement schedules are included in this
Form 10-K report:
Schedule II - Valuation And Qualifying Accounts
All other schedules are omitted because they are not required,
are inapplicable, or the information is otherwise shown in the
consolidated financial statements or notes thereto.
(a)(3) The exhibits listed on the Exhibit Index following the
consolidated financial statements hereof are filed herewith in
response to this Item.
47
Schedule II
EMCOR Group, Inc.
VALUATION AND QUALIFYING ACCOUNTS
Additions
Balance at Charged To
Beginning Costs and Other Deductions Balance at
Description of Year Expenses Accounts (1) End of Year
- -------------------------------------- ------------- ------------- ------------- ------------- -------------
Allowance for doubtful accounts
Year Ended December 31, 1999 $24,006 5,967 5,094 (3,984) $31,083
Year Ended December 31, 1998 $20,456 3,508 475 (433) $24,006
Year Ended December 31, 1997 $18,812 4,300 2,615 (5,271) 20,456
(1) Deductions represent uncollectible balances of accounts receivable written
off, net of recoveries.
48
EMCOR GROUP, INC.
EXHIBIT INDEX
Exhibit Incorporated By Reference To, or
No. Description Page Number
------------ ----------------------------------------------------- ----------------------------------------------
2(a) -- Disclosure Statement and Third Amended Exhibit 2(a) to EMCOR's Registration
Joint Plan of Reorganization (the "Plan of Statement on Form 10 as originally filed
Reorganization") proposed by EMCOR March 17, 1995 (the "Form 10")
Group, Inc. (formerly JWP INC.) (the
"Company" or "EMCOR") and its
subsidiary SellCo Corporation ("SellCo"), as
approved for dissemination by the United
States Bankruptcy Court, Southern District
of New York (the "Bankruptcy Court"), on
August 22, 1994.
2(b) -- Modification to the Plan of Reorganization Exhibit 2(b) to Form 10
dated September 29, 1994
2(c) -- Second Modification to the Plan of Exhibit 2(c) to Form 10
Reorganization dated September 30, 1994
2(d) -- Confirmation Order of the Bankruptcy Court Exhibit 2(d) to Form 10
dated September 30, 1994 (the
"Confirmation Order") confirming the Plan
of Reorganization, as amended
2(e) -- Amendment to the Confirmation Order Exhibit 2(e) to Form 10
dated December 8, 1994
2(f) -- Post-confirmation modification to the Plan Exhibit 2(f) to Form 10
of Reorganization entered on December 13,
1994
3(a-1) -- Restated Certificate of Incorporation of Exhibit 3(a-5) to Form 10
EMCOR filed December 15, 1994
3(a-2) -- Amendment dated November 28, 1995 to Exhibit 3(a-2) to EMCOR's Annual Report on
the Restated Certificate of Incorporation of Form 10-K for the year ended December 31,
EMCOR 1995 (the"1995 Form 10-K")
3(a-3) -- Amendment dated February 12, 1998 to the Exhibit 3(a-3) to EMCOR's Annual Report on
Restated Certificate of Incorporation Form 10-K for the year ended December 31,
1997 (the"1997 Form 10-K")
3(b) -- Amended and Restated By-Laws Exhibit 3(b) to EMCOR's Annual Report on
Form 10-K for the year ended December 31,
1998 (the"1998 Form 10-K)
3(c) -- Rights Agreement dated March 3, 1997 Exhibit 1 to EMCOR's Report on Form 8-K
between EMCOR and the Bank of New York dated March 3, 1997
4.1 -- Amendment and Restatement of Credit Exhibit 4.1 to 1998 Form 10-K
Agreement (the "Credit Agreement") dated as of December
22, 1998 among EMCOR, certain of its subsidiaries and
Harris Trust and Savings Bank, individually and as
agent, and the Lenders which are or become Parties
thereto*
49
Exhibit Incorporated By Reference To, or
No. Description Page Number
------------ ----------------------------------------------------- ----------------------------------------------
4.2 -- Subordinated Indenture dated as of March Exhibit 4(b) to EMCOR's Quarterly Report on
18, 1998 ("Indentured") between EMCOR and Form 10-Q for the quarter ended March 31,
State Street Bank and Trust Company, as 1998 ("March 1998 Form 10-Q")
Trustee ("State Street Bank")
4.3 -- First Supplemental Indenture dated as of Exhibit 4(c) to March 1998 Form 10-Q
March 18, 1998 to Indenture between EMCOR and
State Street Bank
4.4 -- Indenture dated as of December 15, 1994, Exhibit 4.4 to Form 10
between SellCo and Fleet National Bank of
Connecticut, as trustee, in respect of
SellCo's 12% Subordinated Contingent Payment
Notes, Due 2004
10(a) -- Amended and Restated Employment Agreement Exhibit 10(a) to EMCOR's Quarterly
made as of May 4, 1999 between EMCOR and Frank Report on Form 10-Q for the quarter ended
T. MacInnis June 30, 1999 ("June 1999 Form 10-Q")
10(b) -- Amended and Restated Employment Agreement Exhibit 10(b) to June 1999 Form 10-Q
made as of May 4, 1999 between EMCOR and
Sheldon I. Cammaker
10(c) -- Amended and Restated Employment Agreement Exhibit 10(b) to June 1999 Form 10-Q
made as of May 4, 1999 between EMCOR and
Leicle E. Chesser
10(d) -- Amended and Restated Employment Agreement Exhibit 10(e) to June 1999 Form 10-Q
made as of May 4, 1999 between EMCOR and
Jeffrey M. Levy
10(e) -- Amended and Restated Employment Agreement Exhibit 10(f) to June 1999 Form 10-Q
made as of May 4, 1999 between EMCOR and R.
Kevin Matz
10(f) -- Amended and Restated Employment Agreement Exhibit 10(g) to June 1999 Form 10-Q
made as of May 4, 1999 between EMCOR and Mark
A. Pompa
10(g) -- 1994 Management Stock Option Plan Exhibit 10(o) to Form 10
10(h) -- 1995 Non-Employee Directors' Non-Qualified Exhibit 10(p) to Form 10
Stock Option Plan
10(i) -- 1997 Non-Employee Directors' Non-Qualified Exhibit 10(k) to 1999 Form 10-K
Stock Option Plan
10(j) -- 1997 Stock Plan for Directors Exhibit 10(l) to 1999 Form 10-K
--
10(k-1) -- Continuity Agreement dated as of June 22, Exhibit 10(a) to EMCOR's Quarterly Report on
1998 between Frank T. MacInnis and EMCOR Form 10-Q for the quarter ended June 30,
(MacInnis Continuity Agreement 1) 1998 ("June 1998 Form 10-Q")
10(k-2) -- Amendment dated as of May 4, 1999 to Exhibit 10(h) to June 1999 Form 10-Q
MacInnis Continuity Agreement
50
Exhibit Incorporated By Reference To, or
No. Description Page Number
------------ ----------------------------------------------------- ----------------------------------------------
10(l-1) -- Continuity Agreement dated as of June 22, Exhibit 10(c) to the June 1998 Form 10-Q
1998 between Sheldon I. Cammaker and EMCOR
("Cammaker Continuity Agreement")
10(l-2) -- Amendment dated as of May 4, 1999 to Exhibit 10(i) to June 1999 Form 10-Q
Cammaker Continuity Agreement
10(m-1) -- Continuity Agreement dated as of June 22, Exhibit 10(d) to the June 1998 Form 10-Q
1998 between Leicle E. Chesser and EMCOR
("Chesser Continuity Agreement")
10(m-2) -- Amendment dated as of May 4, 1999 to Exhibit 10(j) to June 1999 Form 10-Q
Chesser Continuity Agreement
10(n-1) -- Continuity Agreement dated as of June 22, Exhibit 10(b) to the June 1998 Form 10-Q
1998 between Jeffrey M. Levy and EMCOR ("Levy
Continuity Agreement")
10(n-2) -- Amendment dated as of May 4, 1999 to Levy Exhibit 10(l) to June 1999 Form 10-Q
Continuity Agreement
10(o-1) -- Continuity Agreement dated as of June 22, Exhibit 10(f) to the June 1998 Form 10-Q
1998 between R. Kevin Matz and EMCOR ("Matz
Continuity Agreement")
10(o-2) -- Amendment dated as of May 4, 1999 to Matz Exhibit 10(m) to June 1999 Form 10-Q
Continuity Agreement
10(p-1) -- Continuity Agreement dated as of June 22, Exhibit 10(g) to the June 1998 Form 10-Q
1998 between Mark A. Pompa and EMCOR ("Pompa
Continuity Agreement")
10(p-2) -- Amendment dated as of May 4, 1999 to Pompa Exhibit 10(n) to June 1999 Form 10-Q
Continuity Agreement
10(q) -- Release and Settlement Agreement dated Page
December 22, 1999 between EMCOR and Thomas D.
Cunningham*
11 -- Computation of Basic EPS and Diluted EPS Page
for the years ended December 1999 and 1998*
21 -- List of Significant Subsidiaries* Page
23 -- Consent of Arthur Andersen LLP* Page
27 -- Financial Data Schedule* Page
*Filed Herewith
Pursuant to Item 601(b)(4)(iii) of Regulation S-K, upon request of the
Securities and Exchange Commission, the Registrant hereby undertakes to furnish
a copy of any unfiled instrument which defines the rights of holders of
long-term debt of the Registrant's subsidiaries.
51
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
EMCOR GROUP, INC.
(Registrant)
Date: February 23, 2000 by /s/ FRANK T. MACINNIS
------------------------------------
Frank T. MacInnis
Chairman of the Board of Directors
and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on February 23, 2000.
/S/ FRANK T. MACINNIS Chairman of the Board of Directors and
- ------------------------------------- Chief Executive Officer
Frank T. MacInnis
/S/ STEPHEN W. BERSHAD Director
- -------------------------------------
Stephen W. Bershad
/S/ DAVID A. B. BROWN Director
- -------------------------------------
David A. B. Brown
/S/ GEORGES L. DE BUFFEVENT Director
- -------------------------------------
Georges L. de Buffevent
/S/ ALBERT FRIED, JR. Director
- -------------------------------------
Albert Fried, Jr.
/S/ RICHARD F. HAMM, JR. Director
- -------------------------------------
Richard F. Hamm, Jr.
/S/ KEVIN C. TONER Director
- -------------------------------------
Kevin C. Toner
/S/ LEICLE E. CHESSER Executive Vice President and
- ------------------------------------- Chief Financial Officer
Leicle E. Chesser
/S/ MARK A. POMPA Vice President and Controller
- -------------------------------------
Mark A. Pompa
52