SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10/A AMENDMENT NO. 3 GENERAL FORM FOR REGISTRATION OF SECURITIES PURSUANT TO SECTION 12(B) OR (G) OF THE SECURITIES EXCHANGE ACT OF 1934 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 NORWALK, CONNECTICUT 06851-1060 ------------------------------------ ------------------ (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE) REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE (203) 849-7800 --------------------- SECURITIES TO BE REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT: NONE. ---- SECURITIES TO BE REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT: COMMON STOCK, PAR VALUE $.01 PER SHARE. --------------------------------------- ITEM 1. BUSINESS -------- GENERAL EMCOR Group, Inc. ("EMCOR" or the "Company") (formerly known as JWP INC.) is a leader in mechanical/electrical construction and maintenance services. EMCOR's mechanical and electrical services business units ("MES" or "MES Companies") specialize in the design, distribution, integration, installation and maintenance of complex mechanical and electrical systems. Services are provided to a broad range of commercial, industrial and institutional customers through offices located in major markets throughout the United States and 19 offices located in Canada, the United Kingdom and the Middle East. The MES Companies provide mechanical and electrical services directly to end-users (including corporations, municipalities and other governmental entities, owner/developers and tenants of buildings) and, indirectly, by acting as subcontractor for construction managers, general contractors and other subcontractors. The Company also owns and operates Jamaica Water Supply Company, which is the largest investor-owned water utility in New York State and serves portions of Queens County and Nassau County in New York State, and Sea Cliff Water Company, a water utility which serves a small portion of Nassau County. The Company has decided to sell both Jamaica Water Supply Company and Sea Cliff Water Company as part of its business restructuring plan (the "Restructuring"). As discussed in more detail below under "The Restructuring and Chapter 11 Proceeding," since 1992 EMCOR has been engaged in an ongoing Restructuring of its various businesses and recently reorganized under Chapter 11 of the United States Bankruptcy Code and is continuing to experience losses. From August 1992 until February 1994, when it obtained debtor-in-possession financing, EMCOR did not have available credit facilities, and cash flow from operations was inadequate to fund its operations and service its debt and other obligations. Consequently, the Company had to fund operations from working capital and from the proceeds of sales of businesses and other assets. On December 15, 1994 (the "Effective Date"), the Company emerged from Chapter 11 of the Bankruptcy Code pursuant to its Third Amended Joint Plan of Reorganization dated August 9, 1994, as amended (the "Plan of Reorganization"), proposed by EMCOR and its subsidiary, SellCo Corporation ("SellCo"). Under the Plan of Reorganization, prepetition creditors of the Company (other than holders of subordinated debt) received, in addition to certain notes of EMCOR and SellCo, substantially all of the common stock of EMCOR. Prepetition holders of the Company's subordinated debt, preferred stock, common stock and warrants of participation received warrants to purchase common stock of EMCOR in exchange for their debt and equity interests. See "The Restructuring and Chapter 11 Proceeding -- Plan of Reorganization." EMCOR is a Delaware corporation, formed in 1987 to continue the business of its predecessor, a New York corporation with the name JWP INC. The Delaware corporation was also originally named JWP INC. but changed its name to EMCOR Group, Inc. on the Effective Date. The Company'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. MECHANICAL/ELECTRICAL SERVICES The MES Companies specialize in the design, distribution, integration, installation and maintenance of complex mechanical and electrical systems. The wide range of the Company's MES Companies are more particularly described below. The MES Companies had total revenues of approximately $2,195 million (approximately 70% of EMCOR's total consolidated revenues, including discontinued operations) in 1993 and approximately $1,764 million (approximately 96% of EMCOR's total consolidated revenues, including discontinued operations) in 1994. Range of Mechanical and Electrical Services. The MES Companies are primarily involved in the design, integration, installation and maintenance of (i) distribution systems for electrical power (including power cables, conduits, distribution panels, transformers and generators), (ii) lighting systems and (iii) heating, ventilating, air conditioning, plumbing, process and high purity piping and clean air systems. EMCOR believes its mechanical and electrical services business is the largest of its kind in the United States and Canada and one of the largest in the United Kingdom. Mechanical and electrical services are principally of three types: (1) large installation projects, with contracts generally in the multi-million dollar range, in connection with construction of industrial facilities, institutional and public works projects, commercial buildings and large blocks of space within commercial buildings; (2) smaller system installations involving renovation and retrofit work; and (3) maintenance and service. The MES Companies' largest installation projects have included those (i) for industrial and institutional use (such as manufacturing, pharmaceutical and chemical plants, refineries, research facilities, water and wastewater treatment facilities, hospitals, correctional facilities, schools, trading floors, computer facilities and mass transit systems), (ii) for commercial use (such as office buildings, convention centers, shopping malls, hotels and resorts) and (iii) for electrical utilities. These can be multi-year projects ranging in size up to, and occasionally in excess of, $50 million. The MES Companies also install and maintain street, highway, bridge and tunnel lighting, traffic signals, computerized traffic signal control systems and signal control and communication systems for mass transit in several metropolitan areas. Major projects are performed pursuant to contracts with owners, such as corporations and municipalities and other governmental entities, general contractors, construction managers, as agents for owners of construction projects, owner-developers and tenants of commercial properties. Institutional and public works projects are frequently long-term, complicated projects requiring significant technical skills and financial strength to obtain the bid and performance bonds that are often a condition to the award of contracts for such projects. Smaller projects, which are generally completed in less than a year, involve the provision of conventional mechanical and electrical services in industrial plants, office buildings and commercial and retail space in which the MES Companies install electrical fixtures, provide electrical and air conditioning systems for computer facilities, and install smaller heating, air conditioning, and plumbing systems for office and renovation projects. In this area, the MES Companies are not necessarily dependent upon new construction; demands for their services are frequently prompted by the expiration of leases, changes in technology and changes in the customer's plant or office layout in the normal course of business. The MES Companies also perform maintenance and service work, under contract or on an on-call basis, for exterior and interior lighting systems and for air conditioning and heating systems in plants and other large facilities, office buildings and commercial enterprises. The MES Companies also install refrigeration systems for restaurants, office cafeterias and supermarkets. Contracts for maintenance of mechanical and electrical systems range from one to several years and are billed on a time and materials basis or a fixed fee plus the cost of materials. In many of the buildings in which the MES Companies maintain lighting systems, they also install fixtures, move outlets, rewire and perform other routine electrical work. Maintenance and service operations often require a number of employees to be permanently located at the building or facility served. -2- In addition, the MES Companies operate fully equipped sheet metal fabrication facilities in the United States, providing and installing sheet metal for both their own mechanical services businesses and unrelated mechanical contractors; they also maintain welding and piping fabrication shops for their own mechanical operations. Backlog. The MES Companies had a backlog as of December 31, 1994 of approximately $1,145 million compared with a backlog of approximately $1,045 million as of December 31, 1993 and approximately $1,600 million as of December 31, 1992. Approximately $1,054 million of the December 31, 1994 backlog relates to mechanical and electrical subsidiaries which the Company currently intends to retain. Certain MES Companies experienced a reduction in their backlog principally because of the Company's weakened financial condition, which adversely affected their ability to obtain new contracts, and by reason of the continuing recession in the United States and international construction markets. In addition, one surety company that had provided performance and payment bonds for the Dynalectric Companies referred to below (which subsidiaries accounted for approximately 21% of EMCOR's total consolidated revenues for the year ended December 31, 1994) withdrew from that business in January 1994. Performance and payment bonds provided by surety companies are frequently a precondition to the awarding of a mechanical or electrical services contract. The Company entered into an arrangement in November 1994 with a new bonding company, under which bonds are now being made available to this group of subsidiaries. Employees. The MES Companies presently employ approximately 14,000 people, approximately 77% of whom are represented by various unions. The Company believes that its employee relations are generally satisfactory. Competition. The business in which the MES Companies engage is extremely competitive. They compete with national, regional and local companies. However, the Company believes that, at present, it is the largest mechanical and electrical services company in the United States and Canada and one of the largest in the United Kingdom. Many of the MES Companies compete on the basis of the quality of service, price, performance and reliability. Their competitive position has been adversely affected by the Company's weakened financial condition, among other things, inasmuch as their surety companies have become more selective in issuing bonds, especially on larger, longer duration projects. SUPPLY OF WATER Jamaica Water Supply Company ("JWS") (substantially all the common stock of which is owned by the Company) and Sea Cliff Water Company ("Sea Cliff") (all the capital stock of which is owned by JWS) (sometimes referred to herein collectively as the "Water Companies") are regulated public utilities that own and operate water supply systems on Long Island, New York. JWS, the largest investor-owned water utility in New York State, supplies water to a densely populated residential area of approximately 40 square miles in the Borough of Queens in The City of New York (the "City") and in southwestern Nassau County, an area with an aggregate population of approximately 650,000. Sea Cliff supplies water to a four square mile area on the north shore of western Nassau County with a population of approximately 20,000. The business of the Water Companies consists of the purification, distribution and sale of water for residential and commercial purposes including water used for fire sprinkler systems service and public protection fire service. The Water Companies had total revenues of approximately $66.8 million (approximately 2% of EMCOR's total consolidated revenues) in 1993 and approximately $65.0 million (approximately 4% of EMCOR's total consolidated revenues) in 1994. As of December 31, 1994, the Water Companies provided potable water to approximately 122,000 water service accounts, substantially all of whom are metered and billed for the amount of water actually used, and approximately 1,000 private fire protection accounts for sprinkler connections billed on a flat rate basis. -3- The Water Companies' primary sources of water are ground water from wells located in the New York counties of Queens and Nassau and surface water obtained from the City. JWS has 93 wells on 60 well sites, of which 67 wells are currently operable, and Sea Cliff has two wells on two sites, both of which are currently operable. Where appropriate, JWS has installed treatment facilities at well sites to remove volatile organic compounds prior to the water entering the distribution system. In an effort to reduce the cost of water to City residents, the City provides JWS with an exemption from the City's real property taxes and makes direct revenue support payments to JWS for water service. JWS also has an agreement with the City to purchase up to 50 million gallons of water daily from the City (to the extent available) at a cost of $1 per million gallons; however, JWS expects to purchase only approximately 30 million gallons daily. The $1 per million gallons rate is substantially less than both JWS' cost to pump and treat water from its wells and the City's rate for commercial customers. The agreement expires June 30, 1998, although it is cancellable by either party on two years notice. The 30 million gallons of water JWS expects to purchase daily from the City constitutes approximately 60 percent of the average daily amount of water presently distributed by JWS to its customers in Queens County. JWS customers in Nassau County are served entirely from wells owned and operated by JWS. The Water Companies are subject to regulation by the Public Service Commission of the State of New York (the "Public Service Commission"). Since the population of the areas served by the Water Companies has been relatively stable, the amount of water consumed by their customers has not increased and is not expected to increase in any significant respect. Consequently, cost increases due to inflation or otherwise must be recovered through operating efficiencies or increases in rates which are subject to approval of the Public Service Commission. Until 1992, the Water Companies had traditionally filed for rate increases on an annual basis and had received approvals of rate increases from the Public Service Commission enabling them to maintain satisfactory operating results. Pursuant to a settlement agreement with respect to certain rate related proceedings, which agreement became effective February 2, 1994, JWS has agreed that, subject to specified limited exceptions, it will not seek to have a general rate increase become effective prior to January 1, 1997. JWS is also a party to a certain condemnation proceeding. See "Legal Proceedings-- Jamaica Water Supply Company Rate Related Proceedings and Related Litigation" and "New York City Condemnation Proceeding." The Water Companies are also subject to regulation by various federal, state and local agencies, including the Department of Environmental Conservation of the State of New York, the New York State and New York City Departments of Health, the New York City Department of Environmental Protection, the Nassau County Department of Health and the United States Environmental Protection Agency. The Company believes that the Water Companies are in compliance with all applicable Federal, state and local laws and regulations. The Company has determined to sell the Water Companies as part of its Restructuring plan. See "The Restructuring and Chapter 11 Proceeding." OTHER NON-CORE BUSINESSES Information Services. The Company's former Information Services Group ("IS") was principally engaged in providing computer and systems integration services. It sold integrated multi-vendor personal computer related products and services for medium and large sized companies and other organizations. In 1992, IS had total revenues of approximately $1.7 billion. In March 1993, the Company determined to dispose of its domestic IS business as part of its Restructuring. In August 1993, the Company sold substantially all the assets of its U.S. information services subsidiary to ENTEX Information Services, Inc. ("ENTEX"), a newly organized company owned by a private investor and the management of the U.S. information services subsidiary. As part of the consideration for its sale, the Company's subsidiary received warrants to buy up to 10% of the purchaser's common stock for a nominal amount. Additionally, -4- ENTEX assumed substantially all the debt and other liabilities and obligations relating to the ongoing operations of the U.S. information services subsidiary; that subsidiary retained certain lease obligations and certain tax liabilities. The Company was also released from approximately $210 million of its guarantees of indebtedness and similar obligations of the subsidiary. The Company did not receive any cash proceeds as a result of the sale. In October 1993, that subsidiary filed a voluntary petition under Chapter 7 of the U.S. Bankruptcy Code. During the period April 1993 through January 1994, the Company sold, in separate transactions, its information services businesses in Canada, the United Kingdom, Japan and Germany. The Company also carried on similar information services businesses in France and Belgium. In 1993, the French and Belgian businesses filed petitions in their respective countries' courts seeking relief from their creditors. These businesses are in the process of being liquidated. Telephone Systems. The Company sold its telephone systems business in November 1994 for approximately $11 million. This business was engaged in the design, sale, installation and servicing of telecommunication systems, including LEXAR PBX telephone systems which the Company manufactured. These systems are used to interconnect business and institutional users with telephone lines of the regulated telephone companies. In 1993, this telephone systems business had total revenues of approximately $49 million and in 1994 had total revenues of approximately $43 million. Other. In addition to the sale of certain mechanical and electrical services business units contemplated by its Restructuring plan, the Company has sold certain other non-core businesses and intends to dispose of the balance of its non-core businesses. The non-core business units that continue to be held for sale are principally the Water Companies and the Company's remaining energy and environmental related businesses. The Company's principal remaining energy and environmental related business constructs, operates and maintains co-generation facilities for use in steam enhanced oil recovery processes, industrial plants, hotels, universities, hospitals and shopping centers. EMCOR, through its subsidiaries, has built 16 co-generation facilities, operates 6 of them and owns, in whole or in part, 3 of them. The EMCOR subsidiary which owns co-generation facilities supplies utility services to its customers under long-term contracts. The other energy and environmental related business unit collects methane gas at a landfill for conversion into electrical energy which is sold to a utility. THE RESTRUCTURING AND CHAPTER 11 PROCEEDING BACKGROUND OF THE RESTRUCTURING For the year ended December 31, 1992, EMCOR incurred a net loss of approximately $600 million and negative cash flow from operations of approximately $50 million. These losses and the negative cash flow were brought on by several circumstances, including rapid technology changes and price wars in the IS business, the costs of integrating numerous acquired MES and IS business units, and weakened economic conditions in the United States, Canada and the United Kingdom, particularly in the construction industry, all of which combined to depress EMCOR's operating margins and to create a liquidity crisis. Consequently, EMCOR was unable to obtain an increased revolving credit facility in the summer of 1992. From September 1992 until February 14, 1994, when EMCOR filed a consent to an involuntary petition for reorganization under Chapter 11 of the United States Bankruptcy Code that had been filed against EMCOR on December 21, 1993, EMCOR did not have available undrawn credit facilities, and cash flow from operations was insufficient to meet EMCOR's debt service obligations and working capital requirements. Accordingly, EMCOR funded its operations from working capital and the proceeds of sales of business units and other assets. Shortly after EMCOR consented to the order for relief, EMCOR and substantially all of its domestic subsidiaries, as guarantors, entered into a $35.0 million debtor-in-possession credit facility (the "DIP Loan") with Belmont Capital Partners II, L.P. ("Belmont") which provided cash for EMCOR's working capital requirements. -5- In the second half of 1992, EMCOR developed an asset disposition program to sell certain operations that were determined to be non-core to its MES and domestic IS businesses. It was subsequently determined that the Water Companies which had been identified for sale would not be sold due to uncertainties caused by certain rate-related proceedings and litigation. See "Legal Proceedings - Jamaica Water Supply Company." As part of its ongoing Restructuring plan, since 1992 EMCOR has sold more than twenty businesses and certain other miscellaneous assets, the proceeds of which were used to repay certain indebtedness of the Company and for working capital. In March 1993, EMCOR's Board of Directors concluded that the personal computer industry did not provide the stable operating environment that EMCOR needed to restructure, and the decision was made to sell the domestic IS business. Also, the uncertainties regarding the Water Companies were resolved in February 1994, and thereafter EMCOR decided to proceed with the sale of the Water Companies. In 1993, EMCOR's liquidity worsened. This cash drain was a result of weakened operating performance, the required infusion of working capital into operating units, unusual legal, accounting and financial advisory fees, and the funding of a cash escrow account to provide collateral for payment of claims under EMCOR's partial self-insurance program, which was required because of EMCOR's inability to obtain letters of credit for this purpose. In August 1993, EMCOR concluded that it should be reorganized around a smaller domestic and international MES business that would be less volatile, require less capital and bonding, be easier to control and manage and result in significantly lower overhead costs. A number of factors were considered in determining which MES units to retain and which to sell. Subsidiaries that were to be retained generally had lower bonding and capital requirements, generated better cash flow from recurring maintenance and service revenues to service EMCOR's debt, operated in markets where growth potential existed, had the management infrastructure to support systems and offered the opportunity for growth and for better returns on net assets. EMCOR determined that the international MES companies should be retained to provide access to markets which could provide better margins and serve as a buffer from U.S. business cycles. In the fall of 1993, EMCOR announced that it had reached an agreement in principle with holders of its senior debt to restructure its business and capitalization and, subject to documentation of such agreement, intended to file a prepackaged plan of reorganization. However, on December 21, 1993, an involuntary petition for a reorganization under Chapter 11 of the United States Bankruptcy Code, 11 U.S.C. (S) 101 et seq. ("Bankruptcy Code") was filed against EMCOR in the United States Bankruptcy Court for the Southern District of New York ("Bankruptcy Court") by three subordinated debenture holders. On February 14, 1994, EMCOR filed a consent to the involuntary petition and an order for relief was entered. Under Sections 1107 and 1108 of the Bankruptcy Code, EMCOR continued to operate its businesses as a debtor-in-possession and filed the Plan of Reorganization on August 9, 1994. The Plan of Reorganization as amended was confirmed by order of the Bankruptcy Court dated September 30, 1994 (the "Confirmation Order"). The Confirmation Order was subsequently amended on December 8, 1994 and a post-confirmation modification of the Plan of Reorganization was entered on December 13, 1994. PLAN OF REORGANIZATION Pursuant to the Plan of Reorganization, on the Effective Date EMCOR issued, or reserved for issuance, to prepetition creditors of EMCOR (other than holders of EMCOR's subordinated debentures and notes), in exchange for approximately $525.7 million of EMCOR senior bank and institutional indebtedness and substantially all other general unsecured claims (both allowed and disputed) against EMCOR, and to Belmont, which made the DIP Loan, as Additional Interest (as defined herein), the following securities: (i) 9,424,083 shares of newly authorized common stock of the Company ("New Common Stock") (constituting 100% of the issued and outstanding shares as of the Effective Date); (ii) approximately $62.2 million principal amount of 7% Senior Secured Notes, Series A, due 1997 of the -6- Company ("Series A Notes") and $8.8 million additional principal amount of Series A Notes which are reserved for issuance to holders of general unsecured claims and to Belmont upon resolution of disputed and unliquidated prepetition general unsecured claims (assuming such claims are ultimately allowed in full); (iii) approximately $11.9 million principal amount of 7% Senior Secured Notes, Series B, due 1997 ("Series B Notes"); (iv) approximately $62.8 million principal amount of 11% Notes, Series C, due 2001 of the Company ("Series C Notes"); and (v) approximately $48.1 million principal amount of 12% Subordinated Contingent Payment Notes due 2004 of SellCo (the "SellCo Notes"). The entire $11.9 million principal amount of Series B Notes and approximately $4.1 million principal amount of the Series A Notes issued on the Effective Date were immediately redeemed on that date at their face amount in accordance with their terms from the proceeds realized from the sale and liquidation of certain subsidiaries, the stock of which would have been pledged as part of the collateral securing the Series B Notes had such subsidiaries not been sold (and an additional $600,000 of such proceeds was reserved for prepayment of certain of the Series A Notes reserved for disputed and unliquidated claims). The Series A, Series B, Series C and SellCo Notes are hereinafter collectively referred to as the "New Notes." See "Management's Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources" for a description of the principal terms of the New Notes. In accordance with the Plan of Reorganization, SellCo was organized as a wholly-owned subsidiary of EMCOR for the purpose of holding the shares of capital stock of all subsidiaries of EMCOR that are earmarked for sale or liquidation, other than five other EMCOR subsidiaries (the "Other Non-Core Subsidiaries") also earmarked for sale or liquidation. The net proceeds realized from the sale of the stock or assets of the SellCo Subsidiaries ("Net Sales Proceeds") and the Other Non-Core Subsidiaries are required to be applied first to the prepayment of the Series A Notes (subject to the rights of the Lenders under EMCOR's New Credit Agreements discussed below under "New Credit Facility" to receive the first $15.0 million of proceeds of the sale of stock or assets of the Water Companies). Thereafter, Net Sales Proceeds are to be applied to the prepayment of the SellCo Notes. Neither EMCOR nor any of its subsidiaries has guaranteed payment of the SellCo Notes. However, in accordance with the Plan of Reorganization, EMCOR has issued to SellCo its 8% senior promissory note in the principal amount of approximately $5,464,000 (the "EMCOR Supplemental SellCo Note") which matures on the earlier of (i) the tenth anniversary of the Effective Date or (ii) one day prior to the date on which the SellCo Notes are deemed cancelled as described in the following sentence. If at any time after the fifth anniversary of the Effective Date and prior to the maturity date of the SellCo Notes the value of the consolidated assets of SellCo and its subsidiaries (excluding the EMCOR Supplemental SellCo Note) is determined by independent appraisal to be less than $250,000, the balance of the SellCo Notes (not theretofore paid from Net Sales Proceeds and the proceeds of the EMCOR Supplemental SellCo Note which will have become due and payable) will be deemed cancelled. Thus, EMCOR's liability with respect to the SellCo Notes is limited to the $5,464,000 principal amount of, plus accrued interest on, the EMCOR Supplemental SellCo Note. The holders of the SellCo Notes may only look to EMCOR to the extent of EMCOR's obligation to pay the Supplemental SellCo Note plus accrued interest. It is remote that any significant portion of the SellCo Notes, other than the principal amount of, plus accrued interest on, the Supplemental SellCo Note, will be paid in view of the fair value of the Net Assets Held for Sale since the proceeds of these assets will be applied first to redeem the Series A Notes and to the extent proceeds are realized from the sale of the Water Companies, the first $15.0 million of such proceeds will be used to repay indebtedness under the New Credit Agreements. The terms of the New Notes, copies of which together with their related Indentures are filed as Exhibits to this Registration Statement and incorporated herein by reference, have been designed to minimize the Company's cash flow requirements for debt service following the Effective Date. Interest on all of the New Notes is payable only by the issuance of additional New Notes until their maturity, in the case of the Series A Notes and SellCo Notes, and for the period of 18 months from the Effective Date, in the case of the Series C Notes. The New Notes do not require any amortization of principal prior to their maturity, except in the case of the Series A Notes and the SellCo Notes to the extent of proceeds from the sale of net assets not required to be applied to the prepayment of loans outstanding under the New Credit Agreements discussed below under "New Credit Facility" and except in the case of the Series A Notes that an additional approximately $5.9 million principal amount of Series A Notes (less any additional prepayments) is required to be redeemed on the second anniversary of the Effective Date. In addition, if EMCOR sells certain securities or has Excess Cash (as defined), it must apply such proceeds to prepayment of the Series A Notes. -7- The Amended and Restated Certificate of Incorporation of EMCOR filed on December 15, 1994 pursuant to the Plan of Reorganization authorizes a single class of 13,700,000 shares of New Common Stock, of which (i) 9,000,000 shares have been or will be issued pursuant to the Plan of Reorganization to prepetition creditors of EMCOR (other than holders of EMCOR's subordinated debt); (ii) 1,000,000 shares have been reserved for issuance under the Company's 1994 Management Stock Option Plan, (iii) 1,450,000 shares have been reserved for issuance upon exercise of the New Warrants (as defined below) issued pursuant to the Plan of Reorganization as described below; (iv) 424,083 shares have been issued to Belmont as Additional Interest as described below; (v) 56,544 shares have been reserved for issuance upon exercise of the New Warrants issued to Belmont as Additional Interest; and (vi) 200,000 shares have been reserved for issuance under the Company's 1995 Non-Employee Directors' Non-Qualified Stock Option Plan. Pursuant to the Plan of Reorganization, the Company issued or will issue to the holders of $7,040,000 principal amount of its prepetition 7-3/4% Convertible Subordinated Debentures due 2012 and $9,600,000 principal amount of its prepetition 12% Subordinated Notes due 1996, their pro rata share of each of two series of five-year warrants to purchase shares of New Common Stock, namely, 600,000 Series X Warrants and 600,000 Series Y Warrants (which together with the Series Z Warrants described below are referred to herein as the "New Warrants"), with an exercise price of $12.55 per share and $17.55 per share, respectively. In addition, the Company issued or will issue to prepetition holders of other contingent and statutory subordinate claims and to holders of EMCOR's prepetition common stock, preferred stock and warrants of participation, as well as to the plaintiffs in a shareholder class action lawsuit, their pro rata share of 250,000 Series Z Warrants to purchase shares of New Common Stock, which Series Z Warrants have an exercise price of $50 per share and must be exercised within two years of their issuance. The Plan of Reorganization also authorized the issuance of additional Series A, Series B, Series C and SellCo Notes, New Common Stock and New Warrants to Belmont, the debtor-in-possession lender to the Company, in respect of additional interest required to be paid under the terms of the Company's DIP Loan. The Company agreed, upon the making of the DIP Loan by Belmont, that Belmont would be entitled to "Additional Interest" upon the maturity of the loan which, depending on the length of time the loan was outstanding, could have ranged from 1% to 5.5% of each type of consideration issued pursuant to the Plan of Reorganization. The actual Additional Interest paid or payable to Belmont was 4.5% of each type of security issued pursuant to the Plan of Reorganization; the Additional Interest amount paid or payable to Belmont presently consists of approximately (i) $2.8 million of Series A Notes, (ii) $2.8 million of Series C Notes, (iii) $2.2 million of SellCo Notes, (iv) 424,000 shares of New Common Stock and (v) $535,000 in cash in lieu of Series B Notes which would have been issued to Belmont as Additional Interest had the Series B Notes not been redeemed on the Effective Date. In addition, it is estimated that an additional $100,000 of Series A Notes will be issued to Belmont as Additional Interest upon the resolution of disputed claims. Approximately 28,000 Series X Warrants, 28,000 Series Y Warrants and 12,000 Series Z Warrants will also be issued to Belmont as Additional Interest. MANAGEMENT INCENTIVES Pursuant to the Plan of Reorganization, the Company adopted the 1994 Management Stock Option Plan (the "1994 Plan") as of the Effective Date to foster and promote the long-term financial success of the Company following its emergence from its Chapter 11 proceeding by promoting an equity incentive to executive officers and a select group of key employees. The 1994 Plan provides for the grant of options ("New Stock Options") to acquire up to 1,000,000 shares of New Common Stock to eligible participants. Frank T. MacInnis, President and Chief Executive Officer of the Company, received an option to purchase 200,000 shares of New Common Stock under the 1994 Plan pursuant to his employment agreement with the Company dated April 18, 1994. The 1994 Plan is conditioned upon approval by the stockholders of EMCOR. See Item 6, Executive Compensation ---------------------- - - "Employment Contracts and Termination of Employment and Change of Control Arrangements" and "1994 Management Stock Option Plan" below. -8- STRUCTURE OF EMCOR After completing the asset sales which are an integral part of the Restructuring, EMCOR will be a smaller company, although remaining international in scope, engaged principally in the MES business. EMCOR's corporate headquarters are located in Norwalk, Connecticut. The Norwalk corporate headquarters focuses on corporate direction and strategy, handles the legal and financial requirements for EMCOR, and provides financial reporting, risk management, treasury, tax, and human resources policy and compliance functions and financial and operating controls. The Norwalk office also oversees the management of the businesses earmarked for sale and manages the sale process. The corporate structure of EMCOR reflects the purposes of the Restructuring. EMCOR continues to be a holding company, the principal direct subsidiaries of which are (i) MES Holdings Corporation ("MES Holdings"), a holding company for all MES operating subsidiaries (other than the Dynalectric Companies) which are to be retained by EMCOR, (ii) Dyn Specialty Contracting Inc., which with its five subsidiaries (collectively, the "Dynalectric Companies") consists of a group of mechanical and electrical companies which are also to be retained by EMCOR but were not transferred to MES Holdings in order to accommodate the surety company providing performance and payment bonds for the Dynalectric Companies, (iii) SellCo, the holding company for most of the other subsidiaries of EMCOR, direct or indirect, which constitute substantially all businesses offered for sale by EMCOR, and (iv) the five Other Non-Core Subsidiaries which are also being liquidated or held for sale. The North American MES business continues to operate on a decentralized basis, with day- to-day operations managed by the business units. EMCOR's European, Middle Eastern and Far Eastern operations are managed by Drake & Scull, a subsidiary of MES Holdings, which has its corporate office in London. 1. MES Holdings. The following table lists the names, principal markets and principal business of the principal MES units which are to be retained by EMCOR through its ownership of MES Holdings Corporation. Name Market Principal Business - ---- ------ ------------------ Comstock Canada........................... Canada Mechanical/Electrical Hyre Electric Co. of Indiana, Inc......... Mid-West Electrical Forest Electric Corp...................... New York City Electrical Gibson Electric Company, Inc.............. Chicago/MidWest Electrical Gowan, Inc................................ Southwest Mechanical Hansen Mechanical Contractors, Inc........ Las Vegas Mechanical Heritage Air Systems, Inc................. New York Mechanical J.C. Higgins Corp......................... Boston Mechanical Penguin Air Conditioning Corp............. New York City Mechanical The Drake & Scull Companies............... United Kingdom/ Mechanical/Electrical Middle East/ Far East Trautman & Shreve, Inc.................... Denver Mechanical University Mechanical and Engineering National Mechanical Contractors.............................. Welsbach Electric Corp.................... New York City Electrical Zack Power and Industrial Company......... Mid-West and East Boiler/Mechanical -9- 2. Dynalectric Companies. The following table lists the names, principal markets and principal business of the Dynalectric Companies which are also to be retained by EMCOR. Name Market Principal Business - ---- ------- ------------------ Dyn Specialty Contracting, Inc.* National Electrical Dynalectric Company National Electrical Dynalectric Company of Nevada, Inc. Nevada Electrical Contra Costa Electric, Inc. Northern California Electrical Kirkwood Electric Company Los Angeles Electrical - -------------------- * Dyn Specialty Contracting, Inc. is a direct wholly owned subsidiary of EMCOR and owns all of the capital stock of the other Dynalectric Companies. NEW CREDIT FACILITY On December 14, 1994, the Company and certain of its subsidiaries entered into two Credit Agreements with Belmont and other lenders (collectively, the "Lenders") providing the Company and certain of its subsidiaries with working capital facilities up to an aggregate of $45 million which became available upon the Effective Date. The Lenders include Albert Fried & Co., a broker/dealer firm of which Albert Fried, a Director of the Company, is the Managing Partner, and Kevin C. Toner, a Director of the Company. See Item 7. "Certain Relationships and Related Transactions." One of the Credit Agreements is among the Company, MES Holdings, certain direct and indirect subsidiaries of MES Holdings (the "MES Subsidiaries"), as Guarantors, and the Lenders (the "MES Credit Agreement") and provides the Company and MES Holdings with revolving credit loans (the "MES Loans") in an aggregate amount that shall not exceed at any time $35 million. The other Credit Agreement is among the Company, Dyn Specialty Contracting, Inc. ("Dyn"), the subsidiaries of Dyn (the "Dyn Subsidiaries"), as Guarantors, and the Lenders (the "Dyn Credit Agreement", and together with the MES Credit Agreement, the "New Credit Agreements") and provides Dyn with revolving credit loans (the "Dyn Loans", and together with the MES Loans, the "Loans") in an aggregate amount that shall not exceed at any time $10 million. The Loans bear interest on the principal amount thereof at the rate of 15% per annum, and mature on the date which is eighteen months after the date of the New Credit Agreements. The MES Loans are guaranteed by the U.S. MES Subsidiaries and are secured by, among other things, substantially all of the assets of the Company, MES Holdings and the U.S. MES Subsidiaries, including their respective accounts receivable, inventories, general intangibles and equipment and the capital stock of the U.S. MES Subsidiaries (but not the stock of MES Holdings, Dyn, SellCo, SellCo's Subsidiaries or the Other Non-Core Companies) and the proceeds of the sale of stock or assets of the Water Companies to the extent of the first $15 million of such proceeds, subject to the rights to such proceeds of the Lenders under the Dyn Credit Agreement. The Dyn Loans are guaranteed by the Dyn Subsidiaries and are secured by substantially all of the assets of Dyn and the Dyn Subsidiaries, including their respective accounts receivable, inventories, general intangibles and equipment and the capital stock of Dyn and the Dyn Subsidiaries and the proceeds of the sale of stock or assets of the Water Companies to the extent of the first $15 million of such proceeds, subject to the rights to such proceeds of the Lenders under the MES Credit Agreement. The Dyn Loans are also secured by the collateral securing the MES Loans, subject to the rights to such collateral of the Lenders under the MES Credit Agreement. The proceeds of the MES Loans were used to repay amounts under the DIP Loan and to pay fees and expenses in connection with the MES Loans and the Plan of Reorganization and will be used -10- for the general working capital of MES Holdings, the MES Subsidiaries and the Company. The proceeds of the Dyn Loans were used to pay fees and expenses in connection with the Dyn Loans and will be used for the general working capital of Dyn and the Dyn Subsidiaries. Each of the New Credit Agreements contains various affirmative and negative covenants. The negative covenants limit the Company's, MES Holdings', Dyn's and their subsidiaries' ability to take certain actions without the Lenders' approval. Such actions include, among other things: (i) merger or consolidation, (ii) incurrence of indebtedness, (iii) placing of liens upon their property, (iv) making of loans, investments or guarantees and (v) transfer of assets. The negative covenants require MES Holdings, Dyn and their subsidiaries to maintain their backlogs and work-in-progress at not less than specified levels and to prevent their losses from operations from exceeding specified amounts in any month. The MES Credit Agreement also requires the Company, MES Holdings, Dyn and their subsidiaries to maintain certain financial coverage ratios. -11- ITEM 2. FINANCIAL INFORMATION --------------------- SELECTED HISTORICAL 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 independent auditors' reports thereon, included elsewhere in this Registration Statement. The Consolidated Financial Statements for the year ended December 31, 1992 were audited by Ernst & Young LLP whose independent auditors' report thereon dated June 30, 1994 includes a disclaimer of opinion due to going concern considerations. A disclaimer of opinion due to going concern considerations nevertheless provides assurance that there were no limitations on the scope of the audit and that the accounting principles applied in the preparation of the financial statements are in conformity with generally accepted accounting principles. See Note A to the Consolidated Financial Statements regarding the basis of presentation, pre-consent date bankruptcy claims subject to compromise and the Company's emergence from bankruptcy. -12- Income Statement Data (a) Reorganized | Company | Predecessor Company --------------|-------------------------------------------------------------------------------------------- Three Months | Three Ended | Months Ended March 31 | March 31 Year Ended December 31, 1995 | 1994 ------------------------------------------------------------------------ (unaudited) | (unaudited) 1994 1993 1992 1991 1990 --------------|-------------------------------------------------------------------------------------------- | Revenues $ 386,015 | $ 435,554 $1,763,961 $2,194,735 $2,404,577 $2,318,112 $2,057,607 Gross profit 31,867 | 42,297 156,372 151,177 243,854 344,551 331,400 Reorganization Items --- | 3,600 91,318 --- --- --- --- (Loss) income from | continuing | operations | including | reorganization items (6,959) | (7,418) (118,934) (113,991) (363,515) 4,712 28,649 Income (loss) from | discontinued | operations --- | 1,144 10,216 (9,087) (253,230) 24,263 21,600 Extraordinary Item - | gain on debt | discharge --- | --- 413,249 --- --- --- --- Cumulative effect of | change in method | of accounting: | -Income taxes --- | --- --- --- 4,315 --- --- -Post-employment | benefits --- | (2,100) (2,100) --- --- --- --- ------------|-------------------------------------------------------------------------------------------- Net income (loss) (6,959) | (8,374) $ 302,431 $ (123,078) $ (612,430) $ 28,975 $ 50,249 ============|============================================================================================ Supplemental Net | income (loss) per | share (b): | Continuing operations $ ( .74) | $ (12.62) Discontinued | operations --- | 1.08 Extraordinary Item - | gain on debt | discharge --- | 43.85 Cumulative effect of | change in method of | accounting: | -Post-employment | benefits --- | (0.22) --------- | ---------- Net income per share $ ( .74) | $ 32.09 ========= | ========== -13- Balance Sheet Data Reorganized | Company | Predecessor Company As of March 31, As of December 31,| As of December 31, 1995 1994 | 1993 1992 1991 1990 --------------------------------- | -------------------------------------------------------- | Shareholders' equity | (deficit)(c) $ 74,991 $ 81,130 | $(302,262) $(175,979) $ 456,136 $ 370,513 Total assets $675,165 $707,498 | $ 806,442 $ 907,584 $2,233,827 $1,476,012 Notes payable $ 6,035 $ 4,803 | $ 172 $ 6,452 $ 110,600 $ 62,500 Working capital credit | facilities $ 37,500 $ 40,000 | --- --- --- --- 7% Senior Secured Notes $ 57,157 $ 55,401 | --- --- --- --- Long-term debt, including | current maturities $ 63,288 $ 61,290 | $ 4,465 $ 6,040 $ 463,071 $ 381,323 Debt in default --- --- | $ 501,007 $ 501,007 --- --- Capital lease obligations $ 1,875 $ 2,029 | $ 2,561 $ 3,935 $ 26,995 $ 29,973 Redeemable preferred stock --- --- | --- --- $ 5,242 $ 5,771 - ------------------------ (a) Income statement data has been reclassified for all periods presented to reflect the Company's information services and water supply businesses as discontinued operations (See Note P to the Consolidated Financial Statements). (b) Historical per share data has not been presented as it is not meaningful since the Company has been recapitalized and adopted Fresh-Start Reporting as of December 31, 1994. (c) No cash dividends on the Company's common stock have been paid during the past five years. -14- MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The Company's new capital structure, as discussed below, is the result of the consummation of its Plan of Reorganization. See "Selected Historical Financial Data." Accordingly, the financial condition and results of operations of the Company after giving effect to the Plan of Reorganization and the transactions contemplated therein will not be comparable to the historical financial condition or results of operations of the Company. The following Management's Discussion and Analysis of the Company's historical financial condition and results of operations should be read in light of the foregoing. The Company, since 1992, has been experiencing losses and has been engaged in an ongoing restructuring of its various businesses and recently reorganized under Chapter 11 of the United States Bankruptcy Code. From August 1992 until February 1994, when the Company obtained debtor-in-possession financing, the Company did not have available credit facilities, and cash flow from operations was inadequate to fund its operations and service its debts and other obligations. Consequently, during that period, the Company had to fund its operations from working capital and from the proceeds of sales of businesses and other assets. On December 21, 1993, an involuntary petition for reorganization under Chapter 11 was filed against the Company by three creditors. On February 14, 1994, the Company filed a consent to the involuntary petition and an order for relief was entered. On December 15, 1994, the Effective Date of its Plan of Reorganization, EMCOR emerged from Chapter 11 pursuant to the Plan of Reorganization proposed by the Company and its subsidiary SellCo. Under the Plan of Reorganization, prepetition creditors of the Company (other than holders of subordinated debt) received, in addition to certain notes of the Company and SellCo, substantially all of the New Common Stock of the Company. The prepetition holders of the Company's subordinated debt, common and preferred stock and warrants of participation received warrants to purchase new common stock of the Company in exchange for their debt and equity interests. At that time, the Company also obtained new credit facilities. See "Liquidity and Capital Resources" for additional discussion with respect to the Company's Plan of Reorganization and new credit facilities. Prior to the commencement and during the continuation of the Company's Chapter 11 proceeding, the Company experienced significant constraints in its surety bonding line that adversely affected its operations. The surety bonding companies that provide bid and performance bonds for the Company have reviewed and continue to review bond requests on a case-by-case basis. The Company's surety bonding companies have become more selective in issuing bonds for large construction projects, typically in excess of $10.0 million, and those with a duration of more than three years. The surety bonding companies will generally not bond new projects for non-core businesses that the Company intends to sell. In addition, a surety bonding company that was a primary source of surety bonds for the Dynalectric Companies terminated its surety business as of January 1994. As a result, these subsidiaries were without any surety bonding facilities for most of 1994. In November 1994, the Company entered into an arrangement with a new surety bonding company to provide surety bonds for the Dynalectric Companies. For the year ended December 31, 1994, these subsidiaries comprised approximately 21% of the revenues of the mechanical and electrical subsidiaries the Company plans to retain. The absence of available surety bonding for these subsidiaries resulted in a significant reduction in their backlog, since surety bonds are frequently a condition to the award of a mechanical or electrical contract. The new surety bonding arrangement should allow these subsidiaries to obtain new contracts thereby increasing backlog. -15- RESULTS OF OPERATIONS: YEAR ENDED DECEMBER 31, 1994 COMPARED TO YEAR ENDED DECEMBER 31, 1993 Revenues for the years ended December 31, 1994 and 1993 were $1,764.0 million and $2,194.7 million, respectively. Net income for the year ended December 31, 1994 was $302.4 million or $32.09 per share compared to a net loss of $123.1 million for the year ended 1993. Net income for 1994 includes an extraordinary item for the gain on debt discharge of $413.2 million as well as a charge for the required adoption of Financial Accounting Standards No. 112 "Accounting For Post-Employment Benefits" of $2.1 million. In addition, net income for 1994 includes charges for reorganization items totaling $91.3 million consisting of professional fees of $12.5 million and fresh-start adjustments of $78.8 million to record the Company's assets and liabilities at fair value in accordance with the adoption of "Fresh-Start Reporting" as prescribed by AICPA "Statement of Position 90-7 Financial Reporting by Entities under the Bankruptcy Code". Income from discontinued operations was $10.2 million for the year ended December 31, 1994 compared to a loss of $9.1 million for the year ended December 31, 1993. The loss from discontinued operations for the year ended December 31, 1993 reflects a charge of $8.1 million related to an adjustment in the carrying value of liabilities as a result of the bankruptcy filing under Chapter 7 of the U.S. Bankruptcy Code by the Company's subsidiary that formerly carried on the Company's U.S. information services business. The loss from discontinued operations in 1993 also includes a charge of $7.4 million to write down the net assets of the Company's water supply business to estimated net realizable value, as determined with the assistance of the Company's financial advisors, in connection with the Company's reinstatement of its plan of disposal in early 1994. Loss from continuing operations before reorganization items, income taxes, extraordinary items and cumulative effect of accounting change was $27.9 million for the year ended December 31, 1994. The loss includes: a gain of $1.9 million for the settlement of a construction claim; a net gain of $1.2 million on the sale of certain businesses; a loss of $4.5 million due to the write-down of an investment; a loss of $10.8 million attributable to job write-downs and provisions for loss contingencies on certain industrial and municipal projects; a loss of $1.4 million for lender fees associated with the Company's new working capital and debtor-in-possession credit facilities; and a loss of $0.6 million for severance of certain employees. The losses associated with job write-downs were primarily attributable to adverse weather conditions and inadequate estimating of job costs and labor problems. The loss from continuing operations before income taxes for the year ended December 31, 1993 was $114.7 million which includes $50.2 million of interest expense primarily for interest at default rates on debt in default. The Company ceased accruing interest on debt in default in December 1993 upon the filing of an involuntary bankruptcy petition against the Company. Accordingly, no interest expense on debt in default is included in the Consolidated Statements of Operations for the year ended December 31, 1994. The Company incurred an operating loss of $22.2 million for the year ended December 31, 1994 compared with an operating loss of $65.5 million for the year ended December 31, 1993. The operating loss for 1993 includes a $38.5 million provision for estimated losses on uncompleted construction contracts and approximately $12.0 million of legal, consulting and other professional fees arising from the shareholder litigation and debt restructuring efforts. Professional fees associated with the bankruptcy proceedings are classified as "Reorganization Charges" in the 1994 Consolidated Statements of Operations. MECHANICAL /ELECTRICAL SERVICES Revenues of the mechanical/electrical services business units for the year ended December 31, 1994 decreased by 19.6% to $1,764.0 million from $2,194.7 million for the year ended December 31, 1993. Operating losses of the mechanical/electrical services business (before deduction of general corporate and other expenses discussed below) for the years ended December 31, 1994 and 1993 were $6.4 million and $39.1 million, respectively. In connection with the Company's restructuring plan, certain mechanical and electrical business units have been sold or identified for sale. The operating -16- results of these units are included in the operating results discussed herein. Revenues of the mechanical/electrical units sold or held for sale for the years ended December 31, 1994 and 1993 were $168.9 million and $354.6 million, respectively. Such units incurred an operating loss of $13.7 million for the year ended December 31, 1994 compared to an operating loss of $13.8 million for 1993. The decrease in revenues for the year ended December 31, 1994 was partially attributable to the disposition of certain businesses held for sale and the downsizing of certain other businesses. Revenues for the year ended December 31, 1994 relating to businesses which the Company plans to retain, decreased by approximately 13% when compared to 1993. This decrease resulted primarily from those business units operating in the Western and Midwestern United States and in Eastern Canada. These units experienced difficulties in obtaining new construction contracts because of, among other things, continued poor market conditions and the inability of the Dynalectric Companies to obtain surety bonds to secure new work during most of 1994 because their surety bonding company ceased to engage, as of January 1, 1994, in the business of issuing surety bonds. The operating results for the years ended December 31, 1994 and 1993 reflect, among other things, the continued negative impact of the recession in the construction industry and oversupply in the commercial real estate market which has caused intense competition for new commercial work. As a result of the reduction of work in the commercial real estate market, many of the Company's mechanical/electrical services business units pursued and secured work in the institutional and public works markets, typically for federal, state and municipal government agencies. This work was often characterized by lower margins and different contract practices than in the commercial real estate market. In addition, the continued recession in the construction industry resulted in lower margins on all available work than had been obtained in previous years. Certain of these business units had limited experience in these institutional and public works projects, and, as a result, incurred losses, particularly on certain large, long-term projects. Operating margins in 1994 and 1993 were also adversely affected by the continuing recessions in the United Kingdom and Canada. Selling, general and administrative ("SG&A") expenses, excluding general corporate and other expenses, for the years ended December 31, 1994 and 1993 were $162.8 million and $190.3 million, respectively. The amount of SG&A expenses for 1994 was lower than for the comparable period in 1993 as a result of the implementation of the Company's downsizing plans and the disposition of certain businesses. At December 31, 1994, the mechanical/electrical services business backlog was approximately $1,145.3 million compared to approximately $1,045.4 million at December 31, 1993. Such backlog included $1,054.1 million at December 31, 1994 and $946.8 million at December 31, 1993 relating to companies which the Company currently intends to retain. The Company's backlog in the United States declined by $60.9 million between December 31, 1993 and December 31, 1994, whereas its backlog in the United Kingdom and Canada increased by $145.7 million and $22.5 million, respectively, during that same period. The Company's United Kingdom and Canadian subsidiaries received major long-term contracts during the second and third quarters of 1994. During the year ended December 31, 1994, the Company experienced a reduction in backlog in the Western region of the U.S. The decline was attributable to the downsizing of the Company's operations, the Company's weakened financial condition which adversely affected its ability to obtain new surety bonds and contracts and the inability of the Dynalectric Companies to obtain surety bonds because their surety bonding company ceased to engage, as of January 1, 1994, in the business of issuing surety bonds. In addition, during that period the Company's surety bonding companies reviewed and continue to review requests for surety bonds on a case-by-case basis. The Company's surety bonding companies have become more selective in issuing surety bonds for large construction projects, typically in excess of $10.0 million, and those construction projects with a duration of more than three years. The Company's surety bonding companies will generally not bond new projects for certain non-core businesses which the Company has identified for sale. Surety bonds are frequently a condition to the award -17- of a mechanical or electrical contract. Prospects for a recovery in the commercial office building market in both North America and the United Kingdom remain poor for the immediate future. GENERAL CORPORATE AND OTHER EXPENSES General corporate expenses for the years ended December 31, 1994 and 1993 were $15.8 million and $26.4 million, respectively. General corporate expenses for the year ended December 31, 1993 include approximately $12.0 million related to legal, consulting and other professional fees arising from the shareholder litigation, the debt restructuring and the restatement of the Company's 1991 and 1990 financial statements. Legal and other professional fees for 1994 incurred as a result of the bankruptcy proceeding are reflected under the caption "Reorganization Charges" in the Consolidated Statements of Operations. These expenses for the year ended December 31, 1994 were approximately $12.5 million. The higher amount of general corporate expenses, exclusive of legal, consulting and other professional fees, in 1994 is attributable to debt issuance costs related to the Company's debtor-in-possession credit facility and new working capital credit facility, severance paid to terminated employees and an increase in insurance costs. Net interest expense for the year ended December 31, 1994 was $2.5 million compared to $50.2 million in the year earlier period. The Company ceased accruing interest expense related to debt in default on December 21, 1993, the date on which an involuntary bankruptcy petition was filed against the Company. DISCONTINUED OPERATIONS In April 1992, the Company announced its intention to sell its water supply business. However, in July 1993, the Company's Board of Directors decided not to proceed with the sale due to the then pending rate related proceedings and litigation. In December 1993, the Company's subsidiary JWS entered into an agreement that became effective on February 2, 1994 upon approval by the New York State Public Service Commission, with respect to the rate related proceedings and litigation thereby eliminating significant uncertainties relating to the Company's water supply business. Accordingly, the Company reinstated its plan of divestiture in the first quarter of 1994 and recently has retained investment bankers to assist in the sale of its water supply business. The Consolidated Financial Statements reflect the water supply business as a discontinued operation for all periods presented. See Note X to the Consolidated Financial Statements and "Legal Proceedings" regarding the aforementioned rate related proceedings and litigation as well as the status of a proceeding initiated in 1988 by The City of New York with respect to the possible condemnation of the water distribution system of JWS that is located in New York City and a proceeding initiated by holders of the Company's warrants of participation. In 1993, the Company sold substantially all of its information services businesses. Revenues and income from discontinued operations, excluding the $20.4 million loss from disposal of its information services businesses during 1993, for the years ended December 31, 1994 and 1993 were as follows (in thousands): 1994 1993 ----------------------------- Revenues: (Unaudited) Water Supply $64,993 $ 66,755 Information Services - 876,700 ----------------------------- $64,993 $943,455 ============================= Net Income: -18- Water Supply $10,216 $ 11,427 Information Services - (164) ----------------------------- $10,216 $ 11,263 ============================= The water supply business operating results are impacted by seasonal factors. Its revenues are generally higher in the second and third quarters which reflects the warmer weather conditions in the Northeast United States. RESULTS OF OPERATIONS: 1993 COMPARED TO 1992 Revenues for the years ended December 31, 1993 and 1992 were $2,194.7 million and $2,404.6 million, respectively. The net loss for the years ended December 31, 1993 and 1992 was $123.1 million and $612.4 million, respectively. The Company's net loss from continuing operations for the years ended December 31, 1993 and 1992 was $114.0 million and $363.5 million, respectively. The net loss from continuing operations for the years ended December 31, 1993 and 1992 includes net interest expense of $50.2 million and $44.2 million, respectively. The increase in interest expense in 1993 primarily reflects accruals for penalty interest on debt in default. The net loss from continuing operations for the year ended December 31, 1993 includes a net gain on businesses sold or held for sale of $1.0 million. The net loss or income from continuing operations for the year ended December 31, 1992 includes losses on businesses sold and held for sale of $76.1 million. The net loss from discontinued operations for the years ended December 31, 1993 and 1992 was $9.1 million and $253.2 million, respectively. The loss from discontinued operations for the year ended December 31, 1993 reflects a charge of $8.1 million related to an adjustment in the carrying value of liabilities as a result of the bankruptcy filing under Chapter 7 of the U.S. Bankruptcy Code by the Company's subsidiary that formerly carried on the Company's U.S. information services business. The loss from discontinued operations in 1993 also includes a charge of $7.4 million to write down the net assets of the Company's water supply business to estimated net realizable value, as determined with the assistance of the Company's financial advisors, in connection with the Company's reinstatement of its plan of disposal in early 1994. The net loss in 1992 reflects (i) a continuing slump in the Company's mechanical/electrical services business, principally attributable to a downturn in commercial construction; (ii) intense competition in the Company's information services business; (iii) restructuring charges related to the planned disposition or downsizing of (a) the information services businesses, (b) non-core businesses and (c) certain mechanical/electrical operations; (iv) significant provisions for losses on accounts receivable and inventories; (v) a provision for losses on net assets held for sale; and (vi) expenses associated with the shareholder litigation, the Company's efforts to restructure its debt through a consensual arrangement and the restatement of the Company's financial statements. A significant portion of the 1992 loss, particularly with respect to losses on accounts receivable and write-down of inventories, arose as a result of management's review conducted in connection with the preparation of the Company's year end 1992 financial statements. The provision for losses on accounts and other receivables of $100.4 million is due to the impact of the recession on the financial condition of customers of the Company's mechanical/electrical services business. Additionally, the Company's financial condition and negative cash flow adversely affected the Company's ability to negotiate customers receivables, claims and unapproved charge orders on a favorable basis. The write-down of inventories was due to the decreased market prices of personal computers and rapid introduction of new computer technology resulting in obsolecence of inventory carried by the Company. As a result of such review, the Company recorded significant write-offs and losses in 1992 for impairment of goodwill and other intangibles, for the establishment of asset valuation and restructuring reserves associated with net assets held for sale and as a result of the decision to discontinue the information services business. -19- The net loss for 1993 reflects the continued impact of the recession and the downturn in commercial real estate construction both in North America and the United Kingdom. The net loss includes a $38.5 million provision for estimated losses on uncompleted construction contracts and approximately $12.0 million of legal, consulting and other professional fees arising from the shareholder litigation and debt restructuring efforts. Additionally, the 1993 loss includes one-time charges to discontinued operations, discussed above, with respect to the write-down of the net assets of the Company's water supply business to estimated net realizable value and the loss related to the bankruptcy filing of the Company's subsidiary which formerly carried on its U.S. information services business. SG&A expenses were $216.7 million in 1993 and $440.7 million in 1992. The higher amount of SG&A expenses in 1992 includes a provision of $100.4 million for losses on accounts and other receivables (See "Mechanical/Electrical Services" below), an increase in general corporate expenses of $29.2 million and $13.6 million applicable to the write-off of goodwill. General corporate expenses were $26.4 million in 1993 compared to $48.4 million in 1992. (See "General Corporate and Other Expenses"). A reduction of SG&A expenses was realized in 1993 as a result of the implementation of the Company's restructuring. MECHANICAL/ELECTRICAL SERVICES Revenues of the mechanical/electrical services business units for the year ended December 31, 1993 decreased 8.7% to $2,194.7 million from $2,404.6 million in 1992. Operating losses (before deduction of general corporate and other expenses discussed below) for the years ended December 31, 1993 and 1992 were $39.1 million and $187.2 million, respectively. In connection with the Company's restructuring plan, certain mechanical/electrical business units have been sold or identified for sale. The operating results of such business units are included in the aforementioned operating results. Revenues of the mechanical/electrical business units sold or held for sale for the years ended December 31, 1993 and 1992 were $354.6 million and $526.9 million, respectively. For the years ended December 31, 1993 and 1992, such business units had operating losses of $13.8 million and $41.2 million, respectively. The operating results in both 1993 and 1992 reflect, among other things, the continued negative impact of the recession in the construction industry and oversupply in the commercial real estate market which has caused intense competition for new commercial work. As a result of the reduction of commercial work, many of the Company's mechanical/electrical services business units pursued and secured work in the institutional and public works markets, typically for federal, state and municipal government agencies. This work was often characterized by lower margins and different contract practices than in the commercial real estate market. In addition, the continued recession in the construction industry resulted in lower margins on all available work than had been obtained in previous years. Certain of these business units had limited experience in these institutional and public works projects and, as a result, incurred losses on certain large long-term contracts. The operating loss in 1993 includes $12.5 million and $5.5 million of losses incurred by the Company's business units in the U.S. Midwest and U.S. East, respectively. Such U.S. Midwest losses primarily consist of job write- downs and provisions for loss contingencies on certain completed large industrial and municipal projects. In addition, during 1993, certain of the Company's mechanical business units in its U.S. Western region recorded charges of approximately $20.5 million for estimated losses on certain large uncompleted industrial and municipal projects. The U.S. East and U.S. West losses were primarily attributable to adverse weather conditions, management turnover, inadequate estimating of job costs and labor problems. At December 31, 1994, no additional losses which would be material to the consolidated financial statements are expected based on estimates of anticipated labor costs. Operating margins in 1993 were also adversely affected by approximately $7.6 million of losses in the United Kingdom and Canada. Such losses reflect, among other things, the continuing recessions in the United Kingdom and Canada, downsizing costs in the United Kingdom and the inadequacy -20- of available bonding in Canada which has adversely affected the Canadian subsidiary's ability to obtain new contracts. The operating loss for the year ended December 31, 1992 includes a provision for losses on accounts and other receivables of $100.4 million due in part to the impact of the recession on the financial condition of customers of the Company's mechanical/electrical services business units. Additionally, the Company's financial condition and negative cash flow adversely impacted its ability to settle claims and unapproved change orders on a favorable basis. The operating loss for the year ended December 31, 1992 also includes restructuring charges of $38.7 million for the downsizing of the Company's North America mechanical/electrical services operations, $13.6 million applicable to the write-off of goodwill and a charge of $15.6 million relating the write-off of small tool inventory. Small tools are located at numerous construction sites and generally have short lives. Accordingly, the Company made the decision to write-off its small tool inventory because of the difficulty and expense associated with taking periodic physical inventories required to maintain the tools as an asset. At December 31, 1993 the mechanical/electrical services business backlog was $1.0 billion compared to $1.6 billion at December 31, 1992. The Company's overall backlog in North America and in the United Kingdom has stabilized at approximately $1.0 billion through September 1994. Such backlog included $946.8 million at December 31, 1993 and $1,263.0 million at December 31, 1992 relating to companies which the Company currently intends to retain. A reduction in backlog was experienced in each of the North American markets and in the United Kingdom and is attributable to the downsizing of the Company's operations, the Company's weakened financial condition which adversely affected its ability to obtain new surety bonds and contracts and the continuing recessions in the North American and overseas construction markets. GENERAL CORPORATE AND OTHER EXPENSES General corporate and other expenses for the years ended December 31, 1993 and 1992 were $26.4 million and $48.4 million, respectively. Corporate expenses for the year ended December 31, 1993, include approximately $12.0 million of expenses related to legal, consulting and other professional fees arising from the shareholder litigation and the debt restructuring. The higher amount of corporate expense for the year ended December 31, 1992 was related primarily to (a) fees paid to lenders for extensions of, amendments to and waivers of the Company's revolving credit agreement ($4.5 million), (b) the write-off of deferred debt expense in connection with the Company's debt restructuring ($2.9 million), (c) legal, consulting and other professional fees arising out of shareholder litigation, defaults of covenants contained in loan agreements, associated debt restructuring activities and the restatement of the Company's 1991 and 1990 financial statements ($9.6 million), (d) the accelerated vesting of deferred compensation as a result of the termination of employment of certain officers ($5.6 million), (e) employee termination costs ($1.8 million), (f) the write-off of leasehold improvements and abandonment of a lease ($4.2 million) in connection with the relocation of the corporate headquarters from Purchase, New York to Rye Brook, New York. DISCONTINUED OPERATIONS The Consolidated Financial Statements reflect the water supply business as a discontinued operation for all periods presented. For the years ended December 31, 1993 and 1992, revenues of the water supply business were $66.8 million and $59.8 million, respectively. The operating income for the years ended December 31, 1993 and 1992 were $15.4 million and $4.8 million, respectively. The operating results for the year ended December 31, 1992 included a charge of $7.0 million relating to the settlement of rate related proceedings and litigation. See Note X to the Consolidated Financial Statements and "Liquidity and Capital Resources." -21- On January 1, 1994, upon expiration of the then existing collective bargaining agreement, the local collective bargaining unit (Local 374 of the Utility Workers Union of America) representing 212 employees of JWS commenced a strike against JWS. On March 27, 1994, the membership of the local collective bargaining unit ratified a new five year collective bargaining agreement and ended the work stoppage. In March 1993 the Company's Board of Directors approved the disposition of the Company's U.S. information services business which was sold in August 1993. The Board of Directors had previously decided to sell the Company's overseas information services businesses. Accordingly, operating results reflect the information services businesses as discontinued operations. See Notes P and Q to the Consolidated Financial Statements. Revenues of the information services businesses were approximately $876.7 million and $1.7 billion in 1993 and 1992, respectively. Operating income of the information services businesses in 1993 was $10.2 million compared to a loss from operations of $187.9 million in 1992. The loss in 1992 includes one-time charges of $67.3 million which consists of the write-off of goodwill and other intangible assets related to the U.S. information services business and costs attributable to employee severance and facilities consolidation. The 1992 loss also reflects intense competition among personal computer resellers, decreases in the prices of personal computers and the rapid introduction of new technology. The difficulties encountered by the Company in successfully integrating the back office operations and accounting systems of Businessland Inc., which was acquired in August 1991, with the Company's preexisting information services back office operations resulted in additional losses. In 1993, the Company sold substantially all the assets of its U.S. and foreign information services subsidiaries. See "Liquidity and Capital Resources" for additional information with respect to the disposition of the U.S. information services subsidiary. In connection with the plan to dispose of the Company's foreign information services businesses and certain of its U.S. information services units, the Company provided for losses aggregating $49.5 million in 1992. These charges primarily represented the estimated losses to be realized upon the disposition of such business units in 1993. Such amount is in addition to the aforementioned loss from operations of $187.9 million and is included in the accompanying Consolidated Statements of Operations under the caption "Loss from disposal of businesses" in Discontinued Operations. LIQUIDITY AND CAPITAL RESOURCES From September 1992 to February 1994, the Company had no available lines of credit and experienced significant cash outflow as a result of operating losses coupled with adverse publicity associated with the restatement of its first and second quarter 1992 financial statements, defaults under its loan agreements and senior management changes. In February 1994, the Company obtained a $35 million debtor-in-possession credit facility ("DIP Loan") from Belmont Capital Partners II, L.P., an affiliate of Fidelity Investments ("Belmont"), which is described below. The Company's consolidated cash balance increased by $13.0 million from $39.5 million at December 31, 1993 to $52.5 million at December 31, 1994. The December 31, 1994 cash balance included $2.9 million in foreign bank accounts. Cash in the foreign bank accounts is not available to support the Company's domestic mechanical/electrical services business or to pay corporate expenses. As a consequence of the Company's financial difficulties, an asset disposition program was initiated in the third quarter of 1992 with respect to the Company's non-core businesses and certain other assets to raise cash for working capital and to reduce debt. During the year ended December 31, 1994, the Company received net cash proceeds of $13.6 million from the sale of the Company's telephone systems business, its minority ownership in an environmental business and other non-core businesses and other assets. The Company received net cash proceeds of $43.4 million for the year ended December 31, 1993 primarily from the sale of certain overseas information services business units and other non-core businesses and other assets. Such proceeds were primarily used for working capital requirements. -22- In 1993, the Company's U.S. information services business and its Canadian mechanical and electrical services subsidiary made net repayments of $13.1 million and $6.2 million, respectively, on notes payable to various lending institutions. The DIP Loan agreement provided a credit facility to the Company of up to $35.0 million at an interest rate of 12% per annum during the period of the Company's Chapter 11 proceeding. In addition, Belmont became entitled to receive, as additional interest, 4.5% of the securities issued and to be issued under the Plan of Reorganization (the "Additional Interest"). The DIP Loan was secured by a first lien on substantially all of the assets of the Company and most of its subsidiaries. As of the Effective Date, the Company had drawn down $30 million under the DIP Loan. The DIP Loan was repaid on the Effective Date from borrowings under new credit agreements described below. Pursuant to the Plan of Reorganization, the Company and its wholly-owned subsidiary SellCo issued, or reserved for issuance, four series of notes (the "New Notes") and 9,424,083 shares of newly authorized common stock of the Company ("New Common Stock") (constituting 100% of outstanding shares as of the Effective Date) to prepetition creditors of the Company, other than holders of the Company's prepetition subordinated debt, in settlement of their prepetition claims and to Belmont in payment of Additional Interest under the terms of the DIP Loan. The principal terms and conditions of the New Notes, which are described below, have been designed to minimize the Company's cash flow requirements for debt service. The entire $11.9 million principal amount of Series B Notes and approximately $4.1 million principal amount of Series A Notes were redeemed on the Effective Date with the net cash proceeds derived from the sale of certain of the Company's subsidiaries, the stock of which would have been pledged as part of the collateral securing the Series B Notes had such subsidiaries not been sold (and an additional $600,000 of such proceeds was reserved for prepayment of certain of the Series A Notes which have been reserved for issuance in respect of disputed and unliquidated claims). It is contemplated that, subject to the rights of the Lenders under the Company's New Credit Agreements discussed below under "New Credit Facility" to receive the first $15.0 million of proceeds of the sale of stock or assets of the Water Companies, the balance of the Series A Notes will be prepaid with the net cash proceeds derived from the sale of the remaining subsidiaries of SellCo ("Net Sales Proceeds") and five other non-core subsidiaries pledged as collateral for the Series A Notes (the "Other Non-Core Subsidiaries") and that the SellCo Subordinated Contingent Payment Notes will only be paid from and to the extent of any remaining Net Sales Proceeds of the SellCo subsidiaries and the proceeds of a $5,464,000 promissory note issued by the Company to SellCo pursuant to the Plan of Reorganization (the "EMCOR Supplemental SellCo Note"). Interest on the EMCOR Supplemental SellCo Note is payable on maturity. The Series A Notes are in an initial principal amount of approximately $58.1 million, including an Additional Interest amount issued to Belmont under the DIP Loan, but after giving effect to the prepayment of approximately $4.1 million principal amount of Series A Notes on the Effective Date. The Series A Notes bear interest at the rate of 7% per annum. Interest on the Series A Notes, which commenced on the Effective Date, is compounded semiannually and is payable by the issuance of additional Series A Notes. The Series A Notes mature on the third anniversary of the Effective Date and provide for a mandatory redemption of $10,000,000 principal amount (approximately $5.9 million principal amount after giving effect to the approximate $4.1 million prepayment made on the Effective Date), less any prepayments from additional Net Sales Proceeds of SellCo subsidiaries and the Other Non-Core Subsidiaries or otherwise, on the second anniversary of the Effective Date. The Series A Notes are guaranteed by MES Holdings Corporation ("MES") and SellCo and are secured by pledges of the capital stock of MES and SellCo, most of the SellCo subsidiaries and the Other Non-Core Subsidiaries. Up to a maximum of $8.8 million additional principal amount of Series A Notes have been reserved for issuance to holders of general unsecured prepetition claims and to Belmont in respect of Additional Interest upon resolution of disputed and unliquidated claims (assuming such claims are ultimately allowed in full). -23- The Series B Notes issued by the Company were in the principal amount of $11.9 million. As noted above, the Series B Notes were redeemed in full on the Effective Date immediately upon their issuance. The Series C Notes issued, or reserved for issuance, by the Company are in the principal amount of approximately $62.8 million, including the Additional Interest amount issued to Belmont. The Series C Notes bear interest at the rate of 11% per annum and mature on the seventh anniversary of the Effective Date. Interest on the Series C Notes, which commenced on the Effective Date, is payable semiannually by the issuance of additional Series C Notes for the first eighteen months after the Effective Date and thereafter is payable quarter- annually in cash. The Series C Notes are unsecured senior indebtedness of the Company, but subordinate to (i) the Series A Notes and (ii) up to $100 million of new working capital indebtedness of EMCOR or MES, and are guaranteed by MES subject to payment in full of the Series A Notes. As a means of segregating asset sale proceeds for the benefit of impaired creditors, SellCo issued, or reserved for issuance, approximately $48.1 million principal amount of ten year 12% Subordinated Contingent Payment Notes (the "SellCo Notes"), including the Additional Interest amount issued to Belmont. The SellCo Notes are junior and subordinated indebtedness of SellCo so long as any portion of indebtedness on account of the Series A Notes or the guaranty of SellCo in respect thereof remains outstanding. The SellCo Notes mature on the tenth anniversary of the Effective Date and are secured by a pledge of the capital stock of most of the subsidiaries owned by SellCo subject to the lien in favor of the Series A Notes and the rights of the Lenders under the New Credit Agreements discussed below under "New Credit Facility" to receive the first $15.0 million of proceeds of the sale of stock or assets of the Water Companies. Subject to the prior payment in full of the Series A Notes and establishment of a cash reserve for the payment of capital gains taxes arising from the sales of subsidiaries of SellCo and the rights of the Lenders with respect to the proceeds of the sale of the Water Companies, the SellCo Notes are mandatorily prepayable to the extent of net sales proceeds from the sale of stock or the assets of SellCo subsidiaries. Interest on the SellCo Notes, which commenced on the Effective Date, is payable semiannually in additional SellCo Notes. The EMCOR Supplemental SellCo Note matures on the earlier of the tenth anniversary of the Effective Date or one day prior to the date which the SellCo Notes are deemed cancelled as described in the following sentence. If, at any time after the fifth anniversary of the Effective Date and prior to the maturity date of the SellCo Notes, the value, as determined by an independent appraiser selected by EMCOR, of the consolidated assets of SellCo (excluding the EMCOR Supplemental SellCo Note) is less than $250,000, the balance of the SellCo Notes (not theretofore paid from Net Sales Proceeds and the proceeds of the EMCOR Supplemental SellCo Note which will have become due and payable) will be deemed cancelled. In the opinion of the Company's management, based on currently available information, it is not likely that holders of SellCo Notes will receive any significant recovery in an amount in excess of the principle of, and accrued interest on, the Supplemental SellCo Note. New Credit Facility. On December 14, 1994, the Company and certain of its subsidiaries entered into two New Credit Agreements with Belmont and other lenders providing the Company and certain of its subsidiaries with working capital facilities of up to an aggregate of $45 million which became available upon the Effective Date. The MES Credit Agreement is among the Company, MES, substantially all of the U.S. subsidiaries of MES, as guarantors, and the lenders and provides the Company and MES with loans in an aggregate amount of up to $35 million. The Dyn Credit Agreement is among the Company, Dyn, the Dyn subsidiaries, as guarantors, and the lenders and provides Dyn with loans in an aggregate amount of up to $10 million. All the loans bear interest on the principal amount thereof at the rate of 15% per annum and mature on the date which is 18 months after the date of the New Credit Agreements. The loans under the MES Credit Agreement are guaranteed by most of the U.S. MES subsidiaries of MES and are secured by, among other things, substantially all of the assets of the Company, MES and most of its U.S. subsidiaries, including their respective accounts receivable, inventories, general intangibles and equipment and the capital stock of the U.S. MES subsidiaries (but not the stock of MES, Dyn, SellCo, SellCo's subsidiaries or the five Other Non-Core Companies) and the proceeds of the sale of stock or assets of the Water Companies to the extent of the first $15 million of such proceeds, subject to the rights to such proceeds of the lenders under the Dyn Credit Agreement. The Dyn loans are guaranteed by the Dyn -24- subsidiaries and are secured by substantially all of the assets of Dyn and the Dyn subsidiaries, including their respective accounts receivable, inventories, general intangibles and equipment and the capital stock of Dyn and the Dyn subsidiaries and the proceeds of the sale of stock or assets of the Water Companies to the extent of the first $15 million of such proceeds, subject to the rights to such proceeds of the lenders under the MES Credit Agreement. The Dyn loans are also secured by the collateral securing the MES loans, subject to the rights to such collateral of the lenders under the MES Credit Agreement. The proceeds of the MES loans under the MES Credit Agreement were used to repay amounts under the DIP Loan and pay fees and expenses in connection with the MES Credit Agreement and the Plan of Reorganization and the balance will be used for the general working capital of MES, the MES subsidiaries and the Company. The proceeds of the Dyn loans were used to pay fees and expenses in connection with the Dyn Credit Agreement and will be used for the general working capital of Dyn and the Dyn subsidiaries. Each of the New Credit Agreements contains various affirmative and negative covenants. The negative covenants limit the Company, MES, Dyn and their respective subsidiaries' ability to take certain actions without the lenders' approval. Such actions include, among other things: (i) merger or consolidation, (ii) incurrence of indebtedness, (iii) placing of liens upon their property, (iv) making of loans, investments or guarantees and (v) transfer of assets. The negative covenants require MES, Dyn and their subsidiaries to maintain their backlogs and work-in-progress at not less than specified levels and to prevent their losses from operations from exceeding specified amounts in any month. The MES Credit Agreement also requires the Company, MES and its subsidiaries, and Dyn and its subsidiaries to maintain certain financial coverage ratios. The Company's Canadian subsidiary, Comstock Canada Limited ("Comstock Canada"),has borrowings of less than Canadian $1.0 million outstanding under an expired demand secured facility which is guaranteed by the Company. The lender has permitted Comstock Canada to continue to borrow amounts aggregating less than Canadian $1.0 million. This modest credit facility has adversely affected Comstock Canada and Comstock Canada is seeking to obtain a new increased credit facility. However, there can be no assurance that Comstock Canada will obtain a new credit facility or, if so, as to the amount of any such facility, nor is there any assurance Comstock's existing lender will continue to make advances available to it or the amount of such advances. In June 1994, a number of the Company's U.K. subsidiaries entered into a demand credit facility with a U.K. bank for a credit line of (Pounds)14.1 million (approximately U.S. $22.3 million). The credit facility consists of the following components with the individual credit limits as indicated: an overdraft line of up to (Pounds)6.0 million (approximately U.S. $9.5 million); a facility for the issuance of guarantees, bonds and indemnities of up to (Pounds)7.3 million (approximately U.S. $11.6 million); and other credit facilities of up to (Pounds)0.8 million (approximately U.S. $1.2 million). The facility is secured by substantially all of the assets of the Company's principal U.K. subsidiaries. The overdraft facility provides for interest at the bank's base rate, as defined (6.25% as of December 31, 1994) plus 3% on the first (Pounds)5.0 million of borrowings and at the bank's base rate plus 4% for borrowings over (Pounds)5.0 million. This credit facility, as amended, expires May 31, 1995. The U.K. subsidiaries are negotiating the terms of an extension of the credit facility; however, there can be no assurance the credit facility will be extended or, if so, its terms. As of December 31, 1994, the Company's U.K. subsidiaries had utilized $16.9 million of the credit facilities as follows: $4.8 million of borrowings under the overdraft line, $11.6 million for the issuance of guarantees and $0.5 million under other credit facilities. The Water Companies carried in "Net assets held for sale" in the accompanying Consolidated Balance Sheets, have a revolving credit agreement which permits unsecured borrowings of up to $17.9 million by JWS and $2.1 million by Sea Cliff with interest rates based on the prime rate, LIBOR plus 5/8% or the bid rate (as defined). The revolving credit agreement providing for these facilities expires on November 3, 1995. -25- Borrowings under the revolving credit agreement are reflected as current liabilities in the condensed balance sheet of "Net Assets Held for Sale" in Note Q to the Consolidated Financial Statements. The Company's mechanical/electrical services business does not require significant commitments for capital expenditures. The Water Companies anticipate making capital expenditures of approximately $53.0 million for utility plant over the next five years. These capital expenditures are expected to be financed by internally generated funds with any remaining long-term financing requirements obtained from the proceeds of newly issued first mortgage bonds and from bank loans. Management believes that projected cash flow from operations combined with the available funds under the MES and Dyn Credit Agreements will provide sufficient liquidity to meet the Company's operating, capital and scheduled debt service requirements through at least 1995. Factors supporting this belief include the terms of the New Notes, including the interest and amortization payment terms, and the contemplated prepayment of certain of the New Notes from the proceeds of sales of subsidiaries held for sale. Status of Water Companies. JWS, the New York State Consumer Protection Board, Nassau County, certain other governmental bodies and a consumer advocate group entered into a settlement dated December 22, 1993 (the "Settlement Agreement") which following approval by the New York State Public Service Commission on February 2, 1994, settled all JWS issues outstanding before the Public Service Commission, various state courts and in the RICO action. The Settlement Agreement provides, among other things, (i) that JWS will use its best efforts to bring about a separation of Jamaica Water Securities Corporation ("JWSC"), a subsidiary of the Company, which holds substantially all of the common stock of JWS, from the Company and that JWSC will submit plans to the Public Service Commission for its separation from the Company and the formation of a separate water works corporation to be incorporated under the New York State Transportation Corporation law to provide water utility service to Nassau County customers served by JWS; (ii) a commitment by JWS that, subject to limited specific exceptions, it will not seek to have a general rate increase become effective prior to January 1, 1997, thus providing rate stability for three years; (iii) for refunds and other payments to customers estimated to aggregate approximately $11.7 million over the 1994-1997 period; and (iv) a cap on earnings above which JWS will share with its customers its return on equity. In September 1992, the Public Service Commission issued an order that resulted in the suspension of payment of dividends on JWS's common stock for the last two quarters of 1992 and for the year ended December 31, 1993. As a result of the Settlement Agreement referred to above, JWS recommenced dividend payments on its common stock in April 1994. Dividends paid by JWS to the Company in 1994 amounted to $1.1 million. Dividends paid by JWS to the Company in 1992 amounted to $1.2 million. Certain Insurance Matters. Since October 1992, neither the Company nor Defender has been able to obtain additional letters of credit to secure their insurance obligations, and, as a result they have been required to make cash collateral deposits to an unrelated insurance company to secure those types of obligations. The deposits totaled $37.6 million and $21.4 million as of December 31, 1994 and 1993, respectively, and are classified as a long-term asset in the accompanying Consolidated Balance Sheets under the caption "Insurance Cash Collateral" in other assets. The need to provide cash collateral has adversely affected the Company's cash flow. The Company expects to continue to be required to post additional cash collateral for insurance claims inasmuch as it does not believe it will be able to obtain letters of credit for the foreseeable future. -26- ITEM 3. PROPERTIES ---------- The operations of the Company are conducted primarily in leased properties. The following table lists the major facilities: SQUARE LEASE EXPIRATION FEET DATE, UNLESS OWNED ------- ------------------ CORPORATE HEADQUARTERS 101 Merritt Seven Corporate Park 15,725 4/9/01 Norwalk, Connecticut MECHANICAL AND ELECTRICAL SERVICES 1200 North Sickles Road 29,000 Owned Tempe, Arizona 3208 Landco Drive Bakersfield, California 49,875 4/30/95 4462 Corporate Center Drive Los Alamitos, California 41,400 12/31/00 4464 Alvarado Canyon Road San Diego, California 53,800 7/31/95 9505 Chesapeake Drive San Diego, California 44,000 1/30/96 345 Sheridan Boulevard Lakewood, Colorado 63,000 Owned 5697 New Peachtree Road Atlanta, Georgia 27,200 11/30/95 2100 South York Road Chicago, Illinois 77,700 1/09/00 1300 Michigan Street Gary, Indiana 27,600 Month to Month 2655 Garfield Road Highland, Indiana 34,600 7/08/96 3555 W. Oquendo Road Las Vegas, Nevada 90,000 11/30/98 46-01 20th Avenue Long Island City, New York 33,000 12/31/95 19-49 42nd Street Long Island City, New York 59,000 2/28/96 30 N. MacQuesten Parkway Mount Vernon, New York 25,300 11/30/98 -27- SQUARE LEASE EXPIRATION FEET DATE, UNLESS OWNED ------- ------------------ 111 West 19th Street New York, New York 27,200 5/31/98 Two Penn Plaza New York, New York 57,200 6/30/06 165 Robertson Road Ottawa, Ontario 35,400 Owned 11245 Indian Trial Dallas, Texas 43,400 4/27/96 11261 Indian Trial Dallas, Texas 32,800 8/27/96 5550 Airline Road Houston, Texas 74,500 6/30/96 515 Norwood Road Houston, Texas 29,700 Month to Month Canary Wharf One Canada Square London, U.K. 27,800 1/01/01 Building D-3 Freeport Center Clearfield, Utah 120,000 12/31/99 1574 South West Temple Salt Lake City, Utah 58,500 Month to Month 22930 Shaw Road Sterling, Virginia 32,600 7/31/99 109-D Executive Drive Sterling, Virginia 49,000 7/31/96 1420 Spring Hill Road McLean, Virginia 13,100 4/07/00 SUPPLY OF WATER 410 Lakeville Road Lake Success, New York 24,000 7/31/98 JWS owns a waterworks system consisting of approximately 850 miles of water mains, 32 storage tanks and 93 wells (67 of which are presently operable). Water is drawn from these wells by electric motors housed in small brick or concrete buildings. These facilities are located on parcels of land, aggregating approximately 55 acres, owned by JWS scattered throughout the territory it serves. Many of the parcels are subject to liens, encumbrances and other restrictions. Sea Cliff owns approximately 56 miles of water mains and 4 parcels of land aggregating approximately 5 acres, on which a diesel pumping station, 2 storage facilities and 2 operating wells are located. -28- The Company believes that all of its property, plant and equipment are well maintained, in good operating condition and suitable for purposes for which they are used. See Note N to Consolidated Financial Statements for additional information regarding lease costs. The Company believes there will be no difficulty either in negotiating the renewal of its real property leases as they expire or in finding other satisfactory space. ITEM 4. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT -------------------------------------------------------------- DIRECTORS AND OFFICERS AND OTHER BENEFICIAL OWNERS The following table sets forth as of April 15, 1995 the number of shares of New Common Stock beneficially owned by any person who is known to the Company to be the beneficial owner of more than 5% of any class of the Company's equity securities, by each director and the named executive officers (as defined below) of the Company and by all directors and executive officers of the Company as a group. Except as otherwise indicated, the persons listed below have sole voting power and sole investment power with respect to the shares they beneficially own. Name of Amount and Nature of Beneficial Owner Beneficial Ownership(1)(2) Percent(2) ---------------- -------------------------- ---------- Frank T. MacInnis -- -- Stephen W. Bershad 7,500 (3) * David A.B. Brown 7,500 (3) * Thomas D. Cunningham 7,500 (3) * Albert Fried 115,635 (3)(4) 1.2% Malcolm T. Hopkins 7,500 (3) * Kevin C. Toner 7,500 (3) * Sheldon I. Cammaker -- -- Leicle E. Chesser -- -- Jeffrey M. Levy -- -- Joseph A. Gallo -- -- Mark A. Pompa -- -- All directors and executive officers as a 153,135 1.6% group Belmont Capital Partners II, L.P. 903,675 (4)(5) 9.5% - ------------------------ -29- * Represents less than 1%. (1) The information contained in the table reflects "beneficial ownership" as defined in Rule 13d-3 of the Securities Exchange Act of 1934. Unless otherwise indicated the stockholders identified in this table have sole voting and investment power with respect to the shares owned of record by them. All percentages set forth in this table have been rounded. (2) Assumes completion of issuance of New Common Stock, New Series X Warrants, New Series Y Warrants and New Series Z Warrants pursuant to the Plan of Reorganization. (3) Consists of options, granted on March 20, 1995 pursuant to the Company's 1995 Non-Employee Directors' Non-Qualified Stock Option Plan, to purchase 7,500 shares of New Common Stock, at an exercise price of $5.125 per share, which price was equal to the market price for the New Common Stock on the date of grant. (4) In the case of Albert Fried, the amount assumes beneficial ownership of 108,135 shares of New Common Stock owned by Albert Fried & Co. ("AF&C"), of which Mr. Fried is the managing partner. In the case of Belmont Capital Partners II, L.P. ("Belmont"), the amount includes 835,351 shares of New Common Stock and 68,324 New Warrants as described in Note (5) below. AF&C received the shares of New Common Stock and Belmont received a portion of its shares of New Common Stock in their capacities as holders of prepetition unsecured claims against the Debtor. There is a reserve from the number of shares of New Common Stock to be issued to the holders of prepetition general unsecured claims for disputed claims against the Debtor. The Company believes that a substantial portion of such disputed claims will be disallowed and a substantial portion of the shares of New Common Stock held in reserve will be issued to the holders of allowed claims. In such case, the number of shares issued to AF&C and Belmont will increase in a presently undeterminable amount. (5) Includes 28,272 shares, 28,272 shares and 11,780 shares issuable upon exercise of like numbers of New Series X Warrants, New Series Y Warrants and New Series Z Warrants, respectively, received by Belmont as Additional Interest. ITEM 5. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT -------------------------------------------------- DIRECTORS Frank T. MacInnis, Age 48; Chairman of the Board, President and Chief Executive Officer of the Company since April 18, 1994. From April 1990 to April 1994 Mr. MacInnis served as President and Chief Executive Officer, and from August 1990 to April 1994 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 owns Comstock Group Inc., Spie Construction Inc., a Canadian pipeline construction company, and Spie Horizontal Drilling Inc., a U.S. company engaged in under the water drilling for pipelines and communications cable. Stephen W. Bershad, Age 53; Chairman and Chief Executive Officer for more than the past five years of Vernitron Corporation, a manufacturer of electronic components and controls. David A.B. Brown, Age 51; President of The Windsor Group, a management consulting firm of which he is a co-founder, for more than the past five years. Mr. Brown is also a director of BTU International, Inc. and The Western Company of North America. -30- Thomas D. Cunningham, Age 46; Executive Vice President and Chief Financial Officer and a director of The Forschner Group, Inc., an importer and distributor of Swiss Army knives and watches and Sabatier and Forschner cutlery since March 1994. For more than five years prior thereto, Mr. Cunningham was a Managing Director of J.P. Morgan & Co. Inc., an international lending institution. Albert Fried, Age 65; Managing Partner of Albert Fried & Company, a broker/dealer and member of the New York Stock Exchange, since 1955. Mr. Fried is also Chairman of the Board of Directors of Portec, Inc., a manufacturer of engineered products for the construction equipment, material handling and railroad industries, and is Vice Chairman of the Board of Directors of Oneita Industries, Inc., a manufacturer and marketer of activewear, including T-shirts and fleecewear. Malcolm T. Hopkins, Age 67; Private investor since 1984. Retired Vice Chairman and Chief Financial Officer of the former St. Regis Corporation, a forest products, oil, gas and insurance company. Mr. Hopkins is also a director of The Columbia Gas System, Inc., Kinder-Care Learning Centers, Inc., MAPCO Inc., Metropolitan Series Fund Inc. and U.S. Home Corporation and serves as a Trustee of The Biltmore Funds. Kevin C. Toner, Age 31; Private Investor since March 1995; Managing Director from December 1991 to March 1995 of UBS Securities Inc., a broker/dealer and member of the New York Stock Exchange, engaged in corporate finance, underwriting and distribution of high grade U.S. corporate issues and Eurobonds. From March 1991 to December 1991 Mr. Toner was a Vice President of UBS Securities and for more than five years prior thereto he held various positions with CS First Boston, an investment banking firm. EXECUTIVE OFFICERS In addition to Mr. MacInnis, the following are the executive officers of the Company. Sheldon I. Cammaker, Age 56; Executive Vice President and General Counsel of the Company for more than the past five years. Leicle E. Chesser, Age 48; 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. Jeffrey M. Levy, Age 42; Executive Vice President of the Company since November 1994. Senior Vice President of the Company from December 1993 to November 1994 and Chief Operating Officer of the Company since February 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. From December 1988 to December 1990 Mr. Levy was Vice President of Stone & Webster Engineering Corporation which is engaged in the design and construction of power, industrial and petrochemical facilities. Joseph A. Gallo, Age 43; Senior Vice President of the Company since April 1993, a Vice President of the Company from November 1991 to April 1993, and Treasurer of the Company for more than the past five years. Mark A. Pompa, Age 30; Vice President and Controller of the Company since September 1994. From June 1992 to September 1994, Mr. Pompa was Audit and Business Advisory Manager of Arthur Andersen LLP, an accounting firm, and from June 1988 to June 1992 Mr. Pompa was a Senior Accountant at that firm. -31- ITEM 6. EXECUTIVE COMPENSATION ---------------------- SUMMARY OF CASH AND CERTAIN OTHER COMPENSATION The following Summary Compensation Table sets forth the compensation awarded to, earned by or paid to each of the Chief Executive Officer and the other four most highly compensated executive officers of the Company (collectively the "named executive officers") during the fiscal years ended December 31, 1994, 1993 and 1992 for services rendered in all capacities to the Company and its subsidiaries. On April 18, 1994, Mr. Edward F. Kosnik resigned as Chairman of the Board, President and Chief Executive Officer of EMCOR and Mr. Frank T. MacInnis assumed such offices. For information regarding Mr. Kosnik's resignation and the employment agreements, if any, of the named executive officers, see "Employment Contracts and Termination of Employment and Change of Control Arrangements" below. SUMMARY COMPENSATION TABLE LONG TERM ANNUAL COMPENSATION COMPENSATION AWARDS(4) ----------------------- ------------------------------ NUMBER OF RESTRICTED SECURITIES OTHER ANNUAL STOCK UNDERLYING ALL OTHER COMPENSATION(3) AWARD(S)(5) OPTIONS/SARS(6) COMPENSATION(8) NAME AND PRINCIPAL POSITION YEAR SALARY(2)($) BONUS($) ($) ($) (#) ($) - --------------------------- ---- ------------ -------- --------------- ----------- --------------- --------------- Frank T. MacInnis(1)....... 1994 426,923 250,000 None None (7) 256,300(9) Chairman of the Board, 1993 -- -- -- -- -- -- President and Chief 1992 -- -- -- -- -- -- Executive Officer Edward F. Kosnik(1)........ 1994 146,154 None None None None 251,800(10) Former Chairman of 1993 483,460 80,000 None None None 7,800 the Board, President 1992 30,769 None None 300,000 100,000 None and Chief Executive Officer Sheldon I. Cammaker........ 1994 361,322 50,000 None None (7) 176,700(11) Executive Vice 1993 357,450 50,000 None None None 8,875 President and General 1992 362,600 50,000 None 54,375 37,622 13,110 Counsel Jeffrey M. Levy(1)......... 1994 247,500 175,000 None None (7) 6,300 Executive Vice 1993 195,000 150,000 None None 46,500 7,650 President and Chief 1992 120,000 100,000 None None None None Operating Officer Stephen H. Meyers(1)....... 1994 186,923 None None None None 248,435(12) Former Senior Vice 1993 217,212 40,000 None 181,250 50,000 5,175 President - Finance 1992 -- -- -- -- -- -- - ---------------------------- (1) As Mr. MacInnis joined the Company on April 18, 1994, the blanks opposite his name indicate that during 1992 and 1993 Mr. MacInnis was not employed by the Company, and, accordingly, there is no compensation information to report for him in respect of such years. In addition, amounts shown for Mr. MacInnis for 1994 reflect less than a full year of compensation. As Mr. Kosnik joined the Company in November 1992, and Mr. Levy joined the Company in May 1992, amounts shown for each of them for 1992 reflect less than a full year of compensation. Mr. Meyers joined the Company in January 1993 and the blanks opposite his name indicate that during 1992 there is no compensation information to report for him in respect of such year. In addition, amounts shown for Mr. Levy during 1992 and 1993 represent compensation for Mr. Levy's service as President of EMCOR Mechanical/Electrical Services (East), Inc., a subsidiary of the Company. Inasmuch as Mr. Kosnik and Mr. Meyers left the Company's employ on April 18, 1994 and October 21, 1994, respectively, the amounts shown for them for 1994 reflect less than a full year of compensation. See "Employment Contracts and Termination of Employment and Change of Control Arrangements" below for a description of Mr. Meyers' termination arrangements. (2) Amounts shown include amounts the named executive officers earned but chose to defer pursuant to the Company's 401(k) Retirement Savings Plan (the "401(k) Plan"). Pursuant to the 401(k) Plan, Mr. Cammaker deferred $9,240 for 1994 and $8,994 for 1993 and 1992. Messrs. Kosnik, Levy and Meyers -32- were only eligible to contribute to the 401(k) Plan during 1994 and 1993, and the amounts each of them deferred were $9,240 during 1994 and $8,994 during 1993. Mr. MacInnis was not eligible to participate in the 401(k) Plan during 1994. Amounts shown for the named executive officers also include the amounts applied, if any, by them to payment of their respective medical insurance premiums made pursuant to the Company's Premium Conversion Plan (the "Medical Plan"), a Cafeteria Plan established under Section 125 of the Internal Revenue Code of 1986, as amended. Pursuant to the Medical Plan, during 1994, the following amounts were applied by each of the following named executive officers: Mr. Kosnik, $792, Mr. Cammaker, $4,208, Mr. Levy, $2,453, and Mr. Meyers, $2,453; and during 1993, $2,275 was applied by each of them. During 1992, Mr. Kosnik did not participate in the Medical Plan, Mr. Cammaker applied $1,250 to the Medical Plan, and Mr. Levy applied $609 to the Medical Plan. (3) The personal benefits provided to the named executive officers did not exceed the disclosure threshold established by the SEC pursuant to applicable rules. (4) The column designated by the SEC to report Long-Term Incentive Plan Payouts has been excluded because the Company has no long-term incentive compensation plans and has not had any such plan during any portion of fiscal years 1994, 1993 or 1992. (5) The dollar amounts shown for restricted stock awards are based on the market prices for the Company's previously outstanding common stock (all of which was cancelled on the Effective Date) on the dates the respective awards were made. As of December 31, 1994, none of the named executive officers held any restricted stock awards since the Company's previously outstanding common stock was all cancelled on the Effective Date. As of December 31, 1993, the aggregate number of shares of restricted stock held by each named executive officer and the aggregate dollar value of such shares (calculated by multiplying the aggregate number of shares held by such named executive officer by $.01, the price in the over-the-counter market for a share of the Company's unrestricted common stock on December 31, 1993) was: Mr. Kosnik, 66,667 shares ($667); Mr. Cammaker, 25,577 shares ($258); and Mr. Meyers, 50,000 shares ($500). The restricted stock awards to the named executive officers reported in the table were to vest or vested as follows: awards made in respect of 1992 to Mr. Cammaker vested 50% on January 2, 1994 and would have vested 50% on January 2, 1995. Awards made in respect of 1993 to Mr. Meyers vested 1/3 in January 1994 and the remainder vested in October 1994 when Mr. Meyers' employment with the Company was terminated. Upon joining the Company in November 1993, Mr. Kosnik was awarded a grant of 100,000 shares of restricted stock, 1/3 of which vested in November 1993 and the remaining shares were forfeited upon his resignation. (6) The awards set forth in this column are of stock options only. The Company did not award stock appreciation rights ("SARs"). The stock options refer to previously outstanding common stock, all of which was cancelled on the Effective Date. (7) Mr. MacInnis received on April 5, 1995 an option to purchase 200,000 shares of New Common Stock at an exercise price of $4.75 per share, which price was equal to the market price for the New Common Stock on that date. Mr. Cammaker and Mr. Levy each received on April 5, 1995 an option to purchase 50,000 shares of New Common Stock at an exercise price of $5.13 per share, which price was equal to the average market price for the New Common Stock over the 20 day trading period immediately preceding the issuance of the options. (8) The amounts reported in this column include matching contributions made by the Company under the 401(k) Plan during 1994, 1993 and 1992 for the account of the named executive officers as follows: 1994 and 1993 - Messrs. Kosnik, Cammaker, Levy and Meyers, each $1,800; 1992 - Mr. Cammaker, $1,800. The amounts reported for 1994 also include contributions to be paid during 1995 in respect -33- of 1994 by the Company for the account of the following named executive officers pursuant to the Company's Money Purchase Plan as follows: Mr. Cammaker and Mr. Levy, each $4,500. Messrs. MacInnis, Kosnik and Meyers were not eligible to participate in the Money Purchase Plan for 1994 and Mr. MacInnis was not eligible to participate in the 401(k) Plan for 1994. The amounts reported for 1993 also include contributions made during 1994 in respect of 1993 by the Company for the account of the following named executive officers pursuant to the Company's Money Purchase Plan as follows: Mr. Kosnik, $6,000; Mr. Cammaker, $7,075; Mr. Levy, $5,850; and Mr. Meyers, $3,375. The amounts reported for 1992 also include contributions made during 1993 in respect of 1992 by the Company for the account of the following named executive officer pursuant to the Company's Money Purchase Plan as follows: Mr. Cammaker, $6,866. Messrs. Kosnik and Levy were not eligible to participate in the Money Purchase Plan for 1992. For 1992, the amounts reported also include a contribution made during 1992 in respect of 1991 pursuant to the Company's Employee Stock Ownership Plan of $4,444 for Mr. Cammaker. Inasmuch as Mr. MacInnis was not eligible to participate in the 401(k) Plan or the Money Purchase Plan for 1994, the amounts reported in this column for Mr. MacInnis include $6,300 payable to him under a supplemental retirement plan in accordance with the terms of his employment agreement. (9) Amount reflects a signing bonus of $250,000 paid to Mr. MacInnis upon his joining the Company on April 18, 1994. (10) Amount includes payments of $100,000 in each of February and March 1994 and $50,000 in April 1994 paid to induce Mr. Kosnik to remain with the Company for a period of time to enable the Company to find a successor. (11) Amount includes a stay bonus of $170,400 paid to Mr. Cammaker on September 30, 1994. (12) Amount includes a stay bonus of $112,500 paid to Mr. Meyers on September 30, 1994 and a severance payment of $112,500 paid to Mr. Meyers on October 31, 1994 after Mr. Meyers' employment with EMCOR terminated on October 21, 1994. This amount also includes an aggregate of $21,635 in severance payments paid to Mr. Meyers in November and December of 1994. A remaining $203,365 in severance payments owed to Mr. Meyers will be paid to him in equal weekly installments during 1995. EMPLOYEE OPTION EXERCISES AND HOLDINGS All outstanding options to purchase shares of the previously outstanding common stock of the Company held during 1994 by the named executive officers were cancelled on the Effective Date. In accordance with the terms of his employment agreement, on April 5, 1995, Mr. MacInnis received an option pursuant to the Company's 1994 Management Stock Option Plan to purchase 200,000 shares of New Common Stock at an exercise price of $4.75 per share, which price was equal to the market price for the New Common Stock on that date. On April 5, 1995, Mr. Cammaker and Mr. Levy each received an option pursuant to the 1994 Management Stock Option Plan to purchase 50,000 shares of New Common Stock at an exercise price of $5.13 per share, which price was equal to the average market price for the New Common Stock over the 20 day trading period immediately preceding the issuance of the options. Options granted pursuant to the 1994 Management Stock Option Plan are not exercisable until one year after the date of grant, at which time one-third of the options become exercisable. See "The Company's 1994 Management Stock Option Plan." No named executive officer exercised any options during 1994. No named executive officer holds or held any SARs. -34- EMPLOYMENT CONTRACTS AND TERMINATION OF EMPLOYMENT AND CHANGE OF CONTROL ARRANGEMENTS Employment Agreements The Company has entered into an Employment Agreement (the "Agreement"), dated as of April 18, 1994, with Frank T. MacInnis providing for his employment as Chief Executive Officer and President of the Company during the period April 18, 1994 through December 31, 1997. The Agreement provides that the term of employment will automatically be extended for successive one-year periods unless the Company or Mr. MacInnis gives written notice not to extend at least six months prior to the end of such period. The Company is also to use its best efforts to ensure his election as Chairman of the Board of Directors of the Company. Pursuant to the Agreement, the Company is to pay Mr. MacInnis an annual base salary of $600,000 and to increase such base salary on the first day of each calendar year during his employment by at least the percentage increase for the prior year in the relevant consumer price index. In addition, Mr. MacInnis is entitled to receive an annual bonus, which, for the period ended on December 31, 1994, was to be no less than $150,000. For each calendar year thereafter, Mr. MacInnis' bonus will be determined by a formula agreed upon by Mr. MacInnis and the Compensation and Personnel Committee of the Board of Directors of the Company. In addition to his salary and bonus, Mr. MacInnis has been paid a one- time cash payment of $250,000 and received an option (the "Option") to purchase 200,000 shares of New Common Stock. In accordance with the Agreement, the Option was issued at an exercise price of $4.75 per share, which price was equal to the market price for the New Common Stock on April 5, 1995. Under the terms of the Agreement, Mr. MacInnis has been provided with certain benefits customarily accorded to the Company's senior executive officers as well as supplemental benefits such that he will become fully vested in the Company's Money Purchase Plan and 401(k) Plan. In addition, Mr. MacInnis is entitled to $600 per month for leasing (plus maintenance and insurance) of an automobile; reimbursement for all initiation fees and monthly dues for membership in a club suitable for entertaining clients of the Company; all legal expenses incurred by him in connection with the Agreement; and the cost of any increased tax liability to him caused by the receipt of these fringe benefits. If Mr. MacInnis' employment is terminated during the term of the Agreement by the Company other than for Cause (as defined in the Agreement) or he terminates his employment for Good Reason (as defined in the Agreement), Mr. MacInnis will be entitled to receive a cash payment equal to the sum of: (i) the greater of (A) his base salary at the highest annual rate in effect during his employment from the date of termination through December 31, 1997 or (B) two times his base salary at its then current annual rate and (ii) an amount equal to the product of the highest bonus paid to him during his employment (but in no event less than $150,000) times (A) the number of full or partial years remaining from the date of termination through December 31, 1997 or (B) two, whichever is greater; however, in the event of a termination following a Change in Control (as defined in the Agreement), the factor of two in clause (i)(B) above will be increased to three. In addition, Mr. MacInnis will be entitled to receive all unpaid amounts in respect of any bonus for any calendar year ending before the date of termination. During 1994, the Company had an employment contract with Sheldon I. Cammaker, expiring January 31, 1999, pursuant to which Mr. Cammaker serves as a senior executive officer of the Company. Mr. Cammaker received an annual base salary of $361,322 in 1994 which salary increases on the first day of each calendar year during his employment by at least 6%. In addition, pursuant to the terms of his employment contract, Mr. Cammaker is eligible to receive annual bonuses, has been provided with certain benefits customarily accorded the Company's senior executive officers and is provided with a Company automobile. -35- The above-referenced employment contract provides that, in the event of a change in control of the Company and within two years thereafter Mr. Cammaker is terminated or elects to terminate his employment, Mr. Cammaker would be entitled to retain any shares of restricted stock of the Company previously issued to him and to be paid an amount equal to the sum of (i) $470,000, (ii) $320,000 multiplied by each full calendar year remaining under his employment agreement, and (iii) $320,000 less, with respect to clause (iii), the base salary already paid to him for the year of termination. Mr. Meyers, whose employment with the Company was terminated on October 21, 1994, had an employment agreement with the Company without a fixed term. Mr. Meyers received a base salary at the annual rate of $225,000 and was eligible for an annual bonus. Upon joining the Company, Mr. Meyers received a grant of an option to purchase 50,000 shares of common stock, at an exercise price of $3.625 per share (the fair market value of a share of common stock on the date of grant, January 15, 1993), in addition to a grant of 50,000 shares of restricted stock. The option, which was the only option granted by the Company or any of its subsidiaries to an employee during the 1993 fiscal year, was cancelled pursuant to the Plan of Reorganization. Mr. Edward F. Kosnik joined the Company in November 1992 as Executive Vice President and Chief Financial Officer. In April 1993 he became President and Chief Executive Officer and became Chairman of the Board as of July 1, 1993. In April 1994 Mr. Kosnik resigned as Chairman of the Board, President and Chief Executive Officer of the Company. When Mr. Kosnik joined the Company he received an employment agreement without a fixed term. Prior to becoming President and Chief Executive Officer, his base salary was at the rate of $400,000 per annum in accordance with the terms of his employment agreement, and thereafter his salary was at the annual rate of $500,000. Pursuant to the employment agreement, Mr. Kosnik received an option to purchase 100,000 shares of common stock, at an exercise price of $3.00 per share (the fair market value of a share of common stock on the date of grant, November 24, 1992), in addition to a grant of 100,000 shares of restricted stock. The restricted stock was to vest, and the stock options were to become exercisable, one-third in November 1993, one-third in November 1994 and one-third in November 1995. Mr. Kosnik's employment agreement also provided that he was eligible for an annual bonus. In December 1993 Mr. Kosnik indicated a desire to leave the Company, and in order to induce him to remain with the Company for a period of time to enable the Company to find a successor, Mr. Kosnik was paid $250,000 in 1994 in addition to his base salary and in addition to a bonus of $80,000 paid to him in respect of 1993. Following his resignation, Mr. Kosnik's options lapsed and he forfeited 66,667 shares of the restricted stock issued to him that had not vested. Termination Arrangements Stephen H. Meyers' employment with the Company terminated pursuant to a termination agreement dated October 21, 1994 (the "Meyers Termination Agreement"). Pursuant to the Meyers Termination Agreement, Mr. Meyers resigned as an officer of the Company as of the close of business on October 31, 1994. Mr. Meyers agreed to provide to the Company, upon reasonable notice, consulting services of up to 40 hours during the period November 1, 1994 through February 28, 1995 without any charge to the Company, and at the rate of $125 per hour for such services in excess of 40 hours. Mr. Meyers agreed, following reasonable notice, to use his best efforts to make himself reasonably available for consulting services to the Company after February 28, 1995 at a rate of $125 per hour plus reimbursement of any reasonable and necessary out-of-pocket expenses incurred in connection therewith. The Meyers Termination Agreement also provides for the payment of $337,500 to Mr. Meyers in connection with the termination of his employment, of which $112,500 was paid on October 31, 1994 (including $16,600 paid by the EMCOR Group, Inc. Employee Severance Pay/Stay Bonus Plan) and the balance of $225,000 of which is payable in 52 equal weekly installments. -36- Other Arrangements Effective as of June 25, 1993, the Company adopted the EMCOR Group, Inc. Employees' Severance Pay/Stay Bonus Plan (the "Plan") in order to encourage designated employees of the parent corporation to continue their employment over the next two years while the Company restructured its business operations. As amended, the Plan provides that a Plan participant will be entitled to receive a pre-determined amount of severance pay if his employment with the Company is terminated for reasons other than death, disability, voluntary resignation or for cause (as defined) during the two-year period commencing on June 25, 1993 and ending on June 24, 1995. Certain Plan participants also were entitled to receive a predetermined stay bonus if they remained continuously employed with the Company during the period which commenced on June 25, 1993 and ended on September 30, 1994, and all stay bonuses payable under the Plan have been paid. All severance payments payable under the Plan represent an obligation of the Company and are to be paid from its general assets. Notwithstanding the foregoing, the Company may, from time to time, in its sole discretion, make contributions to a taxable, irrevocable trust ("Trust") to pre-fund all or a portion of a Plan participant's benefits to which he may become entitled. Payments from the Trust to Plan participants shall be in discharge of the Company's liability under the Plan to such participants to the extent such benefits are paid from the Trust. In addition, the assets of the Trust, which would be allocated to accounts to be established for the benefit of Plan participants, will not be subject to the claims of the Company's creditors in a bankruptcy or other insolvency proceeding under federal or state law. Although the Plan participants would have a secured interest in the contributions made by the Company and credited to their respective accounts, if any, they would have no interest, secured or unsecured, in the income of the Trust (including unrealized capital gains), which income would be distributed quarterly to the Company, which will be responsible for the payment of any federal, state or local taxes payable on such income. Through December 31, 1994, $969,514 had been contributed to the Plan and amounts payable as stay bonuses aggregating $828,725 were fully funded and paid out on September 30, 1994. As soon as practicable following the date a Plan participant becomes entitled to receive a severance payment under the Plan, the Company is to direct the Trustee under the Trust (the "Trustee") to distribute to him in a lump sum the lesser of: the amount credited to his account, if any, in the Trust, or the amount of his severance payment benefit to which he is then entitled to the extent, if any, of the amount credited to his Trust account. To the extent that the amount credited to his Trust account is less than such benefit, he is to receive the balance from the Company, either in a lump sum or in weekly installments (not exceeding 52 installments), at such times and in such amounts, as determined by the Committee administering the Plan in its sole discretion. Payments under the Plan are subject to federal, state and local income tax withholding and all other applicable federal, state and local taxes. The Trustee and the Company, as the case may be, are to withhold from any payments it makes all applicable federal, state and local withholding taxes and the employee will be required to file any necessary certificate or other form in connection therewith prior to receiving any payments. In the event that a Plan participant dies or becomes disabled prior to becoming entitled to any benefit payable under the Plan, his right to such benefit will be forfeited. In the event a Plan participant dies after becoming entitled to a benefit payable under the Plan but prior to recovering the full amount of such benefit, his designated beneficiary or his estate (if no beneficiary has been designated) will be entitled to receive such unpaid benefits on the date or dates that the Plan participant would have received them while living. The Plan is administered by an administrative committee appointed by the Board of Directors, which consists of such number of persons as shall from time to time be determined by the Board of Directors. -37- Members of the committee may be officers, directors, or employees of the Company or others and shall hold office at the pleasure of the Board of Directors and without compensation, unless otherwise determined by the Board of Directors. The committee is charged with the operation and administration of the Plan. The committee has the power to interpret and construe the Plan, to determine all questions arising under the Plan, and to adopt and amend from time to time such rules and regulations necessary for the administration of the Plan which are not inconsistent with the terms and provisions of the Plan. Notwithstanding the foregoing, the Board of Directors retains the power to determine all questions of eligibility, status and rights of Plan participants. The Plan terminates automatically, effective as of August 24, 1995, unless the termination date is deferred to a later date by the Board of Directors of the Company ("Deferred Termination Date"). The Board of Directors of the Company may amend, suspend or terminate the Plan or any portion thereof at any time prior to the later of August 24, 1995 or any Deferred Termination Date; provided, however, that unless the written consent of a Plan participant is obtained, no such amendment or termination shall adversely affect the rights of any Plan participant. Upon termination of the Plan, all Plan benefits not payable from the Trust shall be paid by the Company within 60 days of such termination date. Upon termination of both the Plan and the Trust, any assets remaining in the Trust after all benefits payable under the Plan have been paid in full shall be returned to the Company. Under the terms of the Plan the following named executive officers of the Company would be entitled to receive a severance payment as follows: Sheldon I. Cammaker-$340,788 and Jeffrey M. Levy-$247,500. See Item 6. "Executive Compensation-Summary Compensation Table" above for the stay bonuses paid to named executive officers. COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION In fiscal year 1994, the Board of Directors of the Company was responsible for matters concerning executive compensation. Mr. Kosnik was Chairman of the Board, President and Chief Executive Officer through April 15, 1994, and Mr. MacInnis, who succeeded Mr. Kosnik as Chairman of the Board, also served as the Chief Executive Officer and President of the Company during 1994. DIRECTOR COMPENSATION Each director who is not an officer of the Company ("non-employee director") receives an annual retainer of $30,000 and $1,000 for each meeting of the Board he attends, other than telephonic meetings of the Board in which case each non-employee director who participates receives $500. Each non-employee director also receives $500 for each meeting of a committee of the Board of Directors attended by the director, and each non-employee director who chairs a committee of the Board receives an additional $2,000 per annum. In addition, pursuant to the 1995 Non-Employee Directors' Non-Qualified Stock Option Plan discussed below, each non-employee director on March 20, 1995 was granted an option on that date to purchase 7,500 shares of New Common Stock at an exercise price of $5.125 per share. Each person who is elected to serve as a non- employee director after March 20, 1995 (including those persons who were non- employee directors on March 20, 1995) shall be granted an option during each calendar year (beginning with 1995) to purchase 3,000 shares of New Common Stock. Directors who also serve as officers of the Company do not receive compensation for services rendered as directors. THE COMPANY'S 1994 MANAGEMENT STOCK OPTION PLAN During the restructuring process and the Plan of Reorganization negotiations, all parties concluded that it would be in the best interests of the Company, its creditors and equity holders that there be both continuity of key management and a performance incentive for maintaining such continuity. Accordingly, -38- the Company adopted a Management Stock Option Plan (the "1994 Plan"). The 1994 Plan is conditioned on approval by the stockholders of the Company following its adoption. The 1994 Plan is administered by the Compensation and Personnel Committee of the Board of Directors (the "Compensation Committee"), comprised of two or more directors of the Company, each of whom is disinterested within the meaning of Rule 16b-3(c)(2) under the Securities Exchange Act of 1934 (the "Exchange Act") and considered an outside director within the meaning of Section 162(m) of the Internal Revenue Code of 1986, as amended (the "Code") and the regulations promulgated thereunder. Such key employees as may be determined by the Compensation Committee from time to time will be eligible to participate in the 1994 Plan. The aggregate number of shares of New Common Stock that may be issued pursuant to options under the 1994 Plan may not exceed 1,000,000. The maximum number of shares which may be the subject of options granted to any individual in any calendar year shall not exceed 500,000 shares. Within one year after the Effective Date, the Compensation Committee shall determine the recipients of options to purchase a minimum of 500,000 shares of New Common Stock of EMCOR pursuant to the 1994 Plan and shall issue such options to such recipients in the respective amounts as determined by the Compensation Committee; provided, however, that in no event shall such options be issued prior to the expiration of three months plus 20 days after the Effective Date. The employment agreement between the Company and Frank T. MacInnis requires that Mr. MacInnis shall receive options to purchase 200,000 shares of New Common Stock three months and twenty-one days following the Effective Date. Options may be granted by the Compensation Committee to eligible employees as "incentive stock options" (as defined under Section 422 of the Code) or as non-qualified stock options. The exercise price of an incentive stock option and a non-qualified stock option must be at least equal to the fair market value of the New Common Stock on the date of grant; provided, however, that pursuant to the Plan of Reorganization the purchase price for the initial grant of options with respect to 500,000 shares shall be equal to the average market price of New Common Stock over the 20 day trading period immediately preceding the date of issuance of the option; and provided, further, that if the average market price of New Common Stock for the applicable period cannot be determined, the exercise price shall be determined by an investment advisor selected by the Compensation Committee of the Board of Directors of the Company. Notwithstanding the preceding, the exercise price of any such option which is an incentive stock option shall not be less than the fair market value of the New Common Stock on the date of grant of the option. Options may not be exercised more than ten years after the date of grant. Options shall be exercisable at such rate and times as may be fixed by the Committee on the date of grant; however, the rate at which the option first becomes exercisable may not be more rapid than 33-1/3% on and after each of the first, second and third anniversaries of the date of grant. The aggregate fair market value (determined at the time the option is granted) of the New Common Stock with respect to which incentive stock options are exercisable for the first time by a participant during any calendar year (under all stock option plans of the Company and its subsidiaries) shall not exceed $100,000; to the extent that this limitation is exceeded, such excess options shall be treated as non-qualified stock options for purposes of the 1994 Plan and the Code. At the time an option is granted, the Compensation Committee may, in its sole discretion, designate whether the option is to be considered an incentive stock option or non-qualified stock option. Options with no such designation shall be deemed an incentive stock option, to the extent that the $100,000 limit described above is met. -39- Payment of the purchase price for shares acquired upon the exercise of options may be made by any one or more of the following methods: in cash, by check, by delivery to the Company of shares of New Common Stock already owned by the option holder, by a "cashless" exercise method with a designated broker, or by such other method as the Compensation Committee may permit from time to time. However, a holder may not use previously owned shares of New Common Stock that were acquired pursuant to the 1994 Plan, or any other stock plan that may be maintained by the Company or its subsidiaries, to pay the purchase price under an option, unless the holder has beneficially owned such shares for at least six months. Options become immediately exercisable in full upon the retirement of the holder after reaching the age of 65, upon the disability or death of the holder while in the employ of the Company, or upon the occurrence of such special circumstances as in the opinion of the Compensation Committee merit special consideration. However, no options or rights may be exercised earlier than six months following the later of the date of grant or of the stockholder approval of the 1994 Plan (except that the estate of a deceased holder of an option may exercise it prior to the expiration of such six-month period). Options terminate at the end of the three-month period following the holder's termination of employment. This period is extended to six months in the case of the death of the holder, in which case the option is exercisable by the holder's estate. Each option contains anti-dilution provisions which will automatically adjust the number of shares subject to options in the event of a stock dividend, split-up, conversion, exchange, reclassification or substitution. In addition, upon the dissolution or liquidation of the Company, or the occurrence of a merger or consolidation in which the Company is not the surviving corporation, or in which the Company becomes a subsidiary of another corporation or in which the voting securities of the Company which are outstanding immediately prior thereto do not continue to represent (either by remaining outstanding or by being converted into voting securities of the surviving entity) more than 50% of the combined voting securities of the Company or such surviving entity immediately after such merger or consolidation, or upon the sale of all or substantially all of the assets of the Company, the 1994 Plan and the options granted thereunder shall terminate unless provision is made by the Company in connection with such transaction for the assumption of options theretofore granted, or the substitution for such options of new options of the successor corporation or a parent or subsidiary thereof, with appropriate adjustments as to the number and kinds of shares and the per share exercise prices. If options terminate as a result of any such transaction, the holder will be entitled to the excess of (i) the fair market value (determined on the basis of the amount received by stockholders in connection with such transaction) of the shares subject to the portion of the option not theretofore exercised (whether or not the option is then exercisable pursuant to its terms or otherwise), over (ii) the aggregate purchase price that would be payable for such shares upon the exercise of the option. In the event of any other change in the corporate structure or outstanding shares of New Common Stock, the Compensation Committee may make such equitable adjustments to the number of shares and the class of shares available under the 1994 Plan or to any outstanding options as it shall deem appropriate to prevent dilution or enlargement of rights. The Company shall obtain such consideration for granting options under the 1994 Plan as the Compensation Committee in its discretion may request. Each option may be subject to provisions to assure that any exercise or disposition of New Common Stock will not violate the securities laws. No options may be granted under the 1994 Plan after ten years following the date of its adoption. The Board of Directors or the Compensation and Personnel Committee may at any time withdraw or amend the 1994 Plan and may, with the consent of the affected holder of an outstanding option -40- at any time withdraw or amend the terms and conditions of outstanding options. Any amendment which would increase the number of shares issuable pursuant to options or to any individual employee, or change the class of employees to whom options may be granted shall be subject to the approval of the stockholders of the Company within one year of such amendment. The Federal income tax consequences to an employee who receives incentive stock options generally will, under current law, be as follows: An employee will not realize any income upon the grant or exercise of an incentive stock option. If the employee disposes of the shares of New Common Stock acquired upon the exercise of an incentive stock option at least two years after the date the option is granted and at least one year after the New Common Stock is transferred to him or her, the employee will realize long-term capital gain in an amount equal to the excess, if any, of his or her selling price for the shares over the option exercise price. In such case, the Company will not be entitled to any tax deduction resulting from the issuance or sale of the shares. If the employee disposes of the shares of New Common Stock acquired upon the exercise of an incentive stock option prior to the expiration of two years from the date the option is granted, or one year from the date the New Common Stock is transferred to him or her, any gain realized will be taxable at such time as follows (a) as ordinary income to the extent of the difference between the option exercise price and the lesser of the fair market value of the shares on the date the option was exercised or the amount realized from such disposition, and (b) as capital gain to the extent of any excess, which gain shall be treated as short-term or long-term capital gain depending upon the holding period of the New Common Stock. In such case, the Company may claim an income tax deduction (as compensation) for the amount taxable to the employee as ordinary income. In general, the difference between the fair market value of the New Common Stock at the time the incentive stock option is exercised and the option exercise price will constitute an item of adjustment, for purposes of determining alternative minimum taxable income, and under certain circumstances may be subject, in the year in which the option is exercised, to the alternative minimum tax. If an employee uses shares of New Common Stock which he or she owns to pay, in whole or in part, the exercise price for shares acquired pursuant to an incentive stock option, (a) the holding period for the newly issued shares of New Common Stock equal in value to the old shares which were surrendered upon the exercise shall include the period during which the old shares were held, (b) the employee's basis in such newly issued shares will be the same as his or her basis in the old shares surrendered and (c) no gain or loss will be recognized by the employee on the old shares surrendered. However, if any employee uses shares previously acquired pursuant to the exercise of an incentive stock option to pay all or part of the exercise price under an incentive stock option, such tender will constitute a disposition of such previously acquired shares for purposes of the one-year (or two-year) holding period requirement applicable to such incentive stock option and such tender may be treated as a taxable exchange. The Federal income tax consequences to an employee who receives non- qualified stock options generally will, under current law, be as follows: An employee will not realize any income at the time the option is granted. Generally, an employee will realize ordinary income, at the time the option is exercised in a total amount equal to the excess of the then market value of the New Common Stock acquired over the exercise price. However, Section 83 of the Code provides that, if a director, officer or principal stockholder (i.e., an owner of more than 10 percent of the outstanding shares of New Common Stock) receives shares pursuant to the exercise of a non-qualified stock option, he or she is not required to recognize any income until the date on which such shares can be sold at a profit without liability under Section 16(b) of the Exchange Act. At such time, the director, officer or principal stockholder will realize income equal to the amount by which the then fair market value of the shares acquired pursuant to the exercise of such option exceeds the price paid for such shares. Alternatively, a director, officer or principal stockholder who would not otherwise be taxed at the time the shares are -41- transferred may file a written election within 30 days with the Internal Revenue Service, to be taxed as of the date of transfer, on the difference between the then fair market value of the shares and the price paid for such shares. All income realized upon the exercise of a non-qualified stock option will be taxed as ordinary income. The Company will be entitled to a tax deduction (as compensation) for the amount taxable to an employee (including a director, officer and principal stockholder) upon the exercise of a non-qualified stock option, as described above, in the same year as those amounts are taxable to the employee. Shares of New Common Stock issued pursuant to the exercise of a non- qualified stock option generally will constitute a capital asset in the hands of an employee (including a director, officer or principal stockholder) and will be eligible for capital gain or loss treatment upon any subsequent disposition. The holding period of an employee (including a director, officer or principal stockholder) will commence upon the date he or she recognizes income with respect to the issuance of such shares, as described above. The employee's basis in the shares will be equal to the greater of their fair market value as of that date or the amount paid for such shares. If, however, an employee uses shares of New Common Stock which he or she owns to pay, in whole or in part, the exercise price for shares acquired pursuant to the exercise of a non-qualified stock option, (a) the holding period for the newly issued shares of New Common Stock equal in value to the old shares which were surrendered upon the exercise shall include the period during which the old shares were held, (b) the employee's basis in such newly issued shares will be the same as his or her basis in the surrendered shares, (c) no gain or loss will be realized by the employee on the old shares surrendered, and (d) the employee will realize ordinary income in an amount equal to the fair market value of the additional number of shares received over and above the number of old shares surrendered (the "Additional Shares") and the employee's basis in the Additional Shares will be equal to such fair market value. In addition to the Federal income tax consequences discussed above, Section 280G of the Code provides that if an officer, stockholder or highly compensated individual receives a payment which is in the nature of compensation and which is contingent upon a change in control of the employer, and such payment equals or exceeds three times his or her "base salary" (as hereinafter defined), then any amount received in excess of base salary shall be considered an "excess parachute payment." An individual's "base salary" is equal to his or her average annual compensation over the five-year period (or period of employment, if shorter) ending with the close of the individual's taxable year immediately preceding the taxable year in which the change in control occurs. If the taxpayer establishes, by clear and convincing evidence, that an amount received is reasonable compensation for past or future services, all or a portion of such amount may be deemed not to be an excess parachute payment. If any payments made under the 1994 Plan in connection with a change in control of the Company constitute excess parachute payments with respect to any employee, then in addition to any income tax which would otherwise be owed on such payment, the individual will be subject to an excise tax equal to 20% of such excess parachute payment and the Company will not be entitled to any tax deduction to which it otherwise would have been entitled with respect to such excess parachute payment. Section 280G provides that payments made pursuant to a contract entered into within one year of the change in control are presumed to be parachute payments unless the individual establishes, by clear and convincing evidence, that such contract was not entered into in contemplation of a change in control. In addition, the General Explanation of the Tax Reform Act of 1984 prepared by the Staff of the Joint Committee on Taxation indicates that the grant of an option within one year of the change in control or the acceleration of an option because of a change in control may be considered a parachute payment in an amount equal to the value of the option or the value of the accelerated portion of the option as the case may be. Pursuant to proposed regulations issued by the Treasury Department under Section 280G, the acceleration of a non-qualified stock option because of a change in control is considered a parachute payment in an amount equal to the value of the accelerated portion of the option. Even if the grant of an option within one year of the change in control or the acceleration of an option is not a parachute payment for purposes of Section -42- 280G, the exercise of an option within one year of the change in control or the exercise of the accelerated portion of an option may result in a parachute payment, in an amount equal to the excess of the fair-market value of the shares received upon exercise of the option over the exercise price. Payments received for the cancellation of an option because of a change in control may also result in parachute payments. The foregoing summary with respect to Federal income taxation does not purport to be complete and reference is made to the applicable provisions of the Code. THE COMPANY'S 1995 NON-EMPLOYEE DIRECTORS' NON-QUALIFIED STOCK OPTION PLAN On March 20, 1995 the Company adopted the 1995 Non-Employee Directors' Non- Qualified Stock Option Plan (the "1995 Plan"). The 1995 Plan is conditioned on approval by the stockholders of the Company following its adoption. The 1995 Plan provides for automatic grants of non-qualified stock options to directors of the Company who are not also employees of the Company or a subsidiary, in consideration of the services of such directors for the Company. Pursuant to the 1995 Plan, each non-employee director on March 20, 1995 was granted an option on that date to purchase 7,500 shares of New Common Stock at an exercise price of $5.125 per share. Each person who is elected to serve as a non-employee director after March 20, 1995 (including those persons who were non-employee directors on March 20, 1995) shall be granted an option during each calendar year (beginning with 1995) to purchase 3,000 shares of New Common Stock, on the date on which the Board of Directors holds its first meeting following the annual meeting of stockholders held during such calendar year; however, if, beginning with 1996, an annual stockholders' meeting does not occur within 16 months after the month in which the prior year's annual meeting was held, such option shall be granted on the last day of such 16th month. The aggregate number of shares of New Common Stock that may be issued pursuant to options under the 1995 Plan may not exceed 200,000. The exercise price of an option granted under the 1995 Plan is equal to the fair market value of the New Common Stock on the date of grant. Such options are fully exercisable as of the date of grant; however, no option may be exercised prior to stockholder approval of the 1995 Plan nor more than ten years after the date of grant. Payment of the purchase price for shares acquired upon the exercise of options may be made by the same methods as are specified in the 1994 Plan (other than such method as may be permitted in the discretion of the Compensation and Personnel Committee). The 1995 Plan contains the same anti-dilution and other adjustment and cash-out provisions as the 1994 Plan in certain events. No options may be granted under the 1995 Plan after ten years following the date of its adoption. The Board of Directors may at any time withdraw or amend the 1995 Plan and may, with the consent of the affected holder of an outstanding option at any time withdraw or amend the terms and conditions of outstanding options. Any amendment which would increase the number of shares issuable pursuant to options, change the class of persons who are eligible to be granted options or materially increase the benefits to participants in the 1995 Plan shall be subject to the approval of the stockholders of the Company. In addition, no amendment may be made more than once every six months to any provision of the 1995 Plan that specifies the directors to whom options may be granted, the timing of option grants, the number or purchase price of shares of New Common Stock that can be purchased under options or the time when options may be exercised, except any amendment that is necessary to comport with changes in the Internal Revenue Code or the Employee Retirement Income Security Act of 1974, as amended. -43- ITEM 7. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS ---------------------------------------------- Albert Fried and Kevin C. Toner are directors of the Company and both have a material interest in the New Credit Agreements, which provide the Company and certain of its subsidiaries with working capital facilities of up to an aggregate of $45.0 million. Albert Fried is Managing Partner of Albert Fried & Company, which agreed to loan up to $7.0 million as one of the Lenders under the New Credit Agreements. Kevin C. Toner agreed to loan up to $1.0 million as one of the Lenders under the New Credit Agreements. In addition, UBS Mortgage Finance Inc., an affiliate of UBS Securities Inc., Mr. Toner's former employer, agreed to loan up to $2.0 million as one of the Lenders under the New Credit Agreements. ITEM 8. LEGAL PROCEEDINGS ----------------- SHAREHOLDER LITIGATION Since August 1992, nineteen class action lawsuits were filed against EMCOR arising out of the restatements of earnings, write-offs and losses announced by EMCOR on August 4, 1992 and October 2, 1992. The lawsuits named as defendants, among others, EMCOR and certain of its former officers and directors and alleged federal securities law and state law violations. On November 2, 1992, all of those actions were consolidated for pre-trial purposes before Judge Charles L. Brieant in the White Plains division of the United States District Court for the Southern District of New York. Pursuant to Stipulation and Court Order, on January 15, 1993, a single consolidated amended class action complaint (the "Complaint") was filed against EMCOR and Andrew T. Dwyer, a former Chairman of the Board, President and Chief Executive Officer of EMCOR, Ernest W. Grendi, a former director, Executive Vice President and Chief Financial Officer of EMCOR, Joseph E. Grendi, former Chief Financial Officer of EMCOR's Mechanical/Electrical Services Group, and four other former directors of EMCOR, Innis O'Rourke, Jr., Craig C. Perry, Edmund S. Twining, Jr. and George M. Duff, Jr., each of whom were members of EMCOR's Audit Committee for all or part of 1991, and Ernst & Young, which served as EMCOR's auditor for 1992 and 1991 and several prior years. The Complaint alleges violations of Section 10(b) of the Securities and Exchange Act of 1934, Rule 10b-5 promulgated thereunder and common law fraud and deceit on the part of EMCOR and the other named defendants. Among other things, EMCOR is alleged to have intentionally and materially overstated its inventory, accounts receivable and earnings in various public disseminations during the purported class period, May 1, 1991 through October 1, 1992. The Complaint seeks an unspecified amount of damages. On March 30, 1993, EMCOR filed an answer which denied the material allegations in the Complaint. In June 1994, the Bankruptcy Court modified the automatic stay provided by the Bankruptcy Code with respect to the class action lawsuits in order to allow discovery of the non-debtor defendants and limited discovery of EMCOR. Following the entry of that order, there has been a substantial amount of documentary and deposition discovery directed to EMCOR and certain of its present and former employees. However, the Bankruptcy Court's order dated September 30, 1994, confirming the Plan of Reorganization, included a discharge of all claims asserted against EMCOR in the class action lawsuits, and a permanent injunction against continuing these lawsuits, or any other proceeding, with respect to the claims asserted therein. Accordingly, on December 2, 1994, these actions were dismissed with prejudice as against EMCOR. -44- SECURITIES AND EXCHANGE COMMISSION INVESTIGATION EMCOR has been informed by the Securities and Exchange Commission (the "SEC") that it is conducting a private investigation to determine whether there have been violations of certain provisions of the federal securities laws and/or the rules and regulations of the SEC in connection with EMCOR's financial records, reports, and public disclosures. EMCOR has been cooperating with the SEC's staff and has voluntarily produced documents and information as requested by the staff. On April 12, 1994, the SEC staff informed EMCOR of its intention to recommend that the SEC file a civil injunction action against EMCOR. EMCOR is currently engaged in discussions with the SEC staff concerning a possible consensual resolution of the matter. NEW YORK COUNTY DISTRICT ATTORNEY INVESTIGATIONS 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 does business with the Company's subsidiary, Forest Electric Corporation ("Forest"), a search warrant was executed at Forest's executive offices. At that time, the Company was informed that Forest and certain of its officers are targets of the continuing investigation. Neither the Company nor Forest has been advised of the precise nature of any suspected violation of law by Forest or its officers. On July 11, 1995, Ted Kohl, a principal of Herbert, and DBP Interiors, Inc. ("DPL"), a company allegedly owned by Kohl were indicted by a New York County grand jury for grand larceny, fraud, repeated failure to file New York City Corporate Tax Returns and related money laundering charges. Kohl was also charged with filing false personal income and earnings tax returns, prejury and offering false instruments for filing with the New York City School Construction Authority. In a press release announcing the indictment, the Manhattan District Attorney said that the investigation disclosed that Mr. Kohl allegedly received more than $7 million in kickbacks from subcontractors through a scheme in which he allegedly inflated subcontracts on Herbert's construction contracts. At a press conference following the Indictment, the District Attorney announced that the investigation is continuing, and he expects further indictments in the investigation. Forest performs electrical contracting services primarily in the New York City commercial market and is one of the largest subsidiaries in the MES group of companies. DYNALECTRIC LITIGATION The Dynalectric Company ("Dynalectric") is a defendant in an action entitled Computran v. Dynalectric, et al., pending in Superior Court of New Jersey, Bergen County, arising out of its participation in a joint venture. The plaintiff, Computran, a participant in, and a subcontractor to, the joint venture, alleges that Dynalectric wrongfully terminated its subcontract, fraudulently diverted funds due it, misappropriated its trade secrets and proprietary information, fraudulently induced it to enter into the joint venture and conspired with other defendants to commit certain acts in violation of the New Jersey Racketeering Influence and Corrupt Organization Act. Dynalectric believes that Computran's claims are without merit and intends to defend this matter vigorously. Dynalectric has filed counterclaims against Computran. Discovery is ongoing; no trial date is scheduled. LITIGATION REGARDING WARRANTS OF PARTICIPATION On September 26, 1994 certain holders of Warrants of Participation ("Warrants") that were issued pursuant to a Warrant Agreement dated June 15, 1969 by the Company's predecessor, Jamaica Water and Utilities, Inc. ("JWU"), commenced a declaratory judgment action against the Company's wholly-owned subsidiary Jamaica Water Securities Corporation ("JWSC") by filing a complaint in the Supreme Court of the State of New York, Westchester County, bearing the caption, Harold F. Scattergood, Jr., et al. v. Jamaica Water Securities Corp. (Index No. 15992/94). On October 17, 1994, an amended complaint (the "Complaint") was served adding additional plaintiffs. Plaintiffs seek a declaration that JWSC is the successor to the Company's obligations under the Warrant Agreement by reason of its 1977 acquisition of JWU's 96% stock interest in Jamaica Water Supply Company. Plaintiffs also claim that three events have triggered the Warrants, obligating JWSC to issue shares of its own stock to plaintiffs: (1) the 1988 filing by the City of New York of a condemnation proceeding and lis pendens seeking to condemn that part of water distribution system of Jamaica Water Supply Company -45- located in Queens County; (2) the prosecution of that condemnation proceeding, which was subsequently dismissed by the court; and (3) a 1993 settlement agreement entered into by JWSC and of Jamaica Water Supply Company which settled unrelated matters involving the Public Service Commission, Nassau County and others. Plaintiffs claim that each of these events constituted a disposition of the assets of Jamaica Water Supply Company which triggered the Warrants. In the alternative, plaintiffs claim that the Warrant Agreement's December 31, 1994 expiration date should be extended for some indefinite period. By a Decision and Order, entered on June 22, 1995, the court granted JWSC's motion to dismiss the action, holding that the assets of JWSC had not been "disposed of" under the express terms of the Warrants prior to their stated expiration on December 31, 1994. The court also held that it lacked the power to rewrite the "clear and unambiguous provisions" of the Warrant of Participation Agreement to extend the December 31, 1994 deadline. The Company does not yet know if the plaintiffs will appeal the court's decision. JAMAICA WATER SUPPLY COMPANY Rate Related Proceedings and Related Litigation. Effective March 1991, Jamaica Water Supply Company ("JWS") was authorized by the Public Service Commission of the State of New York (the "Public Service Commission") to increase its rates charged to customers by amounts designed to increase annual revenues by $3,992,000. At that time the Public Service Commission made $2,000,000 of that increase temporary and subject to refund pending a further review by the Public Service Commission. Upon completion of its review, in July 1992, the Public Service Commission ordered JWS to refund to its customers all of the amounts collected under the temporary portion of the rate increase during the period from March 1991 through June 1992. In addition, the Public Service Commission ordered JWS to reduce the rates charged customers, as initially authorized effective March 1991, by amounts designed to reduce annual revenues by $1,400,000 effective July 1, 1992. During the third quarter of 1992, JWS, which had not recorded as revenue any of the amounts collected under the temporary portion of the rate increase, made the required refund, aggregating $2,900,000 including interest, by way of credits to customers' bills. In January 1992, the Public Service Commission ordered its Staff to perform an audit covering all aspects of JWS's operations. The report on that audit alleged that mismanagement and imprudence on the part of JWS may have resulted in excess charges to the customers of up to $10,600,000. As a result of the audit report, in June 1992, the Public Service Commission instituted a proceeding requiring JWS to demonstrate that its rates charged customers are not excessive and providing for an investigation of JWS's management practices. As part of this proceeding, and citing the audit report's assertions without receiving the audit report in evidence, the Public Service Commission ordered that $10,600,000 of JWS's annual revenues be made temporary and subject to refund, effective August 6, 1992, pending the completion of the investigation. Between December 1992 and May 1993, each of JWS, the Public Service Commission Staff, the New York State Consumer Protection Board, Waterbill Watchdogs, Inc., the County of Nassau, the Town of Hempstead, the New York City Department of Environmental Protection and the New York City Water Board appeared and submitted testimony in the Public Service Commission proceedings. On June 3, 1993, the Public Service Commission issued an order suspending hearings and appointing two administrative law judges for the purpose of effecting a settlement. Negotiations among the parties and through the settlement judges were ongoing from that time. In addition, in February 1993, the County of Nassau commenced an action alleging violation of the Racketeer Influenced and Corrupt Organizations Act ("RICO") and common law fraud based on allegations that JWS intentionally filed false rate applications and, as a result, had earnings that exceeded projections by $8,653,000. The complaint demanded treble damages and punitive damages. As a result of the negotiations ordered by the Public Service Commission, all of the foregoing parties entered into a settlement agreement dated December 22, 1993 (the "Settlement Agreement"), which, following approval by the Public Service Commission on February 2, 1994, settled all issues outstanding before the Public Service Commission, various state courts, and in the RICO action. The Settlement Agreement provides, among other things, (i) that JWS will use its best efforts to bring about the separation of Jamaica Water Securities Corp. ("JWSC"), a subsidiary of EMCOR, which holds substantially all of the common stock of JWS, from EMCOR and that JWSC will submit plans to the Public Service Commission for its separation -46- from EMCOR and the formation of a separate waterworks corporation to be incorporated under the New York Transportation Corporations Law to provide water utility service to the Nassau County customers served by JWS, (ii) a commitment by JWS that, subject to limited specified exceptions, it will not seek to have a general rate increase become effective prior to January 1, 1997, thus providing rate stability for three years, (iii) for refunds and other payments to customers estimated to aggregate approximately $11.7 million over the 1994-1997 period, and (iv) a cap on earnings above which JWS will share with its customers its return on equity. New York City Condemnation Proceeding. From time to time representatives of New York City (the "City") and EMCOR met to discuss a possible purchase by the City of that portion of JWS's water distribution system which is located in the City. That system constitutes approximately 75% of JWS's water plant. In September 1986, the State of New York enacted a law that requires the City to acquire by condemnation all of the property of JWS "constituting or relating to [its] water distribution system located in the City of New York" only in the event of a decision by the Supreme Court of the State of New York that the amount of compensation to be paid JWS for the water distribution system "shall be determined solely by the income capitalization method of valuation, based on the actual net income as allowed (to JWS) by the [New York State] public service commission." In addition, the law provides that if any court determines "that a method of compensation other than the income capitalization method be utilized, or if the proposed award is more than the [JWS] rate base of the [condemned] assets . . . as utilized by the public service commission in setting rates," the City may withdraw the condemnation proceeding without prejudice or costs. As of December 31, 1987, the rate base of those assets located in the City was approximately $53,084,000 exclusive of water meters currently under lease which may be required to be purchased in the event of condemnation. In April 1988, the City instituted a proceeding in the Supreme Court of the State of New York pursuant to the 1986 statute. The City sought, in the first instance, an order providing that the income capitalization method of valuation would be the sole method used to determine compensation for JWS's property, and, on that basis, asked the Court to determine the value of the JWS property to be condemned. Pursuant to the 1986 law, if the Court were to determine compensation that exceeds the rate base or were to determine compensation by a method other than the income capitalization method, the City could withdraw the condemnation proceeding. JWS argued, at trial and in its post-trial memorandum, that the judicially recognized method of valuing public utility property is by the Reproduction Cost New, Less Depreciation ("RCNLD") for tangible and intangible assets in order to determine just compensation for the JWS property in the City. JWS also sought consequential and severance damages that would result from separating the JWS Nassau County water supply system from that in the City. The aggregate compensation sought by JWS as of December 31, 1987 was $923,966,341, consisting of $846,625,285 RCNLD, $49,670,056 consequential and severance damages and $27,671,000 as the fair market value of the land owned by JWS. The City submitted its income capitalization valuation, as of December 31, 1987, at $62,500,000. The evidentiary hearings in the proceedings were concluded and JWS reserved its right to contest the constitutionality of the statute. Subsequent to the trial, the Court requested that the parties address the constitutionality of the statute. After a joint post-hearing submission from JWS and the City contending that the statute was constitutional, the Supreme Court sua sponte, by decision dated June 21, 1993, dismissed the City's petition and held, inter alia, that "insofar as the legislature has directed this Court to make . . . a decision [on valuation only prior to any taking] through General City Law 20(2), that statute is unconstitutional", because such a decision would be advisory. Aware that a constitutional challenge to a nearly identical condemnation statute involving Saratoga County, was pending in the appellate courts, neither JWS nor the City served a notice of entry of the dismissal order that would commence the period within which an appeal could be taken. On February 24, 1994, the New York Court of Appeals held the nearly- identical Saratoga County related statute to be constitutional. On April 6, 1994, a conference was held with the Supreme Court -47- pursuant to the City's request to reconsider its JWS decision in light of the Court of Appeals February 24, 1994 decision. At the April 6, 1994 conference, the Court stated it would, as requested by the City, reconsider its June 21, 1993 decision. The Court further stated that in the event it decided to withdraw its June 21, 1993 decision that it would then take the proceedings under further consideration. EMCOR cannot predict when or if the Supreme Court will conduct further proceedings under the statute, what the decision of the Supreme Court might be if it decides to value the JWS property, or the effect of the pending litigation on the ability to sell or the timing of the sale of JWS. ITEM 9. MARKET PRICE OF AND DIVIDENDS OF THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS ------------------------------------------------------------------- MARKET INFORMATION There is no established public trading market at present for the New Common Stock. The Company will apply in the future for inclusion of the New Common Stock in the National Association of Securities Dealers' Automated Quotation System ("NASDAQ"). As of April 25, 1995, 5,485,719 shares of New Common Stock were issued and outstanding and 3,938,364 shares were held by the Company pending distribution pursuant to the Plan of Reorganization. HOLDERS The number of holders of record of New Common Stock as of July 31, 1995 was approximately 48. DIVIDENDS The Company did not pay dividends on the prepetition common stock during 1993 or 1992 and it does not anticipate that it will pay any dividends on the New Common Stock in the foreseeable future. The Series A Notes prohibit the payment of dividends on the New Common Stock and the Series C Notes provide that dividends are limited to 50% of Consolidated Net Income (as defined) for the period from the Effective Date to the most recently ended fiscal quarter. ITEM 10. RECENT SALES OF UNREGISTERED SECURITIES --------------------------------------- The New Common Stock, the New Notes and the New Warrants have been issued pursuant to the Plan of Reorganization on the Effective Date in satisfaction of various claims against, or interests in, the Company allowed by the Bankruptcy Court. In reliance on the exemptions provided by section 1145 of the United States Bankruptcy Code, none of such securities were registered under the Securities Act of 1933, as amended (the "Securities Act") in connection with their issuance and distribution pursuant to the Plan of Reorganization. On March 6, 1992, $60 million principal amount of 9.10% Senior Notes due 2002 (the "Notes") were issued by the Company to nine insurance companies. The offering of Notes was made pursuant to Section 4(2) of the Securities Act which exempts from registration transactions not involving a public offering. The following are the original purchasers of the Notes: The Prudential Insurance Company, American General Life and Accident Insurance Company, The Ohio National Life Insurance Company, Modern Woodmen of America, The Paul Revere Life Insurance Company, The Paul Revere Protective Life Insurance Company, The -48- Union Central Life Insurance Company, The Paul Revere Variable Annuity Insurance Company, and the Manhattan Life Insurance Company. ITEM 11. DESCRIPTION OF REGISTRANT'S SECURITIES TO BE REGISTERED ------------------------------------------------------- AUTHORIZED CAPITAL STOCK The Company's Amended and Restated Certificate of Incorporation (the "Charter") provides that the total number of all classes of stock which the Company shall have authority to issue is Thirteen Million Seven Hundred Thousand (13,700,000) shares of New Common Stock, par value $.01 per share. As of April 25, 1995, 5,485,719 shares of New Common Stock had been issued and were outstanding and 3,938,364 shares were held by the Company pending distribution pursuant to the Plan of Reorganization. NEW COMMON STOCK Each share of New Common Stock has one vote and, except as may be otherwise provided by the General Corporation Law of the State of Delaware (the "General Corporation Law"), the exclusive voting power for all purposes is fixed in the holders of the New Common Stock. The holders of record of the New Common Stock are entitled to receive, when, if and as declared by the Board of Directors, but only out of funds legally available for the payment of dividends, such dividends of cash or in property, including securities of the Company, as the Board of Directors shall from time to time declare. In the event of any liquidation, dissolution or winding up of the Company, whether voluntary or involuntary, after payment or provision for payment of the debts and other liabilities of the Company, the holders of the New Common Stock would be entitled to share ratably (i.e., an equal amount of assets for each share of New Common Stock) in the remaining assets of the Company. Subject to the provisions of the General Corporation Law, the Company may issue its New Common Stock from time to time for such consideration (not less than the par value thereof) as may be fixed by the Board of Directors, which is expressly authorized to fix the same at its discretion. Shares so issued for which the consideration has been paid or delivered to the Company shall be deemed fully paid stock and shall not be liable to any further call or assessment thereon, and the holders of such shares shall not be liable for any further payments in respect of such shares. Notwithstanding anything to the contrary set forth in the Charter, the Company shall not issue any non-voting equity securities; provided, however, that this provision, included in the Charter in compliance with Section 1123(a)(6) of the Bankruptcy Code, shall have no force and effect beyond that required by Section 1123(a)(6) of the Bankruptcy Code and shall be effective only for so long as Section 1123(a)(6) of the Bankruptcy Code is in effect and applicable to the Company. Whenever a compromise or arrangement is proposed between the Company and its creditors or any class of them and/or between the Company and its stockholders or any class of them, any court of equitable jurisdiction within the State of Delaware may, on the application in a summary way of the Company or any creditor or stockholder thereof or on the application of any receiver or receivers appointed for the Company under the provisions of Section 291 of Title 8 of the Delaware Code or on the application of trustees in dissolution or of any receiver or receivers appointed for the Company under the provisions of Section 279 of Title 8 of the Delaware Code, order a meeting of the creditors or class of creditors, and/or of the stockholders or class of stockholders, of the Company, as the case may be, to be summoned in such manner as the said court directs. If a majority in number representing three-fourths in value of the creditors or class of creditors, and/or of the stockholders or class of stockholders, of the Company, as the case may be, agree to any compromise or arrangement and to any reorganization of the Company as a consequence of such compromise or arrangement, the said compromise or arrangement and the said reorganization shall, if sanctioned by the court to which the said application has been made, be binding on all the creditors or class of creditors, and/or on all the stockholders or class of stockholders, of the Company, as the case may be, and also on the Company. -49- CERTAIN CORPORATE GOVERNANCE MATTERS Except as the General Corporation Law or the By-Laws of the Company may otherwise provide, the holders of a majority of the outstanding shares of stock entitled to vote shall constitute a quorum at a meeting of stockholders for the transaction of any business. The stockholders present may adjourn the meeting despite the absence of a quorum. When a quorum is once present to organize a meeting, it is not broken by the subsequent withdrawal of any stockholders. Each stockholder entitled to vote in accordance with the terms of the Charter and By-laws shall be entitled to one vote, in person or by proxy, for each share of stock entitled to vote held by such stockholder. In the election of Directors, a plurality of the votes present at the meeting shall elect. Election of Directors need not be by written ballot, unless the By-Laws of the Company so provide. Any other action shall be authorized by a majority of the votes cast except where the Charter or the General Corporation Law prescribes a different percentage of votes and/or a different exercise of voting power. Action shall be taken by stockholders of the Company only at a duly called annual or special meeting of stockholders of the Company and stockholders may not act by written consent. Voting by ballot shall not be required for corporate action except as otherwise provided by the General Corporation Law. In furtherance and not in limitation of the powers conferred under the General Corporation Law, the Board of Directors of the Company is expressly authorized to make, alter or repeal By-Laws not inconsistent with law or with the Charter. ITEM 12. INDEMNIFICATION OF DIRECTORS AND OFFICERS ----------------------------------------- The Company's Charter provides that the personal liability of directors of the Company to the Company is eliminated to the fullest extent permitted by Section 102(b)(7) of the General Corporation Law, as the same may be amended and supplemented. The Company's Charter provides for the indemnification of, to the fullest extent permitted by the General Corporation Law, all persons who may be indemnified by the Company under the General Corporation Law, which would include the directors, officers, employees and agents of the Company. The indemnification provided by the Company's Charter does not limit or exclude any rights, indemnities or limitations of liability to which any person may be entitled, whether as a matter of law, under the By-Laws of the Company, by agreement, vote of the stockholders or disinterested directors of the Company or otherwise. The Company's Charter also does not absolve directors of liability (1) for any breach of the directors' duty of loyalty to the Company or its stockholders, (2) for acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law, (3) under Section 174 of the General Corporation Law, which makes directors personally liable for unlawful dividends or unlawful stock repurchases or redemptions in certain circumstances and expressly sets forth a negligence standard with respect to such liability, or (4) for any transaction from which the director derived any improper personal benefit. Under Delaware law, directors, officers, employees and other individuals may be indemnified against expenses (including attorneys' fees), judgments, fines and amounts paid in settlement in connection with specified actions, suits or proceedings, whether civil, criminal, administrative or investigative (other than an action by or in the right of the corporation (a "derivative action")) if they acted in good faith and in a manner they reasonably believed to be in or not opposed to the best interests of the Company and, with respect to any criminal action or proceeding, had no reasonable cause to believe their conduct was unlawful. A similar standard of care is applicable in the case of a derivative action, except that indemnification only extends to expenses (including attorneys' fees) incurred in connection with defense or settlement of such an action and Delaware law requires court approval before there can be any indemnification of expenses where the person seeking indemnification has been found liable to the Company. -50- The Company has entered into indemnification agreements with its directors and officers, a form of which has been filed as an Exhibit to this Registration Statement, pursuant to which the Company has agreed to indemnify such directors and officers to the fullest extent permitted by Delaware law, as the same may be amended from time to time. ITEM 13. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA ------------------------------------------- See "Item 15. Financial Statements and Exhibits" and the Consolidated Financial Statements which begin on page F-1. ITEM 14. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE -------------------------------------- None. ITEM 15. FINANCIAL STATEMENTS AND EXHIBITS --------------------------------- (a) Financial Statements -------------------- See Index to Consolidated Financial Statements and Schedules which appears on page F-1 hereof. (b) Exhibits -------- The exhibits listed on the Exhibit Index following the Consolidated Financial Statements hereof are filed herewith in response to this Item. -51- SIGNATURES ---------- Pursuant to the requirements of Section 12 of the Securities Exchange Act of 1934, the registrant has duly caused this Amendment No. 3 to a Registration Statement on Form 10 to be signed on its behalf by the undersigned, thereunto duly authorized. Date: August 11, 1995 EMCOR GROUP, INC. By:/s/ Frank T. MacInnis ----------------------------------------- Name: Frank T. MacInnis Title: Chairman of the Board, President and Chief Executive Officer -52- EMCOR GROUP, INC. AND SUBSIDIARIES (FORMERLY JWP INC. AND SUBSIDIARIES) INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULES Page No. -------- Financial Statements: Independent Auditors' Report as of and for the Years Ended December 31, 1994 and 1993....................... F-2 Independent Auditors' Report as of and for the Year Ended December 31, 1992..................................... F-4* Consolidated Balance Sheets as of March 31, 1995 (unaudited) and December 31, 1994 and 1993................................... F-6 Consolidated Statements of Operations for the Three Months Ended March 31, 1995 and 1994 (unaudited) and Years Ended December 31, 1994, 1993 and 1992.............................................. F-8 Consolidated Statements of Cash Flows for the Three Months Ended March 31, 1995 and 1994 (unaudited) and Years Ended December 31, 1994, 1993 and 1992.............................................. F-10 Consolidated Statements of Shareholders' Equity (Deficit) as of December 31, 1994, 1993 and 1992........................... F-14 Notes to Consolidated Financial Statements....................... F-16 Schedules: Schedule I - Condensed Financial Information of EMCOR Group, Inc. ....................................... S-I-1 Schedule II - Valuation and Qualifying Accounts.................. S-II-1 - ---------- * Refer to page 12 for discussion regarding the independent auditors' report for the year ended December 31, 1992. F-1 INDEPENDENT AUDITORS' REPORT To the Board of Directors and Shareholders of EMCOR Group, Inc. We have audited the accompanying Consolidated Balance Sheets of EMCOR Group, Inc. (formerly JWP INC.) and its subsidiaries (the "Company") as of December 31, 1994 and 1993, and the related Consolidated Statements of Operations, Shareholders' Equity (Deficit) and Cash Flows for the years then ended. Our audit also included the financial statement schedules for the year ended December 31, 1994 and 1993 listed in the Index at Item 15(a). These financial statements and financial statement schedules are the responsibility of the Company's management. Our responsibility is to report on these financial statements and financial statement schedules based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audits 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 report dated July 8, 1994, we did not express an opinion on the 1993 consolidated financial statements due to the material uncertainties related to the Company's ability to continue as a going concern because the Company had experienced significant losses from operations for each of the years ended December 31, 1993 and 1992, had negative working capital and a deficit in shareholders' equity and because of the possible material effects of uncertainties related to the net realizable value of assets of discontinued operations, claims filed against the Company, and the possible consequences of the bankruptcy proceedings. As discussed in Note A to the consolidated financial statements, during December 1994 the Company emerged from Chapter 11 of the Federal Bankruptcy Code. The emergence from bankruptcy resulted in a significant reduction in debt, the obtaining of a new credit agreement and the valuing of the Company at its new reorganization value resulted in positive shareholders' equity versus a pre-emergence deficit of $324.0 million. Accordingly, our present opinion on the 1993 consolidated financial statements, as expressed herein, is different from our prior report on the 1993 consolidated financial statements. As discussed in Notes A and F to the consolidated financial statements, the Company emerged from Chapter 11 of the U.S. Bankruptcy Code on December 15, 1994. Accordingly, the accompanying financial statements have been prepared in accordance with the American Institute of Certified Public Accountants F-2 Statement of Position 90-7, "Financial Reporting by Entities in Reorganization Under the Bankruptcy Code." The Company accounted for the Reorganization as of December 31, 1994 and adopted "Fresh-Start Reporting." As a result, the December 31, 1994 consolidated balance sheet is not comparable to prior periods since it presents the consolidated financial position of the reorganized entity. In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 1994 and 1993, and the results of its operations and its cash flows for the years then ended in conformity with generally accepted accounting principles. Also, in our opinion, such financial statement schedules, when considered in relation to the basic consolidated financial statements taken as a whole, present fairly in all material respects the information set forth therein. As more fully described in Note X to the consolidated financial statements, the Company is involved with certain legal proceedings. The Company is presently unable to predict the outcome of these proceedings, and the impact, if any, that the ultimate resolution of such matters will have upon the Company and its consolidated financial statements. No provision for any liability that may result from the resolution of these uncertainties has been made in the accompanying consolidated financial statements. As discussed in Note Y to the consolidated financial statements, the Company changed its method of accounting for post-employment benefits effective January 1, 1994. /s/ Deloitte & Touche LLP New York, New York March 17, 1995 F-3 INDEPENDENT AUDITORS' REPORT To the Board of Directors and Shareholders of EMCOR Group, Inc. We have audited the accompanying Consolidated Statements of Operations, Shareholders' (Deficit) Equity, and Cash Flows of EMCOR Group, Inc. (formerly JWP INC., the "Company") and subsidiaries for the year ended December 31, 1992. Our audit also included the financial statement schedules listed in the Index at Item 15(a). These financial statements and schedules are the responsibility of the Company's management. Our responsibility is to report on these financial statements and schedules based on our audit. We conducted our audit in accordance with generally accepted auditing standards. Those standard 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 audit provides a reasonable basis for our report. At December 31, 1992, the Company is not in compliance with certain covenants with respect to its revolving credit facility, senior notes and subordinated debt, as further described in Note C, under which the Company owed $501 million. The Company has negotiated the restructuring of its debt and intends to effect the restructuring through a proposed plan of reorganization under an ongoing proceeding under Chapter 11 of the U.S. Bankruptcy Code. The proposed plan of reorganization also contemplates a business restructuring plan to divest certain businesses, the proceeds of which, to date, have been used for working capital and to reduce debt. There is no assurance that the Company will be able to consummate the remaining sales and, if consummated, whether the Company will realize the proceeds contemplated by the plan. Further, the Company cannot predict the results of the reorganization, if completed, or provide any assurance that the proposed plan of reorganization will be completed or, if so, its timing. If the Company is not successful in these efforts there is the likelihood that a liquidation would result. As more fully described in Note X, the Company has been named as a defendant in various litigation. The Company is presently unable to predict the outcome of this litigation, and the impact, if any, that the ultimate resolution of such litigation will have upon the Company and its financial statements. The 1992 consolidated financial statements have been prepared assuming that the Company will continue as a going concern. The Company has a working capital deficiency of $364.9 million and a shareholders' deficit of $176.0 million at December 31, 1992. In addition, the Company has incurred a loss of $612.4 million for the year ended December 31, 1992 that has significantly weakened the Company's financial condition. The Company's surety companies are issuing new bonds required to guarantee the Company's performance on construction contracts, but are reviewing bonding requests on a case-by-case basis for large construction projects and those with durations of more than two years in light of the Company's financial condition. The matters discussed in this and the two preceding paragraphs raise substantial doubt about the Company's ability to continue as a going concern. The financial statements do not F-4 include any adjustments to reflect the possible future effects on the recoverability of assets or the amounts of liabilities that may result from the possible inability of the Company to continue as a going concern. Because of the possible material effects on the consolidated financial statements referred to above of the matters described in the three preceding paragraphs, we are unable to, and do not, express an opinion on these consolidated financial statements or the related financial statement schedules. As discussed in Notes B and K, in 1992 the Company changed its method of accounting for income taxes. ERNST & YOUNG LLP New York, New York June 30, 1994 F-5 EMCOR GROUP, INC. AND SUBSIDIARIES (FORMERLY JWP INC. AND SUBSIDIARIES) CONSOLIDATED BALANCE SHEETS (IN THOUSANDS) - -------------------------------------------------------------------------------- ASSETS | Predecessor Reorganized Company | Company March 31, December 31, | December 31, 1995 1994 | 1993 (unaudited) | | CURRENT ASSETS: | Cash and cash equivalents $ 45,150 $ 52,505 | $ 39,534 Accounts receivable, less allowance for doubtful | accounts of $18,214, $19,820 and $31,170, respectively 410,084 438,958 | 455,944 Costs and estimated earnings in excess of billings on | uncompleted contracts 54,931 52,347 | 61,987 Inventories 7,861 6,910 | 5,221 Prepaid expenses and other 8,240 8,115 | 13,240 Net assets held for sale 57,157 55,401 | 20,454 -------- -------- | -------- Total current assets 583,423 614,236 | 596,380 -------- -------- | -------- | NET ASSETS HELD FOR SALE - - | 63,161 | INVESTMENTS, NOTES AND OTHER | LONG-TERM RECEIVABLES 5,075 6,122 | 19,737 | PROPERTY, PLANT AND EQUIPMENT - Net 31,453 33,670 | 39,266 | OTHER ASSETS: | Excess of cost of acquired businesses | over net assets, less amortization - - | 58,973 Insurance cash collateral 39,126 37,577 | 21,394 Funds held in escrow 8,976 8,649 | 335 Miscellaneous 7,112 7,244 | 7,196 -------- -------- | -------- 55,214 53,470 | 87,898 -------- -------- | -------- TOTAL ASSETS $675,165 $707,498 | $806,442 ======== ======== ======== (Continued) F-6 EMCOR GROUP, INC. AND SUBSIDIARIES (FORMERLY JWP INC. AND SUBSIDIARIES) CONSOLIDATED BALANCE SHEETS (IN THOUSANDS) - -------------------------------------------------------------------------------- LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT) | Predecessor Reorganized Company | Company March 31, December 31, | December 31, 1995 1994 | 1993 (unaudited) | | CURRENT LIABILITIES: | Notes payable $ 6,035 $ 4,803 | $ 172 Borrowings under working capital credit line 37,500 40,000 | - Current maturities of long-term debt and capital lease obligations 1,774 2,089 | 2,327 7% Senior Secured Notes (Series A) 57,157 55,401 | - Debt in default - - | 501,007 Accounts payable 196,684 219,564 | 209,867 Billings in excess of costs and estimated earnings on | uncompleted contracts 116,103 115,567 | 115,179 Accrued payroll and benefits 36,656 38,914 | 37,939 Other accrued expenses and liabilities 41,549 45,660 | 182,213 -------- -------- | ---------- | Total current liabilities 493,458 521,998 | 1,048,704 -------- -------- | ---------- | LONG-TERM DEBT 62,135 59,782 | 2,538 | OTHER LONG-TERM OBLIGATIONS 44,581 44,588 | 57,462 | SHAREHOLDERS' EQUITY (DEFICIT): | Common Stock, $.01 par value, 13,700,000 shares | authorized, 9,424,083 shares issued or issuable under | the Plan of Reorganization 94 94 | - Warrants 2,179 2,179 | - Old Preferred Stock, $1 par value, 25,000,000 shares | authorized, 425,000 shares of Series A issued and outstanding - - | 21,250 Old Common Stock, $.10 par value, 75,000,000 shares | authorized, 40,715,541 shares issued and outstanding, | excluding treasury shares of 727,389 - - | 4,072 Old Warrants of Participation - - | 576 Capital surplus 78,857 78,857 | 204,247 Cumulative translation adjustment 820 - | (6,068) Accumulated deficit (6,959) - | (526,339) -------- -------- | ---------- | Total shareholders' equity (deficit) 74,991 81,130 | (302,262) -------- -------- | ---------- TOTAL LIABILITIES AND | SHAREHOLDERS' EQUITY (DEFICIT) $675,165 $707,498 | $ 806,442 ======== ======== ========== The accompanying notes to the consolidated financial statements are an integral part of these statements. F-7 EMCOR GROUP, INC. AND SUBSIDIARIES (FORMERLY JWP INC. AND SUBSIDIARIES) CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE THREE MONTHS ENDED MARCH 31, (UNAUDITED) (IN THOUSANDS, EXCEPT PER SHARE DATA) - -------------------------------------------------------------------------------- Reorganized | Predecessor Company | Company 1995 | 1994 ----------- | ----------- | REVENUES $386,015 | $435,554 -------- | -------- COSTS AND EXPENSES: | Cost of sales 354,148 | 393,257 Selling, general and administrative 34,771 | 45,448 Restructuring charges - | - -------- | -------- 388,919 | 438,705 -------- | -------- OPERATING LOSS (2,904) | (3,151) Interest expense(2) (4,195) | (433) Interest income 390 | 257 Net gain (loss) on businesses sold or held for sale - | 241 -------- | -------- | LOSS FROM CONTINUING OPERATIONS BEFORE | REORGANIZATION ITEMS, INCOME TAXES, | EXTRAORDINARY ITEM AND CUMULATIVE | EFFECT OF ACCOUNTING CHANGES (6,709) | (3,568) -------- | -------- REORGANIZATION ITEMS: | Professional fees - | (3,600) -------- | -------- LOSS FROM CONTINUING OPERATIONS INCLUDING | REORGANIZATION ITEMS, BEFORE INCOME TAXES, | AND CUMULATIVE EFFECT OF ACCOUNTING CHANGES (6,709) | (7,168) | INCOME TAX (BENEFIT) PROVISION 250 | 250 -------- | -------- LOSS FROM CONTINUING OPERATIONS INCLUDING | REORGANIZATION ITEMS, BEFORE EXTRAORDINARY | ITEM AND CUMULATIVE EFFECT OF ACCOUNTING | CHANGES (6,959) | (7,418) -------- | -------- DISCONTINUED OPERATIONS: | Income (loss) from operations, net of income taxes - | 1,144 -------- | -------- Income (loss) from discontinued operations - | 1,144 -------- | -------- | CUMULATIVE EFFECT OF CHANGE IN METHOD OF | ACCOUNTING FOR: | Post-employment benefits - | 2,100 -------- | -------- NET INCOME (LOSS) $ (6,959) | $ (8,374) ======== | ======== SUPPLEMENTAL INCOME (LOSS) PER SHARE(1): | Continuing operations $ (.74) | * Cumulative effect of change in method of accounting for | Post-employment benefits - | * ------- | Net income $ (.74) | * ======= | (1) Historical per share data has not been presented as it is not meaningful since the Company has been recapitalized and adopted Fresh-Start Reporting as of December 31, 1994. (2) Interest expense excludes $11,194 of stated contractual interest related to debt obligations for the period from January 1, 1994 to March 31, 1994. The accompanying notes to the consolidated financial statements are an integral part of these statements. F-8 EMCOR GROUP, INC. AND SUBSIDIARIES (FORMERLY JWP INC. AND SUBSIDIARIES) CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, (IN THOUSANDS, EXCEPT PER SHARE DATA) - -------------------------------------------------------------------------------- 1994 1993 1992 REVENUES $1,763,961 $2,194,735 $2,404,577 ---------- ---------- ---------- COSTS AND EXPENSES: Cost of sales 1,607,589 2,043,558 2,160,723 Selling, general and administrative 178,575 216,709 440,725 Restructuring charges - - 38,741 ---------- ---------- ---------- 1,786,164 2,260,267 2,640,189 ---------- ---------- ---------- OPERATING LOSS (22,203) (65,532) (235,612) Interest expense(2) (3,867) (51,075) (45,894) Interest income 1,391 888 1,713 Net gain (loss) on businesses sold or held for sale 1,183 1,028 (76,078) Loss on investment (4,452) - - ---------- ---------- ---------- LOSS FROM CONTINUING OPERATIONS BEFORE REORGANIZATION ITEMS, INCOME TAXES, EXTRAORDINARY ITEM AND CUMULATIVE EFFECT OF ACCOUNTING CHANGES (27,948) (114,691) (355,871) ---------- ---------- ---------- REORGANIZATION ITEMS: Professional fees (12,535) - - Fresh-start adjustments (78,783) - - ---------- ---------- ---------- (91,318) - - ---------- ---------- ---------- LOSS FROM CONTINUING OPERATIONS INCLUDING REORGANIZATION ITEMS, BEFORE INCOME TAXES, EXTRAORDINARY ITEM AND CUMULATIVE EFFECT OF ACCOUNTING CHANGES (119,266) (114,691) (355,871) INCOME TAX (BENEFIT) PROVISION (332) (700) 7,644 ---------- ---------- ---------- LOSS FROM CONTINUING OPERATIONS INCLUDING REORGANIZATION ITEMS, BEFORE EXTRAORDINARY ITEM AND CUMULATIVE EFFECT OF ACCOUNTING CHANGES (118,934) (113,991) (363,515) ---------- ---------- ---------- DISCONTINUED OPERATIONS: Income (loss) from operations, net of income taxes 10,216 11,263 (203,739) Loss from disposal of businesses, net of income taxes - (20,350) (49,491) ---------- ---------- ---------- Income (loss) from discontinued operations 10,216 (9,087) (253,230) ---------- ---------- ---------- EXTRAORDINARY ITEM - Gain on debt discharge 413,249 - - CUMULATIVE EFFECT OF CHANGE IN METHOD OF ACCOUNTING FOR: Post-employment benefits (2,100) - - Income taxes - - 4,315 ---------- ---------- ---------- NET INCOME (LOSS) $ 302,431 $ (123,078) $ (612,430) ========== ========== ========== SUPPLEMENTAL INCOME (LOSS) PER SHARE(1): Continuing operations before extraordinary item $(12.62) * * Discontinued operations: Income from operations 1.08 * * Extraordinary item 43.85 * * Cumulative effect of change in method of accounting for: Post-employment benefits (0.22) * * ------ Net income $32.09 * * ====== (1) Historical per share data has not been presented as it is not meaningful since the Company has been recapitalized and adopted Fresh-Start Reporting as of December 31, 1994. (2) Interest expense excludes $42,909 of stated contractual interest related to debt obligations for the period from January 1, 1994 to December 15, 1994. The accompanying notes to the consolidated financial statements are an integral part of these statements. F-9 EMCOR GROUP, INC. AND SUBSIDIARIES (FORMERLY JWP INC. AND SUBSIDIARIES) CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE THREE MONTHS ENDED MARCH 31, (UNAUDITED) (IN THOUSANDS) - -------------------------------------------------------------------------- Reorganized | Predecessor Company | Company 1995 | 1994 ----------- | ----------- | CASH FLOWS FROM OPERATING ACTIVITIES: | Net loss $ (6,959) | $ (8,374) Adjustments to reconcile net loss to net cash | used in operating activities: | Depreciation and amortization 2,336 | 4,112 Cumulative effect of accounting for: | Post-employment benefits - | 2,100 Other, net 2,353 | 1,553 -------- | -------- (2,270) | (609) | | Change in Operating Assets and Liabilities Excluding | Effect of Businesses Disposed of and Acquired: | Decrease in accounts receivable 28,874 | 21,065 (Increase) in inventories and contracts in progress (2,999) | (12,505) (Decrease) increase in accounts payable and accrued expenses (28,640) | 3,525 Changes in other assets and liabilities 952 | (28,638) -------- | -------- | Net Cash Used in Operations $ (4,083) | $(17,162) ======== ======== F-10 EMCOR GROUP, INC. AND SUBSIDIARIES (FORMERLY JWP INC. AND SUBSIDIARIES) CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE THREE MONTHS ENDED MARCH 31, (UNAUDITED) (IN THOUSANDS) - -------------------------------------------------------------------------- Reorganized | Predecessor Company | Company 1995 | 1994 ----------- | ----------- | | CASH FLOWS FROM FINANCING ACTIVITIES: | Payment of working capital credit line $ (2,500) | $ - Proceeds from debtor-in-possession financing - | 15,000 Payments of long-term debt and capital lease obligations (315) | (745) Proceeds from notes payable 1,232 | 2,951 Payments of notes payable - | (172) -------- | -------- (1,583) | 17,034 -------- | -------- Net Cash (Used in) Provided by Financing Activities | | CASH FLOWS FROM INVESTING ACTIVITIES: | Proceeds from sale of businesses and other assets - | 2,990 Purchase of property, plant and equipment (1,689) | (2,846) Net disbursements for other investments - | (2,422) Change in cash balance of businesses held for sale or sold - | 4,899 -------- | -------- | Net Cash (Used in) Provided by Investing Activities (1,689) | 2,621 -------- | -------- | Increase (Decrease) in Cash and Cash Equivalents (7,355) | 2,493 | Cash and Cash Equivalents at Beginning of Year 52,505 | 39,534 -------- | -------- Cash and Cash Equivalents at End of Year $ 45,150 | $ 42,027 ======== | ======== The accompanying notes to the consolidated financial statements are an integral part of these statements. (Concluded) F-11 EMCOR GROUP, INC. AND SUBSIDIARIES (FORMERLY JWP INC. AND SUBSIDIARIES) CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, (IN THOUSANDS) - -------------------------------------------------------------------------------- 1994 1993 1992 CASH FLOWS FROM OPERATING ACTIVITIES: Net income (loss) $ 302,431 $(123,078) $(612,430) Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: Depreciation and amortization 15,724 35,246 68,993 Restructuring charges applicable to continuing operations - - 38,741 Restructuring charges applicable to discontinued operations - - 25,950 Net (gain) loss from businesses sold or held for sale (1,183) (1,028) 76,078 Provision for losses on accounts and other receivables - 13,663 113,903 Inventory valuation adjustments - - 59,787 Write-off of deferred debt issuance cost - - 2,876 Write-off of fixed assets and miscellaneous assets - - 11,167 Write-off of goodwill and other intangibles - - 54,873 Write-down of investment 4,452 - - Stock compensation - 727 9,518 Deferred income taxes - 4,138 7,137 Loss from disposal of discontinued operations - 20,350 49,491 Equity and other losses in unconsolidated affiliate - - 5,690 Cumulative effect of accounting for: Income taxes - - (4,315) Post-employment benefits 2,100 - - Other, net - 2,411 21,112 ---------- ---------- ---------- 323,524 (47,571) (71,429) Change in Operating Assets and Liabilities Excluding Effect of Businesses Disposed of and Acquired: Decrease in accounts receivable 9,172 41,286 73,379 (Increase) decrease in inventories and contracts in progress (6,879) 35,292 123,884 Increase (decrease) in accounts payable and accrued expenses 22,703 (73,563) (190,752) Changes in other assets and liabilities (20,703) 17 15,335 Changes due to reorganization activities: Reorganization charges 12,535 - - Gain on discharge of debt (413,249) - - Net adjustments to accounts for fair value 78,783 - - ---------- ---------- ---------- Net Cash Provided by (Used in) Operations 5,886 (44,539) (49,583) ---------- ---------- ---------- (Continued) F-12 EMCOR GROUP, INC. AND SUBSIDIARIES (FORMERLY JWP INC. AND SUBSIDIARIES) CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, (IN THOUSANDS) - -------------------------------------------------------------------------------- 1994 1993 1992 CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from working capital credit lines $ 40,000 $ - $ - Proceeds from long-term debt - 710 85,302 Proceeds from debtor-in-possession financing 30,000 - - Payment of debtor-in-possession financing (30,000) - - Cash deposited in trust account for funding of post-bankruptcy debt (15,940) - - Payments of long-term debt and capital lease obligations (1,430) (6,027) (68,514) Repayment of Series B Notes and partial Series A Note repayment (16,054) - - Redemption of preferred stock of subsidiary company - (500) - Proceeds from notes payable 4,646 7,900 40,575 Payments of notes payable (172) (27,169) (10,317) Debt issuance costs (900) - - Proceeds from issuance of common stock and exercise of stock options - - 1,911 Payment of preferred dividends - - (1,354) Acquisition of common stock for the treasury - - (8,130) -------- -------- -------- Net Cash Provided by (Used in) Financing Activities 10,150 (25,086) 39,473 -------- -------- -------- CASH FLOWS FROM INVESTING ACTIVITIES: Proceeds from sale of businesses and other assets 13,620 43,400 138,971 Acquisitions of businesses, net of cash acquired - - (15,899) Purchase of property, plant and equipment (4,164) (17,329) (36,411) Purchase of environmental facilities - - (32,044) Net disbursements for other investments (2,442) - (9,695) Change in cash balance of businesses held for sale or sold (10,079) (3,748) (26,241) Other, net - - 1,672 -------- -------- -------- Net Cash (Used in) Provided by Investing Activities (3,065) 22,323 20,353 -------- -------- -------- Increase (Decrease) in Cash and Cash Equivalents 12,971 (47,302) 10,243 Cash and Cash Equivalents at Beginning of Year 39,534 86,836 76,593 -------- -------- -------- Cash and Cash Equivalents at End of Year $ 52,505 $ 39,534 $ 86,836 ======== ======== ======== The accompanying notes to the consolidated financial statements are an integral part of these statements. (Concluded) F-13 EMCOR GROUP, INC. AND SUBSIDIARIES (FORMERLY JWP INC. AND SUBSIDIARIES) CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT) (IN THOUSANDS) - -------------------------------------------------------------------------------- OLD NEW OLD OLD WARRANTS COMMON PREFERRED COMMON OF NEW STOCK STOCK STOCK PARTICIPATION WARRANTS ----- --------- ------- ------------- -------- BALANCE, JANUARY 1, 1992 $ - $ 21,250 $ 4,018 $ 576 $ - Common stock issued in connection with acquisitions - - 10 - - Exercise of stock options - - 14 - - Acquisition of common stock for the treasury - - (57) - - Guaranteed future value of stock issued to acquire businesses - - - - - Deferred compensation and officer bonus - - 55 - - Foreign currency trans- lation adjustment - - - - - Preferred stock dividends - - - - - Other, net - - 35 - - Net loss - - - - - ----- ------- -------- ----- ------- BALANCE, DECEMBER 31, 1992 - 21,250 4,075 576 - Deferred compen- sation - - 9 - - Foreign currency trans- lation adjustment - - - - - Preferred stock dividends - - - - - Other, net - - (12) - - Net loss - - - - - ----- ------- -------- ----- ------- BALANCE, DECEMBER 31, 1993 - 21,250 4,072 576 - Foreign currency translation adjustment - - - - - Exchange of preferred stock for common stock - (345) 1 - - Net income - - - - - Exchange of stock and fresh-start adjustments 94 (20,905) (4,073) (576) 2,179 ----- -------- -------- ----- ------- BALANCE, DECEMBER 31, 1994 $ 94 $ - $ - $ - $ 2,179 ===== ======== ======== ===== ======= F-14 CUMULATIVE RETAINED SHARE- TRANS- EARNINGS HOLDERS' CAPITAL LATION (ACCUMULATED EQUITY SURPLUS ADJUSTMENTS DEFICIT) (DEFICIT) ------- ----------- ------- ------- BALANCE, JANUARY 1, 1992 $ 212,703 $ 4,807 $ 212,782 $ 456,136 Common stock issued in connection with acquisitions 739 - - 749 Exercise of stock options 1,897 - - 1,911 Acquisition of common stock for the treasury (8,073) - - (8,130) Guaranteed future value of stock issued to acquire businesses (12,308) - - (12,308) Deferred compensation and officer bonus 9,463 - - 9,518 Foreign currency tran- lation adjustment - (8,737) - (8,737) Preferred stock dividends - - (1,807) (1,807) Other, net (916) - - (881) Net loss - - (612,430) (612,430) ------- ------- --------- --------- BALANCE, DECEMBER 31, 1992 203,505 (3,930) (401,455) (175,979) Deferred compen- sation 718 - - 727 Foreign currency trans- lation adjustment - (2,138) - (2,138) Preferred stock dividends - - (1,806) (1,806) Other, net 24 - - 12 Net loss - - (123,078) (123,078) ------- ------- --------- --------- BALANCE, DECEMBER 31, 1993 204,247 (6,068) (526,339) (302,262) Foreign currency translation adjustment - (173) - (173) Exchange of preferred stock for common stock 344 - - - Net income - - 302,431 302,431 Exchange of stock and fresh-start adjustments (125,734) 6,241 223,908 81,134 --------- ------- --------- -------- BALANCE, DECEMBER 31, 1994 $ 78,857 $ - $ - $ 81,130 ========= ======= ========= ======== The accompanying notes to the consolidated financial statements are an integral part of these statements. F-15 EMCOR GROUP, INC. AND SUBSIDIARIES (FORMERLY JWP INC. AND SUBSIDIARIES) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 1994, 1993 AND 1992 (Information relating to the three month periods ended March 31, 1995 and 1994 is unaudited) - -------------------------------------------------------------------------------- NOTE A BASIS OF PRESENTATION JWP INC. emerged from Chapter 11 of the United States Bankruptcy Code on December 15, 1994 (the "Effective Date") and changed its name to EMCOR Group, Inc. ("EMCOR" or the "Company"). The Company reorganized pursuant to its Third Amended Joint Plan of Reorganization dated August 9, 1994, as amended and proposed by the Company and its subsidiary SellCo Corporation (the "Plan of Reorganization"). Under the Plan of Reorganization, prepetition creditors of the Company (other than holders of subordinated debt) received certain notes of EMCOR and its subsidiary SellCo Corporation ("SellCo") and substantially all of the common stock of EMCOR. The prepetition holders of the Company's subordinated debt, common and preferred stock and warrants of participation received warrants to purchase common stock of EMCOR in exchange for their debt and equity interests. Pursuant to the Plan of Reorganization, on the Effective Date EMCOR issued or reserved for issuance to prepetition creditors of EMCOR (other than holders of EMCOR's subordinated debentures and notes) in exchange for approximately $525.7 million of EMCOR senior bank and institutional indebtedness and substantially all other general unsecured claims, both allowed and disputed, against the Company, and to Belmont Capital Partners II, L.P. ("Belmont"), which provided a debtor-in-possession credit facility to the Company, the following securities: (i) 9,424,083 shares of newly authorized common stock of the Company ("New Common Stock") (constituting 100% of the issued and outstanding shares as of the Effective Date); (ii) approximately $62.2 million principal amount of 7% Senior Secured Notes, Series A, due 1997 of the Company ("Series A Notes") issued on the Effective Date and up to a maximum of $8.8 million additional principal amount of Series A Notes which are reserved for issuance to holders of general unsecured claims and to Belmont upon resolution of disputed and unliquidated prepetition general unsecured claims (assuming such claims are ultimately allowed in full). The Company recorded the Series A Notes based upon an assumed total of $100 million of pre-petition general unsecured claims after settlement of disputed and unliquidated pre-petition general unsecured claims; (iii) approximately $11.9 million principal amount of 7% Senior Secured Notes, Series B, due 1997 ("Series B Notes"); (iv) approximately $62.8 million principal amount of 11% Notes, Series C, due 2001 of the Company ("Series C Notes"); and (v) approximately $48.1 million principal amount of 12% Subordinated Contingent Payment Notes due 2004 of SellCo (the "SellCo Notes"). The entire $11.9 million principal amount of Series B Notes and approximately $4.1 million principal amount of the Series A Notes issued on the Effective Date were immediately redeemed on that date at their face amount in accordance with their terms from the proceeds realized from the sale and liquidation of certain subsidiaries, the stock of which would have been pledged as part of the collateral securing the Series B Notes had such subsidiaries not been sold (and an additional $600,000 of such proceeds was reserved for redemption of certain of the Series A Notes reserved for disputed and unliquidated claims). From February 14, 1994 to the Effective Date, the Company was a debtor-in- possession under Chapter 11 of the U.S. Bankruptcy Code. The accompanying Consolidated Financial Statements were prepared on the basis of the principles prescribed by the American Institute of Certified Public Accountants' Statement of Position 90-7, "Financial Reporting by Entities in Reorganization under the Bankruptcy Code." As a result, during 1994 the liabilities compromised in the bankruptcy proceeding were classified to "Pre-consent date bankruptcy claims subject to compromise". As of December 21, 1993, the Company ceased to accrue interest on its debt in default. See Note C for further discussion of the debt in default. F-16 As of December 31, 1994, in accordance with AICPA Statement of Position 90-7, "Financial Reporting by Entities in Reorganization under the Bankruptcy Code" ("SOP 90-7"), the Company adopted "Fresh-Start Reporting." Prior to the commencement and during the continuation of the Company's Chapter 11 proceeding, the Company experienced significant constraints in its surety bonding lines that adversely affected its operations. The surety bonding companies that provide bid and performance bonds for the Company reviewed and continue to review bond requests on a case-by-case basis. The Company's surety bonding companies have become more selective in issuing surety bonds for large construction projects, typically in excess of $10.0 million, and those with a duration of more than three years. The Company's surety bonding companies will generally not bond new projects for the Company's businesses held for sale. In addition, a surety bonding company that was a primary source of surety bonds for the Dynalectric Companies, wholly-owned subsidiaries of the Company, terminated its surety business as of January 1994. As a result, these subsidiaries were without any surety bonding facilities for most of 1994. In November 1994 the Company entered into an arrangement with a new surety bonding company to provide surety bonds for the Dynalectric Companies. The Dynalectric Companies accounted for approximately 21% of the Company's revenues for the year ended December 31, 1994 attributable to mechanical and electrical subsidiaries EMCOR plans to retain. The absence of available surety bonding for the Dynalectric Companies resulted in a significant reduction in their backlog. The new surety bonding arrangement should allow the Dynalectric Companies to obtain new contracts thereby increasing backlog. During the third and fourth quarters of 1994, the Company wrote down its investment in Health Care International Ltd. ("HCI"), a Scottish hospital, due to its deteriorating financial condition. HCI was placed in receivership in November, 1994. Effective January 1, 1994, the Company adopted the provisions of Statement of Financial Accounting Standards No. 112, "Employers' Accounting for Post- employment Benefits" (SFAS 112). See Note Y. In April 1992, the Company announced its intention to sell its water supply business. However, in July 1993, the Company's Board of Directors decided not to proceed with the sale due to uncertainties created by the then pending rate- related proceedings and litigation which are described in Note X. In December 1993, the Company's principal water supply subsidiary, Jamaica Water Supply Company ("JWS"), entered into an agreement with respect to the rate-related proceedings and litigation thereby eliminating significant uncertainties relating to the water supply business. This agreement was approved by the New York State Public Service Commission on February 2, 1994. Accordingly, in the first quarter of 1994 the Company reinstated its plan of sale. The Company is actively pursuing the sale of its water supply business. In 1993, the Company sold substantially all of its information services businesses. Operating results for all periods presented reflect the Company's information services and water supply businesses as discontinued operations (see Note P). As indicated above and in Notes P and Q, the Company developed and implemented a business restructuring plan which presently includes the sale of its water supply business, certain mechanical services business units and non-core businesses. The net assets of businesses to be sold have been classified in the Consolidated Balance Sheets as of December 31, 1994 and 1993 as "Net assets held for sale" and carried as either current or long-term assets on the basis of their actual or expected disposition dates. In the opinion of management, the financial data for the three months ended March 31, 1995 and 1994 reflect all adjustments (consisting only of a normal recurring nature) necessary to fairly present the data for such periods; however, the result of operations for such periods are not necessarily indicative of the operating results of the full year. F-17 NOTE B SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The Company has implemented the recommended accounting for entities emerging from Chapter 11 reorganization set forth in SOP 90-7. See Note F. PRINCIPLES OF CONSOLIDATION - The Consolidated Financial Statements include the accounts of the Company and its wholly-owned subsidiaries. Significant intercompany accounts and transactions have been eliminated. Certain reclassifications have been made to prior period consolidated financial statements to conform with current consolidated financial statement presentation. REVENUE RECOGNITION - Revenues on long-term contracts are recognized on the percentage-of-completion method. Percentage-of-completion for the mechanical contracting business 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 ("cost to cost"). Certain of the Company's electrical contracting business units measure percentage of completion by the percentage of labor costs incurred and accrued to date for each contract to the estimated total labor costs for such contract, while others are on the cost to cost method. Provisions for estimated losses on uncompleted contracts are made in the period in which such losses are determined. Changes in contract performance and estimated profitability, including those arising from contract penalty provisions and final contract settlements may result in revisions to costs and income and are recognized in the period in which the revisions are determined. Accounts receivable at December 31, 1994 and 1993, include $67.2 million and $90.4 million, respectively, of retainage billed under the terms of the contracts. In accordance with industry practice, certain of these receivables relate to contracts having production cycles longer than one year and, therefore, a portion will not be realized within the year. Disputes involving customers often arise in the normal course of the Company's business, primarily on projects where the Company is a subcontractor and is contesting with general contractors, owners or both for additional funds because of events such as delays or changes in contract specifications. Such disputes, whether for claims or for unapproved change orders in process of negotiation, are recorded at their estimated net realizable value when realization is probable and can be reasonably estimated. Claims against the Company are recognized when a loss is considered probable and amounts are reasonably determinable. Accounts receivable and costs and estimated earnings in excess of billings on uncompleted contracts at December 31, 1994 and 1993, include claims and change orders in the process of negotiation which aggregate approximately $69.0 million and $51.2 million, respectively, net of valuation allowances. Accounts receivable at December 31, 1994 includes approximately $45.0 million of balances that are expected to be collected after one year. Costs and estimated earnings on uncompleted contracts and related amounts billed as of March 31, 1995 and December 31, 1994 and 1993, are as follows: Reorganized | Predecessor Company | Company March 31, | 1995 December 31, | December 31, (unaudited) 1994 | 1993 --------------------------------------------- (in thousands) | Costs incurred on uncompleted contracts $2,583,772 $2,853,799 | $3,031,225 Estimated earnings 139,252 195,508 | 238,869 ---------- ---------- | ---------- 2,444,520 3,049,307 | 3,270,094 | Less billings to date 2,505,692 3,112,527 | 3,323,286 ---------- ---------- | ---------- | $ (61,172) $ (63,220) | $ (53,192) ========== ========== | ========== F-18 Such amounts are included in the accompanying Consolidated Balance Sheets under the following captions: Reorganized | Predecessor Company | Company March 31, | 1995 December 31, | December 31, (unaudited) 1994 | 1993 --------------------------------------------- (in thousands) | Costs and estimated earnings in excess of | billings on uncompleted contracts $ 54,931 $ 52,347 | $ 61,987 | Billings in excess of costs and estimated | earnings on uncompleted contracts (116,103) (115,567) | (115,179) --------- --------- | --------- | $ (61,172) $ (63,220) | $ (53,192) ========= ========= | ========= PROPERTY, PLANT AND EQUIPMENT - Property, plant and equipment is stated at cost. Utility plant and equipment, which is classified as net assets held for sale as of December 31, 1994 and 1993, includes, in addition to direct labor and materials, costs such as related employee benefits, taxes, interest and other costs attributable to plant and equipment construction. The water supply business provides for depreciation on the straight-line basis at amounts equivalent to a composite rate of approximately 2% of the average depreciable plant. All other subsidiaries provide for depreciation principally using the straight-line method over estimated useful lives. Property, plant and equipment as of December 31, 1994 and 1993, consists of: Reorganized | Predecessor Company | Company 1994 | 1993 --------------------------- (in thousands) | | | Machinery and equipment $ 18,069 | $ 55,640 Furniture and fixtures 3,334 | 16,146 Land, buildings and leasehold improvements 12,267 | 19,932 --------- | --------- | 33,670 | 91,718 | Accumulated depreciation and amortization - | 52,452 --------- | --------- | $ 33,670 | $ 39,266 ========= | ========= INVENTORIES - Inventories which consist primarily of construction materials are stated at the lower of cost or market. Cost is determined by principally using average costs. NET ASSETS HELD FOR SALE - Net assets held for sale are stated at the lower of cost or estimated net realizable value and carried as either current or long- term assets on the basis of their actual or expected disposition dates. COST IN EXCESS OF NET ASSETS ACQUIRED - Cost in excess of net assets acquired (goodwill) is amortized on a straight line basis over 40 years. The amounts included in the accompanying Consolidated Balance Sheets are net of cumulative amortization of $8.5 million at December 31, 1993. The pre fresh-start unamortized goodwill of $57.4 million at December 31, 1994 was written off in conjunction with the implementation of fresh-start accounting. See Note F. In 1992, the Company's Board of Directors approved a plan to downsize the Company's North American mechanical/electrical services business and to sell non-core businesses and certain mechanical and electrical F-19 business units. As a result, in 1992, the company wrote off goodwill of $48.5 million related to such businesses to reflect the net realizable value of businesses held for sale and the permanent impairment of goodwill. REORGANIZATION VALUE IN EXCESS OF AMOUNTS ALLOCABLE TO IDENTIFIABLE ASSETS - Reorganization value in excess of amounts allocable to identifiable assets totaling $5 million is being amortized on a straight-line basis over 15 years. This amount is included in "Other assets - miscellaneous" in the accompanying Consolidated Balance Sheet at December 31, 1994. SUPPLEMENTAL NET INCOME (LOSS) PER SHARE - Historical per share data has not been presented as it is not meaningful since the Company has been recapitalized and adopted Fresh Start Reporting as of December 31, 1994. Supplemental net income (loss) per share data has been calculated based on the assumed issuance of the New Common Stock (9,424,083 shares) as of January 1, 1994. STATEMENTS OF CASH FLOWS - For purposes of the Consolidated Statements of Cash Flows, the Company considers all highly liquid instruments with original maturities of three months or less to be cash equivalents. INCOME TAXES - Effective January 1, 1992, the Company adopted the provisions of Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes" (SFAS 109). The adoption of SFAS 109 changed the Company's method of accounting for income taxes from the deferred method (APB 11) to an asset and liability approach which requires the recognition of deferred tax liabilities and assets 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 deferred tax assets to the amount expected to be realized. Income tax expense is the tax payable for the period and the change during the period in deferred tax assets and liabilities. At December 31, 1994 and 1993, the valuation allowance recorded against the deferred tax assets was $114.5 million and $170.1 million, respectively. (See Note K). NOTE C DEBT IN DEFAULT Debt in default at December 31, 1993, consists of (in thousands): 1993 ---- Notes payable to banks under revolving credit facility at prime plus 3/4% $155,795 Senior notes payable to insurance companies, 9.1% to 10.95% 328,572 -------- Total senior debt 484,367 Subordinated notes payable to insurance companies, 12% 9,600 7-3/4% Convertible Subordinated Debentures 7,040 -------- $501,007 ======== Prior to the commencement of its Chapter 11 bankruptcy proceeding, the Company failed to make principal payments on its senior notes and 12% subordinated notes and was in default under various financial covenants contained in the loan agreements pursuant to which those notes were issued, including covenants requiring F-20 maintenance of minimum tangible net worth and minimum current ratio. Its bank revolving credit facility also contained certain financial and other covenants, including covenants requiring maintenance of minimum tangible net worth and minimum current ratio, under which the Company was in default. Additionally, the Company had not made scheduled semi-annual interest payments since September 1, 1993 with respect to its 7-3/4% Convertible Subordinated Debentures. As a result, the entire amount of such notes, bank indebtedness and debentures have been classified in the accompanying Consolidated Balance Sheets as "Debt in default" at December 31, 1993. Commencing in April 1993, the Company ceased making payments of principal and interest on indebtedness under its revolving credit facility and on indebtedness evidenced by its senior and subordinated notes. Interest continued to accrue in accordance with the provisions of the loan agreements and notes pursuant to which this indebtedness was incurred, which in certain circumstances included default rates at an additional 2% and, in one case, 4% until December 21, 1993, the date on which an involuntary bankruptcy petition was filed against the Company. At December 31, 1993, accrued interest applicable to debt in default was $43.3 million. Such amount is included in "Other accrued expenses and liabilities" at December 31, 1993 in the accompanying Consolidated Balance Sheets. The Company also had pledged to the holders of its senior notes and bank indebtedness the common stock of five subsidiaries held for sale and certain proceeds from the sale of these subsidiaries. Substantially all of the assets of three of those subsidiaries were sold in 1994. The Company's 7-3/4% Convertible Subordinated Debentures were convertible into its common stock at any time on or prior to September 1, 2012 at $30.11 per share which was subject to change as provided in the indenture pursuant to which the debentures were issued. The debentures were redeemable, at the Company's option, on any date prior to maturity at redemption prices (expressed as percentages of principal amount) ranging from 102.325% in 1994 to 100% in 1997 and thereafter, plus accrued interest. In 1992, the Company purchased $8.7 million of its 7 3/4% debentures and realized a net gain of $1.8 million from early retirement of such debt. See Note A with respect to the exchange of the debt in default for new debt and equity securities pursuant to the Company's Plan of Reorganization which became effective on December 15, 1994. NOTE D PRE-CONSENT DATE BANKRUPTCY CLAIMS SUBJECT TO COMPROMISE On February 14, 1994, the Company consented to the entry of an order for relief under Chapter 11 of the U.S. Bankruptcy Code. Under Chapter 11, certain claims against the Company in existence prior to the date that an involuntary petition was filed against the Company, December 21, 1993, were stayed while the Company continued business as a debtor-in-possession. These liabilities, described below, are included in various liability accounts in the Company's Consolidated Balance Sheet as of December 31, 1993. These liabilities have been discharged pursuant to the Plan of Reorganization. F-21 OTHER ACCRUED OTHER LONG- ACCOUNTS DEBT EXPENSES AND TERM PAYABLE IN DEFAULT LIABILITIES OBLIGATIONS TOTAL ------------------------------------------------------------ (IN THOUSANDS) Debt in default $ - $501,007 $ - $ - $501,007 Accrued interest - - 43,315 - 43,315 Amount due to JWP Information Services, Inc. - - 24,933 - 24,933 Foreign debt guarantees - - 6,037 - 6,037 Stock price guarantees - - 5,118 - 5,118 Preferred dividends in arrears - - 2,257 - 2,257 Unexpired leases - - - 1,718 1,718 Unfunded directors' retirement benefits - - - 975 975 Insurance reserves - - 9,600 26,800 36,400 Other impaired claims 400 - 699 - 1,099 ---- -------- -------- ------- -------- $400 $501,007 $ 91,959 $29,493 $622,859 ==== ======== ======== ======= ======== The Bankruptcy Court established April 8, 1994 as the bar date for filing of claims against the Company. Certain claims filed against the Company are contingent or in dispute and such claims will be resolved by either litigation or settlement. See Note A. The Company received approval from the Bankruptcy Court to pay or otherwise honor certain of its obligations that arose prior to the entry of the order for relief under Chapter 11, including employee wages and benefits, amounts payable under the Company's property, casualty, workers' compensation and other insurance programs and amounts payable under an employee stay bonus/severance pay plan. NOTE E DEBTOR-IN-POSSESSION FINANCING In February 1994, the Company and most of its subsidiaries entered into an agreement with Belmont to provide for a debtor-in-possession credit facility to the Company (the "DIP Loan"). The agreement provided to the Company a credit facility of $35 million at an interest rate of 12% per annum during the Chapter 11 proceeding. The agreement also provided that Belmont was to receive, as additional interest, a percentage of the securities to be issued under the Company's Plan of Reorganization. The DIP Loan was secured by a first lien on substantially all of the assets of the Company and most of its subsidiaries. As of the Effective Date, the Company had drawn down $30 million under the DIP Loan. The Company was in default of certain covenants of the DIP Loan. Pursuant to written waivers of default dated April 27, 1994, May 6, 1994, August 2, 1994 and November 4, 1994, the Company had been permitted by Belmont to draw on its line of credit. The DIP Loan was repaid on the Effective Date from borrowings under the MES Credit Agreement. NOTE F FRESH-START REPORTING The Company has accounted for its reorganization by using the principles of Fresh-Start Accounting as required by SOP 90-7. For accounting purposes, the Company assumed that the Plan of Reorganization was F-22 consummated on December 31, 1994. Under the principles of Fresh-Start Accounting, the Company's total net assets were recorded at their assumed reorganization value, with the reorganization value allocated to identifiable assets on the basis of their estimated fair value. Accordingly, the Company's accounts receivable and costs and estimated earnings in excess of billings on uncompleted contracts were reduced by approximately $11.6 million. In addition, its intangible assets of approximately $60.5 million were written off. The Company's accumulated shareholders' deficit of approximately $334.5 million, including its Old common stock of $4.1 million, Old Series A Preferred Stock of $20.9 million, and Old warrants of participation of $0.6 million and cumulative Translation Adjustments of $6.2 million were eliminated. The excess of reorganization value over the value of identifiable assets is reported as "reorganization value in excess of amounts allocable to identifiable assets" (the "Excess of Reorganization Value"). The primary valuation methodology employed by the Company, with the assistance of its financial advisors to determine the reorganization value of the Company was a net present value approach. The valuation was based on the Company's forecasts of unleveraged, after-tax cash flows calculated for each year over the four-year period from 1994 to 1997, capitalizing projected earnings before interest, taxes, depreciation and amortization at multiples ranging from 3 to 10 selected to value earnings and cash flows beyond 1997, and discounting the resulting amounts to present value at rates ranging from 10% to 30% selected to approximate the Company's projected weighted average cost of capital. The above calculations resulted in an estimated reorganization value of approximately $81.1 million, of which the Excess Reorganization Value was $5.0 million. The Excess Reorganization Value will be amortized over 15 years. As a result of the implementation of Fresh-Start Accounting, the financial statements of the Company after consummation of the Plan will not be comparable to the Company's financial statements of prior periods. A black line is shown to separate the accompanying December 31, 1994 Consolidated Balance Sheet from the prior year since it is not prepared on a comparable basis. The effect of the Plan of Reorganization, including the discharge of debt, and the implementation of Fresh-Start Accounting on the Company's Consolidated Balance Sheet as of December 31, 1994 was as follows (in thousands): F-23 ADJUSTMENTS TO RECORD PLAN OF REORGANIZATION ---------------------------------------------------------------------- PRE-FRESH-START DEBT FRESH-START BALANCE SHEET DISCHARGE BALANCE SHEET DECEMBER 31, & EXCHANGE FRESH-START DECEMBER 31, 1994 OF STOCK (a) ADJUSTMENTS (f) 1994 ----------------------------------------------------------------------- CURRENT ASSETS: Cash and cash equivalents $ 52,505 $ - $ - $ 52,505 Accounts receivable, net 441,958 - (3,000) 438,958 Costs and estimated earnings in excess of billings on uncompleted contracts 60,912 - (8,565) 52,347 Inventories 6,910 - - 6,910 Prepaid expenses and other 8,115 - - 8,115 Net assets held for sale 83,113 - (27,712)(g) 55,401 --------- ---------- -------- --------- TOTAL CURRENT ASSETS 653,513 - (39,277) 614,236 --------- ---------- -------- --------- INVESTMENTS, NOTES AND OTHER LONG-TERM RECEIVABLES 6,122 - - 6,122 PROPERTY, PLANT AND EQUIPMENT, NET 33,670 - - 33,670 OTHER ASSETS: Excess of cost of acquired business over net assets 57,435 - (57,435) - Reorganization value in excess of amounts allocable to identifiable assets - - 5,000 5,000 Miscellaneous 51,595 - (3,125) 48,470 --------- ---------- -------- ------- 109,030 - (55,560) 53,470 --------- ---------- -------- --------- TOTAL ASSETS $ 802,335 $ - $(94,837) $ 707,498 ========= ========== ======== ========= CURRENT LIABILITIES: Notes payable $ 4,803 - - $ 4,803 Borrowings under working capital credit line 40,000 - - 40,000 Current maturities of long-term debt and capital lease obligations 2,627 (538)(b) - 2,089 Series A Senior Notes - 63,785 (b) (8,384)(g) 55,401 Accounts payable 219,564 - - 219,564 Billings in excess of costs and estimated earnings on uncompleted contracts 115,567 - - 115,567 Accrued expenses and other liabilities 84,574 - - 84,574 --------- ---------- -------- --------- TOTAL CURRENT LIABILITIES 467,135 63,247 (8,384) 521,998 --------- ---------- -------- --------- LONG-TERM DEBT 2,219 68,292(b) (10,729) 59,782 --------- ---------- -------- --------- OTHER LONG-TERM OBLIGATIONS 44,588 - - 44,588 --------- ---------- ------- --------- PRE-CONSENT DATE LIABILITIES, SUBJECT TO COMPROMISE 622,859 (622,859)(b)(c) - - --------- ---------- ------- --------- SHAREHOLDERS' (DEFICIT) EQUITY: Old Series A Preferred Stock 20,905 (20,905)(d) - - Old Common Stock 4,073 (4,073)(d) - - New Common Stock - 94 (d) - 94 Old Warrants of Participation 576 (576)(d) - - New Warrants - - 2,179 2,179 Capital Surplus 204,591 25,460 (151,194) 78,857 Cumulative translation adjustment (6,241) - 6,241 - (Deficit) (558,370) 491,320 (e) 67,050 - --------- ---------- -------- -------- TOTAL SHAREHOLDERS' (DEFICIT) EQUITY (334,466) 491,320 (75,724) 81,130 --------- ---------- -------- -------- TOTAL LIABILITIES AND SHARE- HOLDERS' (DEFICIT) EQUITY $ 802,335 $ - $(94,837) $707,498 ========= ========== ======= ======== F-24 (a) Reflects adjustments relating to discharge of debt and exchange of newly issued debt and equity securities pursuant to the Plan of Reorganization. (b) Reflects the discharge of old debt and issuance of new debt under the Plan as follows: HISTORICAL RESTRUCTURE FRESH CARRYING DISCHARGE/ START AMOUNT EXCHANGE BALANCE* ------ -------- ------- Senior Notes Payable under Revolving Credit Facility $155,795 $(155,795) $ - Senior Notes Payable under Various Indentures 328,572 (328,572) - Subordinated Note Payable 9,600 (9,600) - Convertible Subordinated Debentures 7,040 (7,040) - -------- --------- ------- Total Debt in Default $501,007 $(501,007) - ======== ========= ======= Other Senior Notes (included in current maturities of long-term debt) $ 538 $ (538) $ - ======== ========= ======= New 7% Series A Senior Secured Notes $ - $ 63,785(1) $63,785 ======== ========= ======= New 11% Series C Notes (included in long-term debt) $ - $ 62,827 $62,827 ======== ========= ======= New 8% Supplemental SellCo Note (included in long-term debt) $ - $ 5,464 $ 5,464 ======== ========= ======= ______________________ * The pro forma adjustments to the recorded debt balances reflect the differences between the historical carrying amounts of the old debt securities and the face amount of the new debt securities issued pursuant to the Plan of Reorganization before fresh-start adjustments. (1) The amount of Series A Notes to be issued are based upon an assumed total of $100.0 million of prepetition general unsecured claims after settlement of disputed and unliquidated prepetition general unsecured claims. An additional $7.2 million of Series A Notes may still be issued to holders of general unsecured claims calculated as follows: Authorized value of Series A Notes $71.0 Series A Notes issued or estimated to be issued 63.8 ----- Series A Notes available for issue $ 7.2 ===== F-25 (c) Reflects reduction of recorded amounts of accrued interest, insurance reserves, other impaired liabilities and unexpired leases rejected by the Company during its bankruptcy proceedings classified as pre-consent liabilities subject to compromise: ACCOUNTS ACCRUED LONG-TERM PAYABLE EXPENSES LIABILITIES TOTAL ------- -------- ----------- ----- Accrued interest $ - $43,315 $ - $ 43,315 Insurance reserves - 9,600 26,800 36,400 Amount due to JWP Information Services, Inc. - 24,933 - 24,933 Foreign debt guarantees - 6,037 - 6,037 Stock price guarantees - 5,118 - 5,118 Preferred dividends in arrears - 2,257 - 2,257 Unexpired leases - - 1,718 1,718 Director's retirement benefits - - 975 975 Other impaired claims 400 699 - 1,099 ----- ------- ------- ------- Total $ 400 $91,959 $29,493 $121,852 ===== ======= ======= ======== (d) Reflects the elimination of the recorded book value of old common stock, old preferred stock and warrants of participation upon consummation of the Plan of Reorganization and the issuance of 1,518,000 New Warrants and 9,424,083 shares of New Common Stock, $.01 par value. (e) The deficit was reduced by the net reduction in debt due to the discharge of old debt and issuance of new debt instruments at face value, as well as the reduction of recorded amounts of impaired liabilities as described in Note (c). Reconciliation to Gain on debt discharge shown in the Consolidated Statement of Operations: $491,320 Equity adjustment to record plan of reorganization 14,951 Debt discount recorded as Fresh-start adjustment (81,130) Fair value of equity securities issue recorded as fresh-start adjustment (11,892) Series B Notes which were paid on effective date -------- $413,249 Gain on debt discharge -------- (f) To record the adjustments to state assets and liabilities at fair value and to eliminate the deficit in accumulated earnings against additional paid-in capital. Reconciliation to Fresh-start adjustments shown in the Consolidated Statement of Operations: $ 75,724 Equity adjustment to record plan of reorganization 14,951 Debt discount included in calculation of gain on debt discharge (11,892) Series B Notes which were paid on effective date -------- $ 78,783 Fresh-start adjustments -------- (g) Amount includes approximately $4.1 million of principal reduction of Series A Notes on the Effective Date. F-26 NOTE G PRO-FORMA STATEMENT OF OPERATIONS The following unaudited Consolidated Pro Forma Statement of Operations reflects the financial results of the Company as if the reorganization had been effective January 1, 1994 (in thousands): OPERATIONS SOLD OR OTHER HELD FOR PRO FORMA PRO FORMA HISTORICAL SALE (a) ADJUSTMENTS REORGANIZED ---------- -------- ----------- ----------- REVENUES $1,763,961 $(168,939) $ - $1,595,022 ---------- -------- ----------- ----------- COSTS AND EXPENSES: Cost of sales 1,607,589 (152,023) - 1,455,566 Selling, general and administrative 178,575 (30,567) (3,646)(b) 144,362 ---------- --------- ---------- ---------- 1,786,164 (182,590) (3,646) 1,599,928 ---------- --------- ---------- ---------- OPERATING LOSS: (22,203) 13,651 3,646 (4,906) Interest expense, net (2,476) 120 (13,211)(c) (15,567) Net gain on businesses sold or held for sale 1,183 - (1,183)(d) - Loss on investment (4,452) - - (4,452) REORGANIZATION ITEMS: Professional fees (12,535) - 12,535(e) - Fresh-start adjustments (78,783) - 78,783(e) - ---------- --------- ---------- ---------- (119,266) 13,771 80,570 (24,925) INCOME TAX BENEFIT (332) - - (332) ---------- --------- ---------- ---------- (LOSS) FROM CONTINUING OPERATIONS BEFORE EXTRAORDINARY ITEM AND CUMULATIVE EFFECT OF ACCOUNTING CHANGE (118,934) 13,771 80,570 (24,593) ========== ========= ========= ========== NET INCOME (LOSS) PER SHARE FROM CONTINUING OPERATIONS BEFORE EXTRAORDINARY ITEM AND CUMULATIVE EFFECT OF ACCOUNTING CHANGE $ (12.62) $ 1.46 $ 8.55 $ (2.61) ========== ========= ========= ========== (a) Reflects adjustments to the Company's historical consolidated statement of operations to eliminate revenues, cost, expenses and interest. F-27 (b) Reflects the following adjustments to selling, general and administrative expenses: To eliminate amortization of goodwill and other intangibles $ 3,646 ======= (c) Reflects the following adjustments to interest expense: To record interest expense on 11% Series C Notes based upon the pro forma discounted $ 7,745 carrying value and assuming a discount rate of 14% To record interest expense on 8% SellCo Supplemental Note based upon the pro forma 596 discounted carrying value and assuming a discount rate of 14% To record interest expense on new working capital credit facilities assuming an average of $30 million outstanding at 15%(f) 4,500 To reverse interest on Debtor-in-Possession financing credit facility (2,030) To record debt issuance costs at closing 2,400 ------- $13,211 ======= Interest expense on the 7% Series A and Series B Senior Notes is not included as a component of interest expense as amounts will be paid from the sale of stock or assets of subsidiaries of SellCo and other net assets held for sale. Under the terms of the Series A Notes, interest expense would have been $6.8 million for the year ended December 31, 1994. (d) To eliminate net gain on sale of businesses $ 1,183 ======= (e) To eliminate various legal and other professional fees associated with the Chapter 11 proceedings, and to record fair value adjustments in accordance with SOP 90-7. (f) The amount of borrowings under the new working capital credit line is contingent upon the cash requirements of the Company. The following table reflects the impact of various borrowing levels on the pro-forma statement of operations. Pro Forma Reorganized ------------------------------------------------------------------------------------------------------------------ Net income (loss) from Net income (loss) per share Total continuing operations before from continuing operations before Borrowing Interest extraordinary item and cumulative extraordinary item and cumulative Level Expense effect of accounting change effect of accounting change ------------------------------------------------------------------------------------------------------------------ $35 million $16,317 ($25,343) ($2.69) $40 million 17,067 (26,093) (2.77) $45 million $17,817 ($26,843) ($2.85) NOTE H REORGANIZATION ITEMS For the year ended December 31, 1994, the Company recorded $12.5 million of reorganization charges in the accompanying Consolidated Statement of Operations for various legal and other professional fees associated with its Chapter 11 proceeding. Such reorganization charges are expensed as incurred as prescribed by SOP 90-7. In addition, reorganization items include fresh start adjustments (see Note F) which reflect the net charge to state assets and liabilities at fair value. NOTE I EXTRAORDINARY ITEM - DISCHARGE OF DEBT The Plan of Reorganization resulted in the discharge of pre-consent date liabilities totaling approximately $623 million. The value of securities distributed was $413.2 million less allowed claims, and accordingly, the resulting gain was recorded as an extraordinary item. NOTE J DEBT MES CREDIT AGREEMENT - On December 14, 1994, the Company and certain of its subsidiaries entered into a credit agreement with Belmont, certain directors of the Company and/or their affiliates and other lenders (the "Lenders") providing the Company and MES Holdings Corporation ("MES"), a wholly-owned subsidiary of the Company, with revolving credit loans (the "MES Loans") of up to an aggregate amount of $35 million. The MES Loans are guaranteed by certain direct or indirect subsidiaries of MES (the "MES subsidiaries") and are secured by, among other things, substantially all of the assets of the Company, MES and the U.S. MES subsidiaries, including the proceeds of the sale of all of the assets of the Company. MES and the U.S. MES subsidiaries, including the proceeds of the sale of stock or assets of the Company's two water supply companies (the "Water Companies") to the extent of the first F-28 $15 million of such proceeds, subject to the rights to such proceeds of the Lenders under the Dyn Credit Agreement. The MES Loans bear interest on the principal amount thereof at the rate of 15% per annum and mature on June 14, 1996. DYN CREDIT AGREEMENT - On December 14, 1994, the Company, Dyn Specialty Contracting, Inc. ("Dyn"), a wholly-owned subsidiary of the Company and Dyn subsidiaries entered into a credit agreement with the Lenders providing revolving credit loans (the "Dyn Loans") of up to an aggregate amount of $10 million. The Dyn Loans are guaranteed by the Dyn subsidiaries and are secured by, substantially all of the assets of Dyn and the Dyn subsidiaries, including the proceeds of the sale of stock or assets of the Water Companies to the extent of the first $15 million of such proceeds, subject to the rights to such proceeds of the Lenders under the MES Credit Agreement. The Dyn Loans bear interest on the principal amount thereof at the rate of 15% per annum, and mature on June 14, 1996. Borrowings under the MES and Dyn Credit Agreements (the "New Credit Agreements") are classified as current liabilities under the caption "Borrowings under working capital credit line" in the accompanying Consolidated Balance Sheets. Albert Fried, a director of the Company, is Managing Partner of Albert Fried & Company, which agreed to loan up to $7.0 million as one of the Lenders under the New credit Agreements. Kevin C. Toner, a director of the Company, agreed to loan up to $1.0 million as one of the Lenders under the New Credit Agreements. In addition, UBS Mortgage Finance Inc., an affiliate of UBS Securities Inc., Mr. Toner's former employer, agreed to loan up to $2.0 million as one of the Lenders under the New Credit Agreement. SERIES A NOTES - Pursuant to the Plan of Reorganization, on December 15, 1994 the Company issued or reserved for issuance approximately $62.2 million principal amount of Series A Notes, and reserved for issuance up to a maximum of $8.8 million additional principal amount of Series A Notes upon resolution of disputed and unliquidated pre-petition general unsecured claims. The Series A Notes are guaranteed by MES and SellCo. The terms of the Series A Notes require that the net proceeds realized from the sale of the stock or assets of the Company's subsidiaries be applied to the prepayment of the Series A Notes (subject to the rights of the Lenders under the MES and Dyn Credit Agreements to receive proceeds from the sale of the stock or assets of the Company's mechanical and electrical subsidiaries and the first $15.0 million of proceeds of the sale of stock or assets of the Water Companies). The recorded amount includes the estimated amount of Series A Notes to be issued upon resolution of the disputed and unliquidated prepetition general unsecured claims. The Company recorded the Series A Notes based upon an assumed total of $100 million of pre- petition general unsecured claims after settlement of disputed and unliquidated pre-petition general and unsecured claims. Approximately $4.1 million of the issued Series A Notes were redeemed prior to December 31, 1994. The Series A Notes have been recorded at a discount to the face amount to yield an estimated effective interest rate of 12%. The Series A Notes have been classified as a current liability based on the expected disposition of assets held for sale. Interest on the Series A Notes is payable semiannually by issuance of additional Series A Notes until maturity. SERIES B NOTES - Pursuant to the Plan of Reorganization, on December 15, 1994 the Company issued approximately $11.9 million principal amount of Series B Notes. The entire $11.9 million principal amount was immediately redeemed, on that date at the face amount in accordance with the terms of the Series B Notes from the proceeds realized from the sale and liquidation of certain subsidiaries. SERIES C NOTES - Pursuant to the Plan of Reorganization, on December 15, 1994 the Company issued approximately $62.8 million principal amount of Series C Notes. Interest on the Series C Notes is payable semiannually by the issuance of additional Series C Notes eighteen months from the Effective Date and thereafter is payable quarterly in cash. The Series C Notes are unsecured senior indebtedness of the Company, but subordinate to (i) the Series A Notes and (ii) up to $100 million of working capital indebtedness of the Company or MES, and are guaranteed by MES subject to payment in full of the Series A Notes. The Series C Notes have been recorded at a discount to their face amount to yield an estimated effective interest rate of 14%. F-29 SUPPLEMENTAL SELLCO NOTE - Pursuant to the Plan of Reorganization, EMCOR has issued to SellCo its 8% promissory note in the principal amount of approximately $5,464,000 (the "Supplemental SellCo Note"). The note matures on the earlier of (i) December 15, 2004 or, (ii) one day prior to the date on which the SellCo Notes are deemed canceled. If at any time after the fifth anniversary of the Effective Date and prior to the maturity date of the SellCo Notes the value of the consolidated assets of SellCo and its subsidiaries (excluding the Supplemental SellCo Note) is determined by independent appraisal to be less than $250,000, the balance of the SellCo Notes (not therefore paid from net sales proceeds from the sale of the stock or assets of SellCo subsidiaries and the proceeds of the Supplemental SellCo Note which will have become due and payable) will be deemed canceled. Interest on the Supplemental SellCo Note is payable upon maturity. The Series C Notes and the Supplemental SellCo Note are included in the caption "Long-Term Debt" in the accompanying Consolidated Balance Sheet at December 31, 1994. SELLCO NOTES - Pursuant to the Plan of Reorganization, on December 15, 1994, SellCo issued approximately $48.1 million principal amount of SellCo Notes. Interest is payable semiannually in additional SellCo Notes. Subject to the prior payment in full of the Series A Notes and establishment of a cash reserve for the payment of capital gains taxes arising from the sale of subsidiaries of SellCo and the rights of the Lender with respect to proceeds of the sale of the Water Companies, the SellCo notes are mandatorily prepayable to the extent of net sales proceeds from the sale of stock or assets of SellCo subsidiaries. Since the SellCo Notes will only be satisfied to the extent that assets of SellCo and its subsidiaries generate sufficient cash in excess of what is required to redeem the Series A Notes and prepay a portion of the MES and Dyn Credit Agreements, the SellCo Notes have been netted in the caption "Net assets held for sale" in the accompanying consolidated balance sheet at December 31, 1994. The holders of the SellCo Notes may only look to EMCOR to the extent of EMCOR's obligation to pay the Supplemental SellCo Note plus accrued interest. It is remote that any significant portion of the SellCo Notes, other than the principal amount of, plus accrued interest on, the Supplemental SellCo Note, will be paid in view of the fair value of the Net Assets Held for Sale since the proceeds of these assets will be applied first to redeem the Series A Notes and to the extent proceeds are realized from the sale of the Water Companies, the first $15.0 million of such proceeds will be used to repay indebtedness under the New Credit Agreements. The Company has no liability for the SellCo Notes except to the extent of the 8% Supplemental SellCo Note discussed above. OTHER LONG-TERM DEBT - As of December 31, 1994 and 1993, respectively, long-term debt, excluding current maturities, totaling $2.2 million and $2.5 million was owed by certain of the Company's subsidiaries. The aggregate amount of long-term debt maturing during the next five years is $0.3 million in 1995 and 1996, $0.2 million in 1997 and 1998 and $1.2 million thereafter. NOTE K INCOME TAXES Effective January 1, 1992, the Company adopted the Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes" (SFAS 109). Under the liability method specified by SFAS 109, a deferred tax asset or liability is determined based on the difference between the financial statement and tax basis of assets and liabilities as measured by the enacted tax rates which will be in effect when these differences reverse. The cumulative effect of adopting SFAS 109 was to record an income tax benefit of $4.3 million as of January 1, 1992. Such amount has been reflected in the Consolidated Statements of Operations under the caption "Cumulative Effect of Change in Method of Accounting for Income Taxes." The Company files a consolidated federal income tax return including all U.S. subsidiaries. At December 31, 1994, the Company had a net operating loss carry- forward ("NOL") for U.S. income tax purposes expiring in years through 2008 which approximates $500 million. Under Section 382 (1)(6) of the Internal Revenue Code (the "Code") the use of the NOL would be significantly limited. However, the Company intends, at the present time, to elect to use Code Section 382 (1)(5) which would allow the Company to use approximately $300 million of the NOL. However, a subsequent ownership change within two years from the Effective Date would reduce to zero the future NOL benefits under Code Section 382(1)(5). An irrevocable election must be made as to which method the Company will use by September 15, 1995. F-30 SFAS 109 requires a valuation allowance against deferred tax assets if, based on the weight of available evidence, it is more likely than not that some or all of the deferred tax assets will not be realized. The Company provided a valuation allowance for the full amount of its NOLs. At December 31, 1994 and 1993, the valuation allowances recorded against the deferred tax assets were $114.5 million and $170.1 million, respectively. The (benefit) provision for income taxes relating to continuing operations for the years ended December 31, 1994, 1993 and 1992, consist of: 1994 1993 1992 ------------------------------------ (IN THOUSANDS) Current Federal $ - $(4,138) $ - State and local 1,000 1,000 1,248 Foreign - (1,700) 1,106 ------- ------- ------- 1,000 (4,838) 2,354 ------- ------- ------- Deferred Federal - 4,138 4,487 State and Local (1,332) - (56) Foreign - - 859 ------- ------- ------- (1,332) 4,138 5,290 ------- ------- ------- $ (332) $ (700) $7,644 ======= ======= ======= The (benefit) provision for income taxes relating to discontinued operations for the years ended December 31, 1994, 1993 and 1992, consist of: 1994 1993 1992 ------------------------------------ (IN THOUSANDS) Current Federal $ - $ - $ (237) State and Local - - 7 -------- -------- ------- - - (230) -------- -------- ------- Deferred Federal - - 983 State and Local - - 864 -------- -------- ------- - - 1,847 -------- -------- ------- $ - $ - $ 1,617 ======== ======== ======= F-31 Factors accounting for the variation from U.S. statutory income tax rates relating to continuing operations for the years ended December 31, 1994, 1993 and 1992, are as follows: 1994 1993 1992 -------------------------------------------- (IN THOUSANDS) Federal income taxes at the statutory rate $ (9,782) $ (40,142) $(120,996) State and local income taxes, net of federal tax 650 650 787 Amortization and write-off of intangibles - - 29,791 Valuation allowance against deferred tax asset 8,800 38,792 96,849 Other - - 1,213 --------- --------- --------- $ (332) $ (700) $ 7,644 ========= ========= ========= Factors accounting for the variation from U.S. statutory income tax rates relating to discontinued operations for the years ended December 31, 1994, 1993 and 1992, are as follows: 1994 1993 1992 -------------------------------------------- (IN THOUSANDS) Federal income taxes at the statutory rate $ 3,576 $ (3,180) $ (85,548) State and local income taxes, net of federal tax - - 575 Amortization and write-off of intangibles - - 28,289 Valuation allowance against deferred tax asset (3,576) 3,180 58,409 Other - - (108) --------- --------- --------- $ - $ - $ 1,617 ========= ========= ========= F-32 The components of the net deferred income tax liability for the years ended December 31, 1994 and 1993, are as follows (In 1994 net deferred income tax liability related to net assets held for sale have been netted against such caption): Reorganized | Predecessor Company | Company 1994 | 1993 ------------------------------- (IN THOUSANDS) | Deferred tax assets: | Net operating loss carry-forward $ 95,231 | $ 177,654 Excess of amounts expensed for financial statement purposes | over amounts deducted for income tax purposes 46,522 | 26,183 Other 2,899 | 2,899 --------- | --------- | Total deferred tax asset 144,652 | 206,736 --------- | --------- | Deferred tax liabilities: | Costs capitalized for financial statement purposes | and deducted for income tax purposes 28,790 | 39,593 Foreign deferred tax liability 1,403 | 2,695 --------- | --------- | Total deferred tax liability 30,193 | 42,288 --------- | --------- | Net deferred tax asset before valuation allowance 114,459 | 164,448 Valuation allowance for net deferred tax asset (114,459) | (170,087) --------- | --------- Net deferred income tax liability $ - | $ (5,639) ========= | ========= Loss before income taxes from continuing operations for the years ended December 31, 1994, 1993 and 1992, consists of the following: 1994 1993 1992 ---------------------------------------------------- (IN THOUSANDS) United States $(10,897) $(106,672) $(342,304) Foreign (17,051) (8,019) (13,567) -------- --------- --------- $(27,948) $(114,691) $(355,871) ======== ========= ========= Income (loss) before income taxes from discontinued operations for the years ended December 31, 1994, 1993 and 1992, consists of the following: 1994 1993 1992 ---------------------------------------------------- (IN THOUSANDS) United States $ 10,216 $ (6,270) $(228,754) Foreign - (2,817) (22,859) --------- --------- --------- $ 10,216 $ (9,087) $(251,613) ========= ========= ========= The above amounts applicable to discontinued operations in 1993 and 1992 include a loss from disposal of businesses of $20.4 million and $49.5 million, respectively. F-33 NOTE L CAPITAL STOCK AND WARRANTS AUTHORIZED CAPITAL STOCK - As of December 31, 1994, the Company's Amended and Restated Certificate of Incorporation provides that the total number of all classes of stock which the Company shall have authority to issue is Thirteen Million Seven Hundred Thousand (13,700,000) shares of Common Stock, par value $.01 per share (the "New Common Stock"). As of March 29, 1995, 5,485,719 shares of New Common Stock had been issued and were outstanding and 3,938,364 shares were held by the Company pending distribution pursuant to the Plan of Reorganization. 1994 MANAGEMENT STOCK OPTION PLAN - In connection with the Plan of Reorganization negotiations the Company adopted a Management Stock Option Plan (the "1994 Plan"). The 1994 Plan is conditioned on approval by the stockholders of the Company following its adoption. The aggregate number of New Common Stock that may be issued pursuant to options under the 1994 Plan may not exceed 1,000,000. The maximum number of shares which may be the subject of options granted to any individual in any calendar year shall not exceed 500,000 shares. Within one year after the Effective Date, the Compensation Committee of the Board of Directors of the Company (the "Compensation Committee") shall determine the recipients of options to purchase a minimum of 500,000 shares of New Common Stock of the Company pursuant to the 1994 Plan and shall issue such options to such recipients in the respective amounts as determined by the Compensation Committee; provided, however, that in no event shall such options be issued prior to the expiration of three months plus 20 days after the Effective Date. The employment agreement between the Company and the Chairman of the Board and President, Frank T. MacInnis requires that Mr. MacInnis shall receive options to purchase 200,000 shares of New Common Stock three months and twenty days following the Effective Date. Options may be granted by the Compensation Committee to eligible employees as "incentive stock options" or as non-qualified stock options. The exercise price of an incentive stock option and a non-qualified stock option must be at least equal to the fair market value of the New Common Stock on the date of grant; provided, however, that the purchase for the initial grant of options with respect to 500,000 shares shall be equal to the average market price of New Common Stock over the 20 day trading period immediately preceding the date of issuance of the option; and provided, further, that if the average market price of New Common Stock for the applicable period cannot be determined, the exercise price shall be determined by an investment advisor selected by the Compensation Committee. Notwithstanding the preceding, the exercise price of any such option which is an incentive stock option shall not be less than the fair market value of the New Common Stock on the date of grant of the option. Options may not be exercised more than ten years after the date of grant. Options shall be exercisable at such rate and times as may be fixed by the Compensation Committee on the date of grant; however, the rate at which the option first becomes exercisable may not be more rapid than 33-1/3% on and after each of the first, second and third anniversaries. WARRANTS - 1,450,000 shares were reserved for issuance upon exercise of the New Warrants (as defined below) issued pursuant to the Plan of Reorganization as described below. Pursuant to the Plan of Reorganization, the Company issued to the holders of $7,040,000 principal amount of its prepetition 7-3/4% Convertible Subordinated Debentures due 2012 and $9,600,000 principal amount of its prepetition 12% Subordinated Notes due 1996, their pro rata share of each of two series of five- year warrants to purchase shares of New Common Stock, namely, 600,000 Series X Warrants and 600,000 Series Y Warrants (which together with the Series Z Warrants described below are referred to herein as the "New Warrants"), with F-34 an exercise price of $12.55 per share and $17.55 per share, respectively. In addition, the Company issued or will issue to prepetition holders of other contingent and statutory subordinate claims and to holders of EMCOR's prepetition common stock, preferred stock and warrants of participation, as well as to the plaintiffs in a shareholder class action lawsuit, their pro rata share of 250,000 Series Z Warrants to purchase shares of New Common Stock, which Series Z Warrants have an exercise price of $50 per share and must be exercised within two years of their issuance. Approximately 28,000 Series X Warrants, 28,000 Series Y Warrants and 12,000 Series Z Warrants will also be issued to Belmont as a portion of additional interest under the DIP Loan. OLD PREFERRED STOCK - In August 1991, the Company issued 425,000 shares of preferred stock in connection with the acquisition of Businessland, Inc. The preferred stock was convertible into common stock of the Company, at any time, at the option of the holder at a conversion price of $20.00 per share, subject to customary anti-dilution provisions and exchangeable for 8.5% Convertible Subordinated Notes due 2006 of the Company, in whole, but not in part, at the option of the Company. Commencing July 31, 1993, the Company had the option to redeem the shares of preferred stock at $50.00 per share. Each share of preferred stock entitled the holder to receive cumulative cash dividends at the annual rate of $4.25 per annum per share. The Company has not paid dividends on its preferred stock since September 1992. The Company ceased accruing dividends on its preferred stock on December 21, 1993, the date on which an involuntary bankruptcy petition was filed against the Company. Cumulative unpaid dividends at December 31, 1993 aggregated $2.3 million. The preferred stock and the obligations with respect to the cumulative unpaid dividends were canceled pursuant to the Company's Plan of Reorganization. OLD WARRANTS - In 1969, the Company distributed 1,152,649 warrants of participation to holders of its common stock. The warrants of participation, which would have expired on December 31, 1994, entitled their holders to receive shares of common stock of the Company in the event that JWS disposed of all or any significant portion of its water distribution system or the Company disposed of any shares of JWS. The number of shares of common stock to be issued, if any, would have been determined on the basis of a specified formula and would have been distributed to warrant holders on a pro rata basis. The warrants of participation were canceled pursuant to the Company's Plan of Reorganization. As of December 31, 1993 and 1992, the company had outstanding stock options of approximately 2.3 million and 3.2 million shares, respectively, at option exercise prices ranging from $3.00 to $21.05 per share. The stock options were issued in connection with the Company's 1992 and 1991 Stock Option Plans, the 1986 Incentive Stock Option and Appreciation Plan and in connection with the acquisition of NEECO, Inc. in 1990. During 1993, options to purchase a total of 50,000 shares were granted at an exercise price of $3.625 per share. No stock options were exercised in 1994 or in 1993. All of these options were canceled pursuant to the Company's Plan of Reorganization. As described in Note A, under the Plan of Reorganization, the holders of the Company's old preferred and common stock and warrants of participation received warrants to purchase the common stock of the reorganized Company in exchange for their respective shares and warrants of participation. NOTE M RETIREMENT PLANS A foreign 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. The Company's policy is to fund the minimum amount required by law. F-35 Net pension expenses for the foreign defined benefit plan for the years ended December 31, 1994, 1993 and 1992, consist of the following components: 1994 1993 1992 ---------------------------------------------------- (IN THOUSANDS) Service costs-benefits earned $ 1,725 $ 1,479 $ 1,301 Interest on projected benefit obligations 2,772 2,478 2,481 Actual return on plan assets 2,554 (7,955) (5,473) Net amortization and deferral (6,296) 5,129 2,452 -------- -------- -------- Net pension expense $ 755 $ 1,131 $ 761 ======== ======== ======== The benefit obligations and funded status of the plan at December 31, 1994 and 1993, are as follows: Reorganized | Predecessor Company | Company 1994 | 1993 --------------------------- (IN THOUSANDS) | | Accumulated benefit obligations: | Vested $29,824 | $25,293 Non-Vested - | - Impact of future salary increases 4,769 | 4,049 -------- | --------- Projected benefit obligations 34,593 | 29,342 Plan assets at market value 33,997 | 34,566 -------- | --------- (Deficiency) excess of plan assets over projected benefit obligations (596) | 5,224 Unrecognized prior service cost 867 | 882 Unrecognized net loss (gain) from past experience | different from that assumed and effect of | changes in assumptions 795 | (5,453) Unrecognized net (asset) from initial application | of SFAS No. 87 (759) | (795) -------- | --------- Prepaid (accrued) pension $ 307 | $ (142) ======== | ========= The assumptions used as of December 31, 1994, 1993 and 1992, in determining the pension cost and liability shown above were as follows: 1994 1993 1992 ---------------------------------------------------- Discount rate 9% 9% 10% Rate of salary progressions 7 7 7 Rate of return on assets 10 10 10 The unrecognized net asset of the foreign plan is being amortized over 15 years. The plan assets are invested 80% in equity securities and 20% in fixed income securities. The Company contributes to various union pension funds based upon wages paid to union employees of the mechanical and electrical business units. Such contributions approximated $41.4 million, $45.5 million and $41.6 million for the years ended December 31, 1994, 1993 and 1992, respectively. The Company has defined contribution retirement plans that cover its U.S. non- union eligible employees. Contributions to these plans are based on a percentage of the employee's base compensation. The expense F-36 recognized for the years ended December 31, 1994, 1993 and 1992, relating to continuing operations for the defined contribution plans was $6.9 million, $3.5 million and $4.7 million, respectively. NOTE N LEASE COMMITMENTS The Company and its subsidiaries lease land, buildings and equipment under various leases. The leases frequently include renewal options and require the Company to pay for utilities, taxes, insurance and maintenance expense. In 1994, the Company was unable to renegotiate the terms of the lease for its headquarters located in Rye Brook, New York. As a result, the Company, during its Chapter 11 proceedings, rejected that lease and entered into a new lease for its headquarters in Norwalk, Connecticut. The future minimum payments under operating leases and related subleases, below, include the new lease in Norwalk, Connecticut. Future minimum payments, by year and in the aggregate, under capital leases, non-cancelable operating leases and related subleases with initial or remaining terms of one or more years relating to continuing operations at December 31, 1994 are as follows: CAPITAL OPERATING SUBLEASES LEASES LEASES --------------------------------------------------- (IN THOUSANDS) Year 1 $ 984 $18,186 $ 1,677 Year 2 658 15,260 1,944 Year 3 147 10,767 2,045 Year 4 120 8,092 1,228 Year 5 120 6,166 1,064 Thereafter 537 31,910 9,058 ------- ------- ------- Total minimum lease payments 2,566 $90,381 $17,016 ======= ======= Amounts representing interest 495 ------- Present value of net minimum lease payments (includes current portion of $581) $ 2,071 ======= Future minimum payments under non-cancelable operating leases relating to discontinued operations as of December 31, 1994 are as follows (in thousands): $426, $411, $396, $198 and $0 in 1995, 1996, 1997, 1998 and 1999, respectively. "Other long-term obligations" for the years ended December 31, 1994 and 1993, include capital lease obligations of $1.6 million and $2.2 million, respectively. Rent expense relating to continuing operations for the years ended December 31, 1994, 1993 and 1992, was $20.2 million, $21.5 million and $26.6 million, respectively. Rent expense for the year ended December 31, 1994 includes sublease rentals of $1.4 million and $0.8 million for the years ended December 31, 1993 and 1992, respectively. Rent expenses relating to discontinued operations for the years ended December 31, 1994, 1993 and 1992, was $2.8 million, $7.5 million and $20.7 million, respectively. NOTE O BUSINESS COMBINATIONS There were no significant business combinations during 1993 or 1994. F-37 During 1992, the Company acquired two mechanical contracting businesses for which the Company paid approximately $15.4 million in cash, notes and common stock. Net tangible assets acquired were approximately $7.0 million. The acquisitions were accounted for by the purchase method of accounting, and, accordingly, the consolidated results of operations include the results of the acquired businesses from acquisition dates. Pro-forma amounts for the year ended December 31, 1992 are not materially different from the actual amounts. NOTE P DISCONTINUED OPERATIONS Discontinued operations include the Company's information services businesses and water supply business (the "Water Companies"). In March 1993, the Company's Board of Directors approved the disposition of the Company's U.S. information services business. The Board of Directors had previously decided to sell the Company's overseas information services businesses. Accordingly, operating results of the information services businesses have been classified as discontinued operations. In August 1993, the Company sold substantially all of the assets of the principal subsidiary ("IS Subsidiary") carrying on its U.S. information services business at which time no material gain or loss was realized. Subsequent to the sale, the Company recorded a loss of $8.1 million in the third quarter of 1993 for uncertainties remaining at the time of sale including the elimination of non-cash charges, recognition of additional liabilities of the subsidiary and the disposition of certain of its lease obligations. Such amount is included in "Loss from disposal of businesses, net of income taxes" in the accompanying Consolidated Statements of Operations. Under the terms of the sale agreement, the purchaser assumed the debt and other liabilities relating to the ongoing operations of the business. The IS Subsidiary received warrants to buy up to 10% of the purchasers' common stock for a nominal amount. The Company assigned no value to these warrants. In October 1993, the IS Subsidiary filed a voluntary petition under Chapter 7 of the U.S. Bankruptcy Code. At December 31, 1993, the Company owed its IS Subsidiary $24.9 million. Such amount is included in the accompanying Consolidated Balance Sheets in "Other accrued expenses and liabilities" at December 31, 1993. Additionally, in 1993 the Company recorded a loss of $1.5 million to further write-down the net assets of the IS Subsidiary to its estimated net realizable value based upon current market conditions and sold substantially all of the assets of its foreign information services businesses. The sale of its foreign information services businesses resulted in a loss of $3.3 million. Such amounts are included under the caption "Loss from disposal of businesses, net of income taxes" in the accompanying Consolidated Statements of Operations. As of December 31, 1993, all of the information services businesses had been sold. In 1993, the Company's French and Belgian information services subsidiaries filed petitions in their respective countries seeking relief from their creditors. Revenues of the information services businesses in 1993 and 1992 were $876.7 million and $1,692.4 million, respectively. Operating income of these businesses was $10.2 million in 1993, compared to an operating loss of $187.9 million in 1992. In 1992, the information services businesses loss includes $41.3 million attributable to the write-off of goodwill and other intangibles related to the U.S. information services business and $26.0 million primarily relating to severance payments and facilities consolidation. Additionally, in 1992 the Company provided for a loss of $49.5 million in connection with its plan to dispose of the overseas information services businesses and other units of its U.S. information services business. This loss represented the estimated loss to be realized upon the disposition of such businesses. Such loss includes $32.1 million related to the write-off of goodwill and other intangible assets and $17.4 million for estimated losses to be incurred up to the expected disposal dates and the write-down of other assets to estimated net realizable value. F-38 In April 1992, the Company announced its intention to sell its water supply business. However, in July 1993 the Company's Board of Directors decided not to proceed with the sale due to uncertainties created by the then pending rate related proceedings and litigation. In December 1993, JWS entered into an agreement with respect to the rate related proceedings and litigation. This agreement was approved by the New York State Public Service Commission on February 2, 1994. Accordingly, in the first quarter of 1994 the Company reinstated its plan of disposal and a $7.4 million loss was recorded in 1993 to write-down the net assets of the water supply business to estimated net realizable value, as determined with the assistance of the Company's financial advisors. The financial statements for all periods presented reflect the water supply business as discontinued operations. See Note X with respect to the status of a proceeding initiated in 1988 by The City of New York to acquire by condemnation all of the water distribution system of JWS that is located in New York City. Additionally, see Note X with respect to the lawsuit brought by certain holders of warrants of participation against Jamaica Water Securities Corp. The assets of the water supply business consist primarily of utility plant and equipment which are located in Nassau and Queens Counties in the State of New York. The net assets of the water supply business, which aggregated $61.4 million at December 31, 1994 and $60.0 million at December 31, 1993 are classified as either a short-term asset or a long-term asset in the accompanying Consolidated Balance Sheets under the caption "Net assets held for sale." The Company is actively pursuing the sale of the Water Companies and expects the disposition of the water supply business to take place mid-year 1995. Revenues of the water supply business were $65.0 million, $66.8 million and $59.8 million for the years ended December 31, 1994, 1993 and 1992, respectively. Operating income of the water supply business was $14.3 million, $15.4 million and $4.8 million for the years ended December 31, 1994, 1993 and 1992, respectively. The 1992 results included a provision of $7.0 million related to the settlement of litigation referred to above. Combined operating results of discontinued operations including both the information services and water supply businesses for the three months ended March 31, 1995 and 1994 and years ended December 31, 1994, 1993 and 1992, are as follows: Reorganized | Company | March 31, | March 31, Predecessor Company 1995 | 1994 December 31, (unaudited) | (unaudited) 1994 1993 1992 ----------- | ----------- ------------------------------- | (IN THOUSANDS) | Revenues $14,641 | $14,438 $64,993 $943,455 $1,752,171 Costs and expenses 11,768 | 12,315 50,725 917,872 1,935,349 ------- | ------- ------- -------- ---------- Operating income (loss) 2,873 | 2,123 14,268 25,583 (183,178) Interest expense (1,042) | (979) (4,052) (14,320) (18,944) ------- | ------- ------- -------- ---------- Income (loss) before taxes 1,831 | 1,144 10,216 11,263 (202,122) Provision for income taxes - | - - - 1,617 ------- | ------- ------- -------- ---------- Income (loss) from discontinued operations $ 1,831 | $ 1,144 $10,216 $ 11,263 $ (203,739) ======= | ======= ======= ======== ========== As discussed above, in August 1993, the Company sold substantially all of its information services businesses. The operating results of discontinued operations in 1994 consists only of the water supply business. NOTE Q BUSINESSES SOLD AND OTHER NET ASSETS HELD FOR SALE For the years ended December 31, 1994 and 1993, the Company received cash proceeds of $13.6 million and $30.8 million, respectively, from the sale of certain non-core businesses and other assets, exclusive of the sale of Software House. During 1994, the assets sold by the Company included the sale of the Company's telephone systems business, its minority ownership in an environmental business and other non-core businesses. In 1993, the Company sold substantially all of the assets of its Software House subsidiary, the U.S. information services business and certain other non-core businesses and other assets. The Company realized a gain of $2.7 million F-39 from the sale of Software House. No material gain or loss was realized from the aggregate of these sales in either 1994 or 1993. For the year ended December 31, 1993, the Company received cash proceeds of $43.4 million of which $12.6 million was from the sale of Software House and approximately $30.8 million was from the sale of a number of other non-core businesses and other assets. Additionally, the Company received notes and other assets with an aggregate carrying value of $10.9 million. On October 16, 1992, the Company completed the sale of five environmental businesses for which it received net cash proceeds of $84.1 million. The five businesses sold were two air pollution control businesses, JWP Air Technologies, Inc. and JWP Amcec Corp., a sludge pelletization project located in New York City and another in Baltimore, Maryland, and Enviro-Gro Technologies Co., a sludge processing business. The Company realized a gain of approximately $12.0 million from the sale of these businesses. Additionally, the Company's Board of Directors approved a plan for the sale of the Company's remaining energy and environmental related businesses, other non-core businesses and certain mechanical/electrical services operations. In connection with this asset disposition plan, a loss of $88.1 million was provided for in 1992. The loss represents the estimated loss to be realized upon the disposition of the businesses held for sale. The loss consists of $24.1 million attributable to the write-off of goodwill and $64.0 million related to the write-down of other assets to net realizable value. Revenues and operating losses of businesses sold and other net assets held for sale for the three months ended March 31, 1995 and 1994 and the years ended December 31, 1994, 1993 and 1992 are as follows: Reorganized | Company | March 31, | March 31, Predecessor Company 1995 | 1994 December 31, (unaudited) | (unaudited) 1994 1993 1992 ----------- | ---------- --------------------------------- | (IN THOUSANDS) | Revenues $ 25,440 | $ 43,550 $168,939 $257,910 $526,894 Operating (loss) (4,923) | (2,769) (13,651) (11,802) (41,151) The 1994 revenues and operating loss above include certain retained assets and liabilities of businesses sold ("Closeouts") which were not classified as Net Assets Held for Sale in 1993 and 1992. Revenues and operating losses attributed to Closeouts for 1993 and 1992 were $96.8 million, $1.9 million, $69.1 million and $1.0 million, respectively. A condensed balance sheet relating to discontinued operations (the water supply business) and other net assets held for sale at December 31, 1994 is as follows (in thousands): Cash $ 5,020 Accounts receivable, net 54,290 Costs and estimated earnings in excess of billings 10,051 Inventories 1,513 Other current assets 670 -------- 71,544 Property, plant and equipment, net 151,973 Other assets 19,022 -------- $242,539 ======== Current maturities of long-term debt and capital lease obligations $ 8,391 Accounts payable 24,115 Billings in excess of costs and estimated earnings 5,384 Other accrued expenses 60,944 -------- 98,834 Long-term debt 58,213 Other long-term liabilities 30,091 Net assets held for sale 55,401 -------- $242,539 ======== F-40 NOTE R RESTRUCTURING CHARGES In 1992, the Company recorded $38.7 million of restructuring charges related to continuing operations. The Company's business restructuring plan contemplated the downsizing and consolidation of the Company's North American mechanical/electrical services operations. The Company's strategy also provides for the disposition of non-core businesses and certain mechanical/electrical services operations. The restructuring charges consisted of $10.8 million applicable to permanent impairment of goodwill and $27.9 million for severance payments, facilities consolidation costs, provisions for contract losses and the write-down of certain assets to net realizable value. NOTE S INSURANCE RESERVES The Company is primarily insured with an indirect wholly-owned captive insurance subsidiary ("Defender") for its workers' compensation, automobile and general liability insurance. The insurance liability is determined actuarially based on claims filed and an estimate of claims incurred but not yet reported. The present value of such claims was determined as of December 31, 1994 and 1993 using a 4% discount rate. The estimated current portion of the insurance liability was $1.5 million and $17.7 million at December 31, 1994 and 1993, respectively. Such amounts are included in "Other accrued expenses and liabilities" in the accompanying Consolidated Balance Sheets. The non-current portion of the insurance liability was $29.9 million and $41.0 million at December 31, 1994 and 1993, respectively. Such amounts are included in "Other long-term obligations". The undiscounted liability was approximately $35.9 million and $65.2 million at December 31, 1994 and 1993, respectively. At January 1, 1994, the Company and Defender had letters of credit totaling $36.4 million to secure certain insurance obligations. These letters of credit were intended to serve as collateral for the obligations of Defender and the Company to reimburse the Company's unrelated insurance carrier for claims paid with respect to the insurance programs for the years 1988 through 1991. In 1994, $21.6 million was drawn upon by an insurance carrier and $13.9 million was renewed by the issuing banks. A $0.9 million letter of credit that was to expire in February 1995 was drawn upon in full by the insurance carrier in December 1994. Since October 1992, neither the Company nor Defender has been able to obtain additional letters of credit to secure their insurance obligations, and, as a result they have been required to make cash collateral deposits to an unrelated insurance company to secure those types of obligations. The deposits totaled $37.6 million and $21.3 million as of December 31, 1994 and 1993, respectively, and are classified as a long-term asset in the accompanying Consolidated Balance Sheets under the caption "Insurance Cash Collateral" in other assets. The Plan of Reorganization contemplates that the letters of credit described above will be drawn upon in full by the unrelated insurance carriers either in installments or at one time, and the Company's obligations to Defender, which were pledged as collateral to the banks issuing the letters of credit, were impaired in the proceeding as well as any related Company obligations to those banks. Beginning in February 1994, Defender ceased making payments for the amounts owed to the unrelated insurance carriers, which obligations are in effect secured by the letters of credit, and the Company's insurance carriers commenced partial draws upon certain of the letters of credit. Approximately $22.5 million had been drawn upon these letters of credit through December 31, 1994, to reimburse claims, of which $13.7 million remains on deposit with the insurance companies. Under the terms of the Company's Plan of Reorganization, other than for the distributions provided for under the Plan of Reorganization neither the Company nor Defender is obligated to the banks whose letters of credit are drawn upon by the insurance carriers. The Company is subject to regulation with respect to the handling of certain materials used in construction which are classified as hazardous or toxic by agencies at the Federal, State and local levels. The Company's F-41 policy is not to undertake projects principally involving the remediation or removal of such materials. However, where remediation is a required part of contract performance, the Company believes it complies with all applicable regulations governing the discharge of material into the environment or otherwise relating to the protection of the environment. The Company believes that it presently maintains adequate insurance coverage for all of its current operations. NOTE T ADDITIONAL CASH FLOW INFORMATION Reorganized | Company | March 31, | March 31, Predecessor Company 1995 | 1994 December 31, (unaudited) | (unaudited) 1994 1993 1992 ----------- | ----------- ---------------------------------------- | (IN THOUSANDS) | Cash paid (refunded) during the year for: | Interest $3,834 | $ 186 $ 7,250 $ 26,126 $ 62,582 Income taxes 104 | (347) 720 (2,177) (15,617) | Significant non-cash financing and investment | transactions are as follows: | Notes receivable and other assets received from | sale of assets - | - - 10,875 - Debt assumed in acquisitions - | - - - 929 Debt issued to acquire companies - | - - - 2,566 Common stock issued for acquisitions - | - - - 749 Fixed assets acquired under capital lease obligations - | - - 46 1,616 NOTE U TRANSLATION COMPONENTS OF SHAREHOLDERS' DEFICIT Translation components of shareholders' deficit for the years ended December 31, 1994, 1993 and 1992 are as follows: 1994 1993 1992 -------------------------------------------- (IN THOUSANDS) Amounts transferred from cumulative translation adjustment as a result of the sale or substantially complete liquidation of investments in foreign entities $ - $ 890 $ - Effect of balance sheet translation (173) (3,028) (8,737) -------- --------- --------- $ (173) (2,138) $ (8,737) ======== ========= ========= F-42 NOTE V SEGMENT INFORMATION The following presents information about continuing operations by geographic areas for the years ended December 31, 1994, 1993 and 1992: NET GAIN (LOSS) ON OPERATING BUSINESSES SOLD OR IDENTIFIABLE NET ASSETS REVENUES LOSS HELD FOR SALE ASSETS HELD FOR SALE --------------------------------------------------------------------------------- (IN THOUSANDS) 1994 United States $1,334,537 $ (9,773) $ 1,183 $487,438 $55,401 United Kingdom 287,372 (5,274) -- 119,461 -- Canada 113,331 (6,966) -- 35,681 -- Europe--Other 28,721 (190) -- 12,588 -- ---------- --------- -------- -------- ------- $1,763,961 $ (22,203) $ 1,183 $655,168 $55,401 ========== ========= ======== ======== ======= 1993 United States $1,692,470 $ (57,906) $ 747 $572,468 $83,615 United Kingdom 293,507 (2,494 511 102,784 -- Canada 180,633 (3,223) -- 38,066 -- Europe--Other 28,125 (1,909) (230) 9,509 -- ---------- --------- -------- -------- ------- $2,194,735 $ (65,532) $ 1,028 $722,827 $83,615 ========== ========= ======== ======== ======= 1992 United States $1,793,350 $(220,242) $(74,978) United Kingdom 355,083 (14,354) (1,100) Canada 225,224 615 -- Europe--Other 30,920 (1,631) -- ---------- --------- -------- $2,404,577 $(235,612) $(76,078) ========== ========= ======== F-43 NOTE W SELECTED UNAUDITED QUARTERLY INFORMATION 1994 QUARTERLY RESULTS March 31 June 30 Sept 30 Dec 31 Total -------------------------------------------------------------- (IN THOUSANDS, EXCEPT PER SHARE DATA) Revenues $435,554 $433,541 $444,355 $ 450,511 $1,763,961 Gross profit 42,297 42,825 35,998 35,252 156,372 Reorganization items (3,600) (3,300) (3,200) (81,218) (91,318) Loss from continuing operations including reorganization items, before extraordinary item, cumulative effect of accounting change (7,418) (6,289) (15,589) (89,638) (118,934) Income from discontinued operations 1,144 2,683 5,559 830 10,216 Extraordinary item - gain on debt discharge - - - 413,249 413,249 Cumulative effect of change in method of accounting for post- employment benefits (2,100) - - - (2,100) -------- -------- -------- ---------- ---------- Net (loss) income $ (8,374) $ (3,606) $(10,030) $ 324,441 $ 302,431 ======== ======== ======== ========== ========== Supplemental (loss) income per share: Continuing operations $ (0.79) $ (0.67) $ (1.65) $ (9.51) $ (12.62) Discontinued operations 0.12 0.28 0.59 0.09 1.08 Extraordinary item - gain on debt discharge - - - 43.85 43.85 Cumulative effect of change in method of accounting for post-employment benefits (0.22) - - - (0.22) -------- -------- -------- ---------- ---------- Net (loss) income per share $ (0.89) $ (0.39) $ (1.06) $ 34.43 $ 32.09 ======== ======== ======== ========== ========== The loss from continuing operations including reorganization items in the fourth quarter reflects $2.4 million of reorganization charges for various legal and professional fees associated with the Chapter 11 proceeding. In addition a charge of approximately $78.8 million was recorded to state assets and liabilities at fair value in accordance with the principles of Fresh-Start Accounting as required by SOP 90-7, "Financial Reporting by Entities in Reorganization under the Bankruptcy Code." All per share data has been restated to reflect the assumed issuance of new common stock as of January 1, 1994. F-44 1993 QUARTERLY RESULTS MARCH 31 JUNE 30 SEPT 30 DEC 31 TOTAL ---------------------------------------------------------- (IN THOUSANDS, EXCEPT PER SHARE DATA) Revenues $563,879 $ 583,872 $ 565,845 $ 481,139 $2,194,735 Gross profit 58,554 47,604 40,117 4,902 151,177 Loss from continuing operations (11,830) (18,956) (19,660) (63,545) (113,991) Income (loss) from discontinued operations 1,718 3,026 (4,793) (9,038) (9,087) -------- -------- -------- --------- ---------- Net loss $(10,112) $(15,930) $(24,453) $ (72,583) $ (123,078) ======== ======== ======== ========= ========== The loss from continuing operations in the fourth quarter of 1993 reflects a provision of $37.2 million primarily for estimated losses on large uncompleted contracts. The loss from discontinued operations in the fourth quarter of 1993 includes a $7.4 million charge to write-down the net assets of the water supply business to estimated net realizable value and a $2.4 million loss from the sale of the Company's information services business in Germany. NOTE X LEGAL PROCEEDINGS Since August 1992, nineteen purported class action lawsuits have been filed against the Company arising out of the restatement of earnings, write-offs and losses announced by the Company on August 4, 1992 and October 2, 1992. Pursuant to Stipulation and Court Order, on January 15, 1993, a single consolidated amended class action complaint (the "Complaint") was filed. The Complaint named as defendants the Company, certain former officers and directors, a former subsidiary officer and the Company's then independent auditor Ernst & Young. The Complaint alleges violations of Section 10(b) of the Securities and Exchange Act of 1934, Rule 10(b)-5 promulgated thereunder and common law fraud and deceit on the part of the Company and certain other defendants. Among other things, the Company is alleged to have intentionally and materially overstated its inventory, accounts receivable and earnings in various public disseminations during the purported class period May 1, 1991 through October 2, 1992. The Complaint seeks an unspecified amount of damages. The Company denied the material allegations in the Complaint. The parties are now engaged in discovery proceedings. However, the Bankruptcy Court's order dated October 3, 1994, confirming the Company's Plan of Reorganization, included a discharge of all claims asserted against the Company in the class action lawsuit and a permanent injunction against continuing these actions, or any other proceeding, with respect to the claims asserted therein. Accordingly, on December 2, 1994 the lawsuit against the Company was dismissed with prejudice. The Company had been informed by the Securities and Exchange Commission (the "SEC") that it was conducting a private investigation to determine whether there were violations of certain provisions of the federal securities laws and/or the rules and regulations of the SEC in connection with the Company's financial records, reports and public disclosures. The Company cooperated with the SEC's staff and voluntarily produced requested documents and information. On April 12, 1994, the SEC's staff informed the Company of its intention to recommend that the SEC file a civil injunction against the Company. The Company is currently engaged in discussions with the SEC's staff concerning a possible consensual resolution of the matter. In January 1992 the Public Service Commission of the State of New York ("PSC") ordered its staff to perform an audit covering all aspects of operations of JWS. The report on that audit alleged that mismanagement and imprudence on the part of JWS may have resulted in excess charges to its customers of up to $10.6 million. As a result of the audit report, in June 1992 the PSC instituted a proceeding requiring JWS to demonstrate that its rates charged to customers are not excessive and provided for an investigation of JWS's management practices. As part of this proceeding and citing the audit report's assertion without receiving the audit report in evidence, F-45 the PSC ordered that $10.6 million of JWS's annual revenues be made temporary and subject to refund, effective August 6, 1992, pending the completion of the investigation. Between December 1992 and May 1993 each of JWS, the PSC's staff, the New York State Consumer Protection Board, Waterbill Watchdog, Inc., the County of Nassau, the Town of Hempstead and others appeared and submitted testimony in the PSC proceedings. On June 3, 1993, the PSC issued an order suspending hearings and appointed two administrative law judges for the purpose of effecting a settlement. Negotiations among the parties and through the judges were ongoing from that time. In addition, in February 1993, the County of Nassau commenced an action alleging violations of the Racketeering Influenced Corrupt Organizations Act ("RICO") and common law fraud based on allegations that JWS intentionally filed false rate applications with the PSC and that, for the period from March 31, 1987 through March 31, 1992, JWS had earnings that exceeded its projections by $8.7 million. As a result of the negotiations, JWS, the New York State Consumer Protection Board, Nassau County, certain other governmental bodies and a consumer advocate group entered into a settlement dated December 22, 1993 (the "Settlement Agreement") which, following approval by the PSC on February 2, 1994, settled all issues outstanding before the PSC and various state courts and in the RICO action. The Settlement Agreement provides, among other things (i) that JWS will use its best efforts to bring about a separation of Jamaica Water Securities Corporation ("JWSC"), a subsidiary of the Company which holds substantially all of the common stock of JWS, from the Company and that JWSC will submit a plan to the PSC for its separation from the Company and the formation of a separate water works corporation to be incorporated under the New York State Transportation Corporation law to provide water utility service to Nassau County customers presently served by JWS; (ii) commitment by JWS that, subject to limited specific exceptions, it will not seek to have a general rate increase become effective prior to January 1, 1997, thus providing rate stability for three years; (iii) for refunds and other payments to customers estimated to aggregate approximately $11.7 million over the 1994-1997 period; and (iv) a cap on earnings above which JWS will share with its customers its return on equity. The estimated payments to customers of $11.7 million was provided for against 1993 operations. In 1986, the State of New York enacted a statute requiring The City of New York (the "City") to acquire by condemnation all of the JWS property constituting or relating to its water distribution system located in the City only if a Supreme Court of the State of New York (the "Supreme Court") decides that the amount of compensation to be paid for the system is determined solely by the income capitalization method of valuation. If the Court determines compensation by a method other than the income method capitalization or the award is for more than the rate base of the condemned assets, the statute permits the City to withdraw the proceeding without prejudice or costs. In 1988, the City instituted a proceeding pursuant to the statute to acquire the system which constitutes approximately 75% of JWS' water utility plant. JWS argued at trial that the judicially recognized method for valuing public utility property is by the method known as "Reproduction Cost New, Less Depreciation". JWS also sought consequential and severance damages that would result from separating the JWS Nassau County water supply system from that in the City. The aggregate amount sought by JWS as of December 31, 1987 was approximately $924 million. The City submitted its income capitalization valuation, as of December 31, 1987, at approximately $63 million. In June 1993, the Supreme Court dismissed the City's petition. The Supreme Court concluded, among other things, that the statute is unconstitutional because it directs the Court to render an advisory opinion. In February 1994, the New York Court of Appeals held constitutional a nearly-identical statute dealing with another water utility. In April 1994, upon a request made by the City for reconsideration by the Court, the Court stated that it would reconsider its prior decision in light of the February decision of the Court of Appeals. The Company cannot predict when or if the Court will conduct further proceedings under the statute nor is it possible to predict what the decision of the Court might be if it decides to value the JWS property or the effect of the pending litigation on the proposed sale of JWS. F-46 On September 26, 1994 certain holders of Warrants of Participation ("Warrants") that were issued pursuant to a Warrant Agreement dated June 15, 1969 by the Company's predecessor, Jamaica Water and Utilities, Inc. ("JWU"), commenced a declaratory judgment action against JWSC by filing a complaint in the Supreme Court of the State of New York, Westchester County, bearing the caption, Harold ------- F. Scattergood, Jr., et al. v. Jamaica Water Securities Corp. (Index No. - ------------------------------------------------------------- 15992/94). On October 17, 1994, an amended complaint was served adding additional plaintiffs. Plaintiffs seek a declaration that JWSC is the successor to the Company's obligations under the Warrant Agreement by reason of its 1977 acquisition of JWU's 96% stock interest in JWS. Plaintiffs also claim that three events have triggered the Warrants, obligating JWSC to issue shares of its own stock to plaintiffs: (1) the 1988 filing by The City of New York of a condemnation proceeding and lis pendens seeking to condemn that part of the water distribution system of JWS located in Queens County; (2) the prosecution of that condemnation proceeding, which was subsequently dismissed by the court; and (3) a 1993 settlement agreement entered into by JWSC and JWS which settled unrelated matters involving the Public Service Commission, Nassau County and others. Plaintiffs claim that each of these events constituted a disposition of the assets of JWS which triggered the Warrants. In the alternative, plaintiffs claim that the Warrant Agreement's December 31, 1994 expiration date should be extended for some indefinite period. By a Decision and Order, entered on June 22, 1995, the court granted JWSC's motion to dismiss the action, holding that that assets of JWSC had not been "disposed of" under the express terms of the Warrants prior to their stated expiration on December 31, 1994. The court also held that it lacked the power to rewrite the "clear and unambiguous provisions" of the Warrant of Participation Agreement to extend the December 31, 1994 deadline. The Company does not yet know if the plaintiffs will appeal the court's decision. 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 does business with the Company's subsidiary, Forest Electric Corporation ("Forest"), a search warrant was executed at Forest's executive offices. At that time, the Company was informed that Forest and certain of its officers are targets of the continuing investigation. Neither the Company nor Forest has been advised of the precise nature of any suspected violation of law by Forest or its officers. On July 11, 1995, Ted Kohl, a principal of Herbert, and DBP Interiors, Inc. ("DPL"), a company allegedly owned by Kohl were indicted by a New York County grand jury for grand larceny, fraud, repeated failure to file New York City Corporate Tax Returns and related money laundering charges. Kohl was also charged with filing false personal income and earnings tax returns, prejury and offering false instruments for filing with the New York City School Construction Authority. In a press release announcing the indictment, the Manhattan District Attorney said that the investigation disclosed that Mr. Kohl allegedly received more than $7 million in kickbacks from subcontractors through a scheme in which he allegedly inflated subcontracts on Herbert's construction contracts. At a press conference following the Indictment, the District Attorney announced that the investigation is continuing, and he expects further indictments in the investigation. Forest performs electrical contracting services primarily in the New York City commercial market and is one of the largest subsidiaries in the MES group of companies. The Dynalectric Company ("Dynalectric") is a defendant in an action entitled Computran v. Dynalectric, et al., pending in Superior Court of New Jersey, - ------------------------------- Bergen County, arising out of its participation in a joint venture. The plaintiff, Computran, a participant in and a subcontractor to the joint venture, alleges that Dynalectric wrongfully terminated it from the subcontract, fraudulently diverted funds due it, misappropriated its trade secrets and proprietary information, fraudulently induced it to enter into the joint venture and conspired with other defendants to commit certain acts in violation of the New Jersey Racketeering Influence and Corrupt Organization Act. Dynalectric believes that Computran's claims are without merit and intends to defend this matter vigorously. Dynalectric has filed counterclaims against Computran. Discovery is ongoing; no trial date is scheduled. In addition to the above, the Company is involved in other legal proceedings and claims which have arisen in the ordinary course of business. The Company believes it has a number of valid defenses to these actions and the Company intends to vigorously defend itself in these matters and does not believe that a significant liability will result. However, the Company cannot predict the outcome thereof or the impact that an adverse result of the matters discussed above will have upon the Company's financial position or results of operations. F-47 NOTE Y ADOPTION OF NEW ACCOUNTING PRONOUNCEMENT Effective January 1, 1994, the Company adopted the provisions of Statement of Financial Accounting Standards No. 112, "Employers' Accounting for Post- employment Benefits" (SFAS 112). This standard requires that the cost of benefits provided to former or inactive employees be recognized on an accrual basis of accounting. Previously the Company recognized post-employment benefit costs (primarily short-term disability and severance costs) when paid. The cumulative effect of adopting SFAS 112 was to record a charge of $2.1 million as of January 1, 1994. Such amount has been reflected in the Consolidated Statements of Operations for the year ended December 31, 1994 under the caption "Cumulative Effect of Change in Method of Accounting for Post-employment Benefits." The adoption of SFAS 112 did not have a material effect on the 1994 loss before extraordinary item and cumulative effect of accounting changes. Effective January 1, 1993, the Company adopted the provisions of Statement of Financial Accounting Standards No. 106, "Accounting For Post-retirement Benefits Other Than Pensions" (SFAS 106). The actuarial present value of the accumulated post-retirement benefit obligations under SFAS 106 approximated $7.0 million as of December 31, 1993. Such amount relates to the Company's water supply business which is included in "Net Assets held for Sale" in the accompanying Consolidated Balance Sheets and "Discontinued Operations" in the accompanying Consolidated Statements of Operations. NOTE Z OTHER JWS is subject to a PSC order which requires that dividend payments by JWS not exceed 50% of JWS's net income available to common shareholders for the preceding twelve month period and subject further to a debt/equity ratio restriction. Under the PSC order, approximately $1.8 million of JWS's retained earnings were available for the payment of dividends and $49.4 million of JWS's retained earnings were restricted as of December 31, 1994. In September 1992, the PSC issued an order requiring additional certifications before the payment of JWS of cash dividends on its common stock. This resulted in the suspension of dividend payments by JWS on its common stock for the last two quarters of 1992 and all of 1993. As a result of the Settlement Agreement described in Note X, JWS recommenced dividend payments on its common stock in 1994. Dividends paid by JWS to the Company on its common stock in 1994 amounted to $1.1 million. F-48 SCHEDULE I CONDENSED FINANCIAL INFORMATION OF EMCOR GROUP, INC. Balance Sheets (In Thousands) Reorganized | Predecessor Company | Company December 31,| December 31, 1994 | 1993 ------------| ------------ | ASSETS: | Current Assets: | Cash and cash equivalents $ 13,101 | $ 6,984 Prepaid expenses and other current | assets 3,852 | 3,985 Net assets held for sale 55,401 | 20,454 -------- | --------- Total Current Assets 72,354 | 31,423 Net assets held for sale - | 63,161 Investments, notes and other long-term | receivables - | 452 Property and equipment, net 809 | 982 Other assets, principally investments | in and amounts due from wholly-owned | subsidiaries 306,529 | 220,053 -------- | --------- Total Assets $379,692 | $ 316,071 ======== | ========= | LIABILITIES AND SHAREHOLDERS (DEFICIT) | EQUITY: | Current Liabilities: | Current maturities of long-term debt $ 35,000 | $ 744 Series A Notes 55,401 | Debt in default - | 501,007 Accrued expenses and other current | liabilities 118,007 | 74,419 -------- | --------- Total Current Liabilities 208,408 | 576,170 -------- | --------- Long Term Debt 59,782 | - Other long-term obligations 30,372 | 42,163 Shareholders' Equity (Deficit): | Common Stock 94 | 4,072 Other shareholders' equity (deficit) 81,036 | (306,334) -------- | --------- Total Shareholders' Equity (Deficit) 81,130 | (302,262) -------- | --------- Total Liabilities and Shareholders' | Equity (Deficit) $379,692 | $ 316,071 ======== ========= S-I-1 SCHEDULE I CONDENSED FINANCIAL INFORMATION OF EMCOR GROUP, INC. Statement of Operations (In Thousands) Year Ended December 31, 1994 1993 1992 ------------------------------------ (in thousands) Management fees from wholly-owned subsidiaries $ 11,090 $ 16,632 $ 29,825 Interest income (expense) income from wholly-owned subsidiaries 13,202 (2,265) 3,243 Other interest income 925 557 899 ------------------------------------ 25,217 14,924 33,967 ------------------------------------ Costs and expenses, net: General, administrative and other expenses 15,782 26,401 48,371 Interest expense 2,467 49,012 43,568 Net (gain) loss on businesses sold or held for sale (1,183) (1,028) 76,078 Provision for losses on disposal of discontinued operations - 20,350 49,491 ------------------------------------ 17,066 94,735 217,508 ------------------------------------ Reorganization Items: Professional fees (12,535) - - Fresh-start adjustments (78,783) - - ------------------------------------ (91,318) - - ------------------------------------ (Loss) before income taxes, equity in net (loss) income of subsidiaries, extraordinary item and cumulative effect of accounting change (83,167) (79,811) (183,541) (Benefit) for income taxes - - - Equity in net (loss) income of subsidiaries - continuing operations (35,767) (54,530) (229,465) Equity in net income (loss) of subsidiaries - discontinued operations 10,216 11,263 (203,739) Extraordinary Item - Gain on Debt Discharge 413,249 - - Cumulative effect of accounting change (2,100) - 4,315 ------------------------------------ Net Income (Loss) $302,431 $(123,078) $(612,430) ==================================== S-I-2 SCHEDULE I CONDENSED FINANCIAL INFORMATION OF EMCOR GROUP, INC. Statements of Cash Flows (In Thousands) Year Ended December 31, 1994 1993 1992 ----------------------------------- Net Income (Loss) $302,431 $(123,078) $(612,430) Adjustment to Reconcile Net Income (Loss) to Cash (Used In) Provided by Operating Activities Depreciation and amortization 325 353 3,790 Write-off deferred debt issuance cost - - 2,876 (Gain) loss on net assets held for sale or sold (1,183) (1,028) 76,078 Provision for losses on disposal of discontinued operations - 20,350 49,491 Cumulative effect of accounting change (2,100) - (4,315) Equity loss (income) of consolidated subsidiaries 25,551 43,267 433,204 Other, net (27,305) - 17,962 ----------------------------------- 297,719 (60,136) (33,344) Change in Current Assets and Liabilities Decrease (increase) in prepaid expenses and other current assets 133 3,580 (3,135) Increase (decrease) in accrued expenses and other liabilities 43,588 61,175 11,317 Changes due to reorganization activities: Reorganization charges 12,535 - - Gain on discharge of debt (413,249) - - Net adjustments to accounts for fair value 78,783 - - ----------------------------------- Net Cash Provided by (Used in) Operations 19,509 4,619 (25,162) ----------------------------------- Cash Flows from Financing Activities Proceeds from working capital credit line 35,000 - - Proceeds from debtor-in-possession note payable 30,000 - - Repayment of debtor-in-possession note payable (30,000) - - Proceeds from long-term debt - - 60,000 Payments of long-term debt and capital lease obligation (206) (225) (23,789) Proceeds from issuance of common stock and exercise of stock options - - 1,911 Payment of preferred dividends - - (1,354) Acquisition of common stock for the treasury - - (8,130) Increase in notes payable - - 695 Increase in insurance cash collateral (12,443) - - ----------------------------------- Net Cash Provided by (Used in) Financing Activities 22,351 (225) 29,333 ----------------------------------- Cash Flows from Investment Activities Proceeds from sale of businesses and other assets 13,620 43,400 138,971 (Increase) decrease in investments and amounts due from wholly-owned subsidiaries (49,212) (100,773) (63,884) Acquisition of businesses - - (19,581) Purchase of property and equipment, net of retirements (151) - (1,958) ----------------------------------- Net Cash (Used in) Provided by Investment Activities (35,743) (57,373) 53,548 ----------------------------------- Increase (Decrease) in Cash and Cash Equivalents 6,117 (52,979) 57,719 Cash and Cash Equivalents at Beginning of Year 6,984 59,963 2,244 ----------------------------------- Cash and Cash Equivalents at End of Year $ 13,101 $ 6,984 $ 59,963 =================================== S-I-3 SCHEDULE I CONDENSED FINANCIAL INFORMATION OF EMCOR GROUP, INC. Notes to Condensed Financial Statements (1) Basis of Presentation The Company's investment in subsidiaries is stated at cost plus equity in undistributed earnings (loss) of subsidiaries since dates of acquisition, less write-offs related to permanent impairment of cost in excess of net assets acquired. Net assets held for sale consist of the net assets of wholly-owned subsidiaries that the Company plans to sell. Such net assets are stated at estimated net realizable value. These financial statements should be read in conjunction with the Company's consolidated financial statements. (2) Debt in Default For a discussion and description of debt in default and long-term debt refer to Notes A, C and D of the consolidated financial statements of EMCOR Group, Inc. and Subsidiaries. (3) Income Taxes Effective January 1, 1994, the Company adopted the provisions of Statement of Financial Accounting Standards No. 112, "Employers' Accounting for Post- employment Benefits" (SFAS 112). This standard requires that the cost of benefits provided to former or inactive employees be recognized on an accrual basis of accounting. Previously the Company recognized post- employment benefit costs (primarily short-term disability and severance costs) when paid. The cumulative effect of adopting SFAS 112 was to record a charge of $2.1 million as of January 1, 1994. Such amount has been reflected in the Consolidated Statements of Operations for the year ended December 31, 1994 under the caption "Cumulative Effect of Change in Accounting for Post-employment Benefits". The adoption of SFAS 112 did not have a material effect on the 1994 loss before cumulative effect of change in method of accounting for post-employment benefits. Effective January 1, 1992, the Company adopted the provisions of Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes" (SFAS 109). The adoption of SFAS 109 changed the Company's method of accounting for income taxes from the deferred method (APB 11) to an assets and liability approach. Previously, the Company deferred the past tax effect of timing differences between financial reporting and taxable income. The asset and liability approach requires the recognition of deferred tax liabilities and assets for the expected future tax consequences of temporary differences between the financial statement carrying amounts and the tax bases of assets and liabilities. Valuation allowances are established when necessary to reduce deferred tax assets to the amount expected to be realized. Income tax expense is the tax payable for the period and the change during the period in deferred tax assets and liabilities. Prior years' financial statements have not been restated for the accounting change. The cumulative effect of adopting SFAS 109 was to record an income tax benefit of $4.3 million as of January 1, 1992. At December 31, 1994 and 1993 (after having given effect to the adoption of SFAS No. 109), the valuation allowances recorded against deferred tax assets were $114.5 million and $170.1 million, respectively. (4) Guarantees The Company guarantees various obligations and credit agreements of its wholly-owned subsidiaries. In addition, the Company guarantees a mortgage note payable in the unpaid principal amount of approximately $6.0 million secured by land and building owned by a former subsidiary. The Company also guarantees certain contracts and performance bonds of its subsidiaries. S-I-4 EMCOR GROUP, INC. SCHEDULE II VALUATION AND QUALIFYING ACCOUNTS Additions -------------------------------------------------------- Charged to Balance at Charged to Other Net Assets Balance Beginning Costs and Accounts Deductions Held for End of Description of Year Expenses (2) (1) Sale Year - ----------------------------------------------------------------------------------------------------------------------------------- Allowance for doubtful accounts Year Ended December 31, 1994 $31,170 $ 2,909 $(7,695) $ (6,564) $ - $19,820 Year ended December 31, 1993 $42,630 $ 13,663 $ (892) $(24,231) $ - $31,170 Year ended December 31, 1992 $29,541 $113,903 $10,591 $(78,715) $(32,690) $42,630 (1) Deductions represent uncollectible balances of accounts receivable written off, net of recoveries. (2) Amounts in 1992 and 1991 primarily represent valuation accounts related to companies acquired. S-II-1 EXHIBIT INDEX ------------- Unless otherwise indicated, all exhibits were filed with, or were incorporated by reference into, the Company's Registration Statement on Form 10 as originally filed on March 17, 1995. EXHIBIT NO. INCORPORATED BY REFERENCE TO REGISTRANT'S - ----------- ----------------------------------------- 2(a) Disclosure Statement and Third Amended Joint Plan of Reorganization (the "Plan of Reorganization") proposed by EMCOR Group, Inc. (formerly JWP INC.) (the "Company" or "EMCOR") and its affiliate, 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 dated September 29, 1994. 2(c) Second Modification to the Plan of Reorganization dated September 30, 1994. 2(d) Confirmation Order of the Bankruptcy Court dated September 30, 1994 (the "Confirmation Order"), confirming the Plan of Reorganization, as amended. 2(e) Amendment to the Confirmation Order dated December 8, 1994. 2(f) Post-confirmation modification to the Plan of Reorganization entered on December 13, 1994. 3(a-1) Certificate of Incorporation filed March Exhibit 3(a-1) to Annual Report on Form 10- 31, 1987 K for fiscal year ended December 31, 1988 3(a-2) Copy of Agreement and Plan of Merger Exhibit (b) to Current Report on Form 8-K dated April 1, 1987 between JWP INC., a for August 4, 1987 New York corporation, and JWP INC. a Delaware corporation 3(a-3) Certificate of Amendment to Certificate of Exhibit 3(a-3) to Annual Report on Form 10- Incorporation filed May 17, 1990 K for fiscal year ended December 31, 1990 3(a-4) Certificate of Designation filed August 15, Exhibit 4.1 to Quarterly Report on Form 10- 1991 Q for the quarter ended June 30, 1991 3(a-5) Restated Certificate of Incorporation of EMCOR filed December 15, 1994. 3(b) By-Laws EXHIBIT NO. INCORPORATED BY REFERENCE TO REGISTRANT'S - ----------- ----------------------------------------- 4.1 Form of Credit Agreement dated as of Exhibit 4.14 to Annual Report on Form 10-K February 14, 1994 among Registrant, for fiscal year ended December 31, 1992 certain subsidiaries thereof and Belmont Capital Partners II, L.P. 4.2 Indenture, dated as of December 15, 1994, among EMCOR, MES and SellCo, as guarantors, and IBJ Schroder Bank & Trust Company, as trustee, in respect of EMCOR's 7% Senior Secured Notes, Series A, Due 1997 4.3 Indenture, dated as of December 15, 1994, among EMCOR, MES, as guarantor, and Shawmut Bank Connecticut, National Association, as trustee, in respect of EMCOR's 11% Series C Notes, Due 2001. 4.4 Indenture, dated as of December 15, 1994, between SellCo and Shawmut Bank Connecticut, National Association, as trustee, in respect of SellCo's 12% Subordinated Contingent Payment Notes, Due 2004. 10(a-1) First Mortgage Indenture ("Mortgage") Exhibit B-1 to Form S-1, Registration dated December 1, 1936 of a subsidiary of Statement No. 2-3995 of JWS Registrant, Jamaica Water Supply Company ("JWS") 10(a-2) Supplemental Indenture to First Mortgage Exhibit 1 to Annual Report on Form 10-K for dated December 1, 1953 of JWS fiscal year ended December 31, 1953 10(a-3) Supplemental Indenture to First Mortgage Exhibit 1 to Current Report on Form 8-K for dated May 1, 1962 of JWS August 1962 of JWS 10(a-4) Supplemental Indenture to First Mortgage Exhibit 4.21 to Form S-1, Registration dated May 1, 1970 of JWS Statement No. 2-62590 10(a-5) Supplemental Indenture to First Mortgage Exhibit 4.22 to Form S-1, Registration dated February 15, 1975 of JWS Statement No. 2-62590 EXHIBIT NO. INCORPORATED BY REFERENCE TO REGISTRANT'S - ----------- ----------------------------------------- 10(a-6) Supplemental Indenture to First Mortgage Exhibit 4.23 to Form S-1, Registration dated January 1, 1978 Statement No. 2-62590 10(a-7) Supplemental Indenture to Mortgage dated Exhibit 10(a-7) to S-1, Registration as of April 1, 1981 of JWS Statement No. 2-86988 10(a-8) Supplemental Indenture to Mortgage dated Exhibit 10(a-8) to Form S-1 Registration as of August 1, 1983 of JWS Statement No. 2-86988 10(a-9) Supplemental Indenture to Mortgage dated Exhibit 10(a-9) to Annual Report on 10-K for as of December 1, 1984 fiscal year December 31, 1985 10(b-1) Agreement and Plan of Merger dated as of Exhibit (c)(2) to the Schedule 14D-1 June 3, 1991 among Businessland, Inc., JWP INC., and JWP Acquisition, Inc. 10(b-2) Asset Purchase Agreement dated July 16, Exhibit 2 to Form 8-K; Date of Report; 1993 by and among the Registrant, JWP August 6, 1993 Information Services, Inc. and ENTEX Information Services, Inc. 10(c-1) Employment Agreement dated as of Exhibit 10(e) to Annual Report on Form 10- September 14, 1987 between the Registrant K for fiscal year ended December 31, 1987 and Sheldon I. Cammaker 10(c-2) Amendment dated March 15, 1988 to Exhibit 10(f) to Annual Report on Form 10-K Employment Agreement dated as of for fiscal year ended December 31, 1987 September 14, 1987 between Registrant and Sheldon I. Cammaker 10(d) Letter Agreement dated November 16, Exhibit 10(d) to Annual Report on Form 10- 1992 between the Registrant and Edward K for fiscal year ended December 31, 1992 F. Kosnik 10(e) Letter Agreement dated December 21, Exhibit 10(e) to Annual Report on Form 10- 1992 between the Registrant and Stephen K for fiscal year ended December 31, 1992 H. Meyers EXHIBIT NO. INCORPORATED BY REFERENCE TO REGISTRANT'S - ----------- ----------------------------------------- 10(f) Separation Agreement dated as of June 30, Exhibit 10(l) to Annual Report on Form 10-K 1993 between Registrant and Andrew T. for fiscal year ended December 31, 1992 Dwyer 10(g) Consulting Agreement dated as of June 30, Exhibit 10(m) to Annual Report on Form 10- 1993 between JWP Mechanical/Electrical K for fiscal year ended December 31, 1992 Services, Inc. and Andrew T. Dwyer 10(h) Restricted Stock Agreement dated as of Exhibit 10(n) to Annual Report on Form 10- November 24, 1992 between Registrant and K for fiscal year ended December 31, 1992 Edward F. Kosnik 10(i) Restricted Stock Agreement dated as of Exhibit 10(o) to Annual Report on Form 10- January 3, 1992 between Registrant and K for fiscal year ended December 31, 1992 David L. Sokol 10(j) Letter Agreement dated as of June 30, Exhibit 10(p) to Annual Report on Form 10- 1993 between Drake & Scull Holdings Ltd. K for fiscal year ended December 31, 1992 and Registrant and Steven H. Kornfeld 10(k) Letter Agreement dated August 21, 1992 Exhibit 10(q) to Annual Report on Form 10- between Registrant and David L. Sokol K for fiscal year ended December 31, 1992 10(l) Employees' Severance Pay/Stay Bonus Exhibit 10(r) to Annual Report on Form 10-K Plan, as amended and restated as of for fiscal year ended December 31, 1992 March 16, 1994 10(m) Restricted Stock Agreement dated as of Exhibit 10(s) to Annual Report on Form 10-K January 15, 1993 between Registrant and for fiscal year ended December 31, 1992 Stephen H. Meyers 10(n) Employment Agreement dated as of April Exhibit 10(t) to Annual Report on Form 10-K 18, 1994 between Registrant and Frank T. for fiscal year ended December 31, 1992 MacInnis. 10(o) 1994 Management Stock Option Plan /*/10(p) 1995 Non-Employee Directors' Non- Qualified Stock Option Plan /*/10(q) Form of Indemnification Agreement - ------------------------- /*/ Filed herewith. EXHIBIT NO. INCORPORATED BY REFERENCE TO REGISTRANT'S - ----------- ----------------------------------------- 10(r) Reliance Insurance Companies' Underwriting and Continuing Indemnity Agreement dated as of November 22, 1994, among the Company, Dyn Specialty Contracting, Inc. ("Dyn"), B&B Contracting & Supply Company ("B&B"), Dynalectric Company ("Dyn Co."), Dynalectric Company of Nevada ("Dyn- Nevada"), Contra Costa Electric, Inc. ("Contra Costa"), Kirkwood Electric Co., Inc. ("Kirkwood") and Reliance Surety Company, Reliance Insurance Company, United Pacific Insurance Company, Reliance National Indemnity Company, Reliance National Insurance Company of New York and Reliance Insurance Company of Illinois. 10(s) Form of Security Agreement dated as of November 22, 1994 made by each of Dyn, B&B, Dyn Co., Dyn-Nevada, Contra Costa, and Kirkwood, in favor of and for the benefit of Reliance Surety Company, Reliance Insurance Company, United Pacific Insurance Company, Reliance National Indemnity Company and Reliance Insurance Company of Illinois. 10(t) Pledge Agreement dated November 22, 1994 between the Company and Reliance Surety Company, Reliance Insurance Company, United Pacific Insurance Company, Reliance National Indemnity Company and Reliance Insurance Company of Illinois. 10(u) Pledge Agreement dated November 22, 1994 between Dyn and Reliance Surety Company, Reliance Insurance Company, United Pacific Insurance Company, Reliance National Indemnity Company and Reliance Insurance Company of Illinois. 10(v) Subordination Agreement dated November 22, 1994 among Dyn, Dyn Co., B&B, Dyn- Nevada, Contra Costa and Kirkwood and Reliance Surety Company, Reliance Insurance Company, United Pacific Insurance Company, Reliance National Indemnity Company and Reliance Insurance Company of Illinois. EXHIBIT NO. INCORPORATED BY REFERENCE TO REGISTRANT'S - ----------- ----------------------------------------- 10(w) Credit Agreement dated December 14, 1994 among the Company, MES, certain direct and indirect subsidiaries of MES and Belmont Capital Partners II, L.P. and other lenders (collectively, the "Lenders"). 10(x) Guarantor Security Agreement dated December 14, 1994 by and among certain direct and indirect subsidiaries of MES, the Lenders and CoreStates Bank, N.A., as agent for the Lenders (the "Agent"). 10(y) Pledge and Security Agreement dated December 14, 1994 by and among the Company, MES, the Lenders and the Agent. 10(z) Credit Agreement dated December 14, 1994 among the Company, Dyn, certain direct subsidiaries of Dyn and the Lenders. 10(aa) Guarantor Security Agreement dated December 14, 1994 by and among certain direct subsidiaries of Dyn, the Lenders and the Agent. 10(bb) Pledge and Security Agreement dated December 14, 1994 by and among the Company, Dyn, the Lenders and the Agent. 21 List of Subsidiaries 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.