FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Quarterly Report Under Section 13 or
15(d) of the Securities Exchange Act of 1934
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[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES AND
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES AND
EXCHANGE ACT OF 1934
For the transition period from __________ to __________
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Commission file number 0-2315
EMCOR Group, Inc.
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(Exact name of registrant as specified in
its charter)
Delaware 11-2125338
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
101 Merritt Seven Corporate Park 06851-1060
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Norwalk, Connecticut (Zip Code)
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(Address of principal executive offices)
(203) 849-7800
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(Registrant's telephone number)
N/A
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(Former name, former address and former fiscal year, if changed since last
report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities and Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
filing requirements for the past 90 days. Yes X No __
Indicate by check mark whether the registrant has filed all documents
required to be filed by Section 12, 13 or 15(d) of the Securities and Exchange
Act of 1934, subsequent to the distribution of securities under a plan confirmed
by a court. Yes X No __
Number of shares of Common Stock outstanding as of the close of business on
October 29, 1996:
9,514,636 shares.
<PAGE>
EMCOR GROUP, INC.
INDEX
Page No.
PART I - Financial Information
Item 1 Financial Statements
Condensed consolidated balance sheets -
as of September 30, 1996 and December 31, 1995 1
Condensed consolidated statements of operations -
three months ended September 30, 1996 and 1995 3
Condensed consolidated statements of operations -
nine months ended September 30, 1996 and 1995 4
Condensed consolidated statements of cash flows -
nine months ended September 30, 1996 and 1995 5
Condensed consolidated statement of stockholders'
equity - nine months ended September 30, 1996 6
Notes to condensed consolidated financial statements 7
Item 2 Management's discussion and analysis of financial condition and
results of operations 13
PART II - Other Information
Item 1 Legal Proceedings 17
Item 6 Exhibits and Reports on Form 8-K 17
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1 FINANCIAL STATEMENTS
EMCOR Group, Inc. and Subsidiaries
CONDENSED CONSOLIDATED BALANCE SHEETS
(In Thousands)
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September 30, December 31,
1996 1995
(Unaudited)
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ASSETS
Current Assets:
Cash and cash equivalents $45,494 $53,007
Accounts receivable, net 432,788 435,974
Costs and estimated earnings in
excess of billings on uncompleted
contracts 72,467 65,551
Inventories 8,115 8,031
Prepaid expenses and other 7,682 8,365
Net assets held for sale -- 61,969
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Total Current Assets 566,546 632,897
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Investments, Notes and Other Long-Term
Receivables 4,291 4,684
Property, Plant and Equipment, Net 25,475 27,137
Other Assets:
Insurance cash collateral -- 30,812
Miscellaneous 3,224 15,415
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3,224 46,227
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Total Assets $599,536 $710,945
==================================
See notes to condensed consolidated financial statements.
<PAGE>
EMCOR Group, Inc. and Subsidiaries
CONDENSED CONSOLIDATED BALANCE SHEETS
(In Thousands, Except Per Share and Share Amounts)
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September 30, December 31,
1996 1995
(Unaudited)
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LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Notes payable $10,955 $14,665
Borrowings under working capital credit
lines -- 25,000
Current maturities of long-term debt 1,452 1,875
7% Senior Secured Notes (Series A) -- 61,969
Accounts payable 207,348 224,002
Billings in excess of costs and estimated
earnings on uncompleted contracts 115,527 113,590
Accrued payroll and benefits 38,783 38,928
Other accrued expenses and liabilities 43,444 45,287
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Total Current Liabilities 417,509 525,316
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Long-Term Debt 72,796 68,398
Other Long-Term Obligations 30,216 46,621
Stockholders' Equity:
Common Stock, $.01 par value, 13,700,000
shares authorized, 9,514,636 and
9,424,706 issued and outstanding,
respectively 95 94
Warrants 2,179 2,179
Capital surplus 79,812 78,863
Cumulative translation adjustment 297 327
Accumulated Deficit (3,368) (10,853)
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Total Stockholders' Equity 79,015 70,610
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Total Liabilities and Stockholders' Equity $599,536 $710,945
===========================
See notes to condensed consolidated financial statements.
<PAGE>
EMCOR Group, Inc. and Subsidiaries
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In Thousands, Except Per Share Amounts) (Unaudited)
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Three months ended September 30, 1996 1995
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Revenues $432,452 $403,941
Costs and Expenses:
Cost of sales 390,903 365,232
Selling, general and administrative 35,566 33,135
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426,469 398,367
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Operating Income 5,983 5,574
Interest Expense, Net 2,425 3,805
Net Loss on Businesses Sold -- 926
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Income Before Income Taxes 3,558 843
Provision For Income Taxes 1,627 250
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Net Income $1,931 $593
=============================
Income Per Common Share and Common
Equivalent Share: $0.19 $0.06
=============================
See notes to condensed consolidated financial statements.
<PAGE>
EMCOR Group, Inc. and Subsidiaries
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In Thousands, Except Per Share Amounts) (Unaudited)
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Nine months ended September 30, 1996 1995
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Revenues $1,202,853 $1,171,518
Costs and Expenses:
Cost of sales 1,086,318 1,069,008
Selling, general and administrative 105,999 101,488
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1,192,317 1,170,496
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Operating Income 10,536 1,022
Other Income, Net 12,500 --
Interest Expense, Net 9,915 11,430
Net Loss on Businesses Sold -- 926
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Income (Loss) Before Income Taxes 13,121 (11,334)
Provision For Income Taxes 5,636 750
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Net Income (Loss) $7,485 ($12,084)
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Income (Loss) Per Common Share and
Common Equivalent Share: $0.75 ($1.27)
=============================
See notes to condensed consolidated financial statements.
<PAGE>
EMCOR Group, Inc. and Subsidiaries
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands) (Unaudited)
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Nine months ended September 30, 1996 1995
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CASH FLOWS FROM OPERATIONS:
Net income (loss) $7,485 ($12,084)
Non-cash expenses 10,129 12,887
Net loss on businesses sold -- 926
Changes in operating assets and liabilities 7,692 (8,615)
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NET CASH PROVIDED BY (USED IN) OPERATIONS 25,306 (6,886)
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CASH FLOWS FROM FINANCING ACTIVITIES:
Payments of working capital credit lines (45,125) (11,000)
Borrowings under working capital credit lines 20,125 --
Payment of 7% Senior Secured Notes (Series A) (66,424) --
Payments of long-term debt and capital lease (643) (1,007)
obligations
Change in notes payable, net (3,896) 10,278
Exercise of stock options 487 --
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NET CASH USED IN FINANCING
ACTIVITIES (95,476) (1,729)
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CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property, plant
and equipment, net (4,480) (3,285)
Proceeds from sale of businesses
and other assets 314 650
Proceeds from sales of net assets
held for sale 66,424 --
Decrease in investments, notes and
other long-term receivables 399 --
-----------------------
NET CASH PROVIDED BY (USED IN) INVESTING
ACTIVITIES 62,657 (2,635)
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DECREASE IN CASH AND CASH EQUIVALENTS (7,513) (11,250)
CASH AND CASH EQUIVALENTS AT BEGINNING
OF PERIOD 53,007 52,505
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CASH AND CASH EQUIVALENTS AT END OF PERIOD $45,494 $41,255
=======================
SUPPLEMENTAL CASH FLOW INFORMATION
Cash Paid For:
Interest $5,311 $5,133
Income Taxes $239 $762
See notes to condensed consolidated financial statements.
<PAGE>
EMCOR Group, Inc. and Subsidiaries
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(In Thousands) (Unaudited)
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Cumulative
Common Capital TranslatioAccumulated
Stock Warrants Surplus Adjustment Deficit Total
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Balance, December
31, 1995 $94 $2,179 $78,863 $327 ($10,853) $70,610
Net income -- -- -- -- 7,485 7,485
Common stock issued
under stock option
plans 1 -- 486 -- -- 487
NOL Utilization -- -- 463 -- -- 463
Translation
adjustments -- -- -- (30) -- (30)
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Balance, September
30, 1996 $95 $2,179 $79,812 $297 ($3,368) $79,015
========================================================
See notes to condensed consolidated financial statements.
<PAGE>
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EMCOR Group, Inc. and Subsidiaries
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Notes to Condensed Consolidated Financial Statements (unaudited)
NOTE A Nature Of Operations
EMCOR Group, Inc. and subsidiaries ("EMCOR" or the "Company") is a multinational
corporation involved in mechanical and electrical construction and facilities
management services. EMCOR, which conducts its business through subsidiaries,
specializes in the design, integration, installation, start-up, testing,
operation and maintenance of (i) distribution systems for electrical power
(including power cables, conduits, distribution panels, transformers,
generators, uninterruptible power supply systems and related switch gear and
control), (ii) lighting systems, including fixtures and controls, (iii)
low-voltage systems, including fire alarm, security, communications and process
control systems, (iv) heating, ventilation, air conditioning, refrigeration and
clean-room process ventilation systems, and (v) plumbing, process and high
purity piping systems. EMCOR provides (i) mechanical and electrical construction
services directly to end-users (including corporations, municipalities and other
governmental entities, owners, developers, and tenants of buildings) and,
indirectly, by acting as a subcontractor, to construction managers, general
contractors and other subcontractors and (ii) facilities management services
directly to end users such as corporations, owners, property managers and
tenants of buildings. Mechanical and electrical construction services are
principally of three types: (i) large installation projects, with contracts
generally in the multi-million dollar range, in connection with construction of
industrial, institutional and public work facilities and commercial buildings
and fit-out of large blocks of space within commercial buildings; (ii) smaller
system installation projects involving fit-out, renovation and retrofit work;
and (iii) testing and service of completed facilities. In addition, certain of
its subsidiaries operate and maintain mechanical and/or electrical systems for
customers under contracts and provide other services to customers, at the
customer's facilities, which services are commonly referred to as facilities
management. Mechanical and electrical construction and facilities management
services are provided to a broad range of commercial, industrial and
institutional customers through offices located in major markets throughout the
United States, Canada, the United Kingdom, the Middle East and Hong Kong.
NOTE B Basis of Presentation
In the opinion of the Company, the accompanying unaudited condensed consolidated
financial statements contain all adjustments (consisting only of a normal
recurring nature) necessary to present fairly the financial position of the
Company and the results of its operations. The results of operations for the
three and nine month periods ended September 30, 1996 are not necessarily
indicative of the results to be expected for the year ending December 31, 1996.
A description of the Company's significant accounting policies is included in
its December 31, 1995 Annual Report on Form 10-K filed with the Securities and
Exchange Commission on March 13, 1996. The accompanying unaudited condensed
consolidated financial statements should be read in conjunction with the audited
consolidated financial statements included in the Form 10-K.
Certain reclassifications have been made to prior year financial statements to
conform to current year presentation.
NOTE C Net Income (Loss) Per Common Share and Common Equivalent Share
Net income (loss) per common share and common equivalent share for the three and
nine month periods ended September 30, 1996 and 1995 have been calculated based
on the weighted average number of shares of common stock outstanding and common
stock equivalents relating to warrants and stock options outstanding when the
effect of such common stock equivalents are dilutive.
<PAGE>
NOTE D Net Assets Held For Sale
In May 1996, the Company completed the sale of substantially all of the assets
of its subsidiary Jamaica Water Supply Company ("JWS") to The City of New York
and the Water Authority of Western Nassau County for an aggregate purchase price
of approximately $179.0 million, subject to post-closing adjustments;
approximately $1.2 million of this purchase price is being held in escrow
pending determination of post-closing adjustments. In May 1996, the Company also
completed the sale of the stock of its other water supply subsidiary Sea Cliff
Water Company ("Sea Cliff") to a subsidiary of Aquarion Company for
approximately $2.6 million, subject to post-closing adjustments; approximately
$0.5 million of this purchase price is being held in escrow for a period of
approximately one year pending determination of post-closing adjustments and as
collateral security for certain indemnification obligations. JWS and Sea Cliff
are referred to herein collectively as the "Water Companies". Approximately 96%
of the Common Stock of JWS is owned by the Company.
The sales proceeds from the sale of JWS' assets have been and will be applied to
pay JWS liabilities and preferred stock obligations and to satisfy minority
stock interests in JWS and as a reserve for litigation involving Warrants of
Participation issued by the Company's predecessor (see Note H). Of the balance,
$15.0 million was used to repay a portion of indebtedness under the Company's
then outstanding MES Credit Agreement referred to below and approximately $66.5
million was used to redeem in full its Series A Notes. The remainder was and
will be used to redeem notes issued by the Company's subsidiary SellCo
Corporation ("SellCo"). (See Note F for additional discussion of the use of
proceeds from the sale of JWS' assets and the stock of Sea Cliff).
The operating results of net assets held for sale have been excluded from the
condensed consolidated financial statements for the three and nine month periods
ended September 30, 1996 and 1995 since the operation of these businesses will
primarily only accrue to the benefit of the holders of notes issued by SellCo.
NOTE E Current Debt
New Credit Facility - On June 19, 1996 the Company and its subsidiary Dyn
Specialty Contracting Inc. ("Dyn") entered into a credit agreement with Harris
Trust and Savings Bank ("Harris") providing the Company with up to a $100.0
million revolving credit facility (the "New Credit Facility") for a three year
period. The New Credit Facility, which is guaranteed by certain direct and
indirect U.S. subsidiaries of the Company and is secured by substantially all of
the assets of the Company and those subsidiaries, currently provides for up to
$50.0 million in borrowing capacity and is available in the form of revolving
loans ("Revolving Loans") and/or letters of credit ("LCs" or "LC"). As amended
on September 27, 1996, up to the U.S. Dollar equivalent of (pound)9.0 million
can be borrowed by the Company's United Kingdom subsidiary EMCOR (UK) Limited.
The remaining $50.0 million in borrowing capacity is subject to receipt of
additional commitments from other banks, an earnings test, consents of bonding
companies providing surety bonds to the Company's Canadian and United Kingdom
subsidiaries and these subsidiaries guaranteeing the facility and
collateralizing their guarantees with liens upon their assets. The Revolving
Loans bear interest at a variable rate representing Harris' prime rate (8.25% at
September 30, 1996) plus 1.0% - 2.0% based on certain financial covenants, as
defined. The interest rate on the Revolving Loans was 9.25% at September 30,
1996. LC fees ranging from 1.50% to 3.25% are charged based on the type of LC
issued. The New Credit Facility expires on June 19, 1999. As of September 30,
1996, the Company had approximately $23.8 million of LCs outstanding under the
New Credit Facility. There were no Revolving Loans outstanding as of September
30, 1996.
MES Credit Agreement - On December 14, 1994, the Company and certain of its
subsidiaries entered into a credit agreement (the "MES Credit Agreement") with
lenders (collectively, 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 $35.0 million.
The MES Loans were guaranteed by certain direct and indirect United States
subsidiaries of MES (the "U.S. MES Subsidiaries") and were 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 and the proceeds of the sale of stock
or assets of the Water Companies to the extent of the first $15.0 million of
such proceeds, subject to the right to such proceeds of the Lenders under the
Dyn Credit Agreement referred to below. The MES Loans bore interest on the
principal amount thereof at the rate of 15.0% per annum. Borrowings under the
MES Credit Agreement ($25.0 million at December 31, 1995) are classified as
current liabilities under the caption "Borrowings under working capital credit
lines" in the accompanying condensed consolidated balance sheets.
Borrowings outstanding under the MES Credit Agreement and Dyn Credit Agreement
(hereafter defined) were repaid, in part, on June 12, 1996 from proceeds
received by the Company from the sale of the Water Companies (see Note D) and
the balance was repaid on June 20, 1996 from borrowings under the New Credit
Facility at which time the credit agreements were terminated.
Dyn Credit Agreement - On December 14, 1994, the Company, Dyn and Dyn's
subsidiaries entered into a credit agreement (the "Dyn Credit Agreement") with
the Lenders providing revolving credit loans (the "Dyn Loans") of up to an
aggregate amount of $10.0 million. The Dyn Loans were guaranteed by Dyn's
subsidiaries and were secured by substantially all of the assets of Dyn and
Dyn's subsidiaries and the proceeds of the sale of stock or assets of the Water
Companies to the extent of the first $15.0 million of such proceeds, subject to
the right to such proceeds of the Lenders under the MES Credit Agreement. The
Dyn Loans bore interest on the principal amount thereof at the rate of 15.0% per
annum. No borrowings were outstanding under the Dyn Credit Agreement at December
31, 1995.
Series A Notes - On December 15, 1994 the Company issued or reserved for
issuance approximately $62.2 million principal amount of Series A Notes and $8.8
million additional principal amount of Series A Notes for issuance upon
resolution of disputed and unliquidated pre-petition general unsecured claims
pursuant to the Company's Plan of Reorganization adopted in connection with its
Chapter 11 proceeding. Approximately $4.7 million of the issued Series A Notes
were redeemed prior to payment in full of the Series A Notes during the second
quarter of 1996 (approximately $66.5 million in principal and accrued interest)
with proceeds received by the Company from the sale of the Water Companies.
NOTE F Long-Term Debt
Long-Term Debt in the accompanying condensed consolidated balance sheets
consists of the following amounts at September 30, 1996 and December 31, 1995
(in thousands):
September 30 December 31,
1996 1995
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Series C Notes, outstanding face value of
approximately $73.8 million at 11.0%,
discounted to a 14.0% effective rate,
due 2001 $65,959 $61,494
Supplemental SellCo Note, outstanding
face value of approximately $5.5
million at 8.0%, discounted to a
14.0% effective rate, due 2004 4,417 4,270
Capital Lease Obligations at weighted average
interest rates from 7.25% to 11.0%,
payable in varying amounts through 2004 821 1,284
Other, at weighted average interest rates of
approximately 10.75%, payable in varying
amounts through 2012 3,051 3,225
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74,248 70,273
Less current maturities (1,452) (1,875)
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$72,796 $68,398
============= ==========
<PAGE>
Series C Notes - On December 15, 1994 the Company issued approximately $62.8
million principal amount of Series C Notes. Interest on the Series C Notes was
payable semiannually through June 15, 1996 by the issuance of additional Series
C Notes and is currently payable quarterly in cash. The Series C Notes are
unsecured indebtedness of the Company which are subordinate to indebtedness
under the Company's New Credit Facility. The Series C Notes have been recorded
at a discount to their face amount to yield an estimated effective interest rate
of 14.0%. The Series C Notes mature on December 15, 2001.
Supplemental SellCo Note - On December 15, 1994 EMCOR issued to SellCo its 8%
promissory note in the principal amount of approximately $5.5 million (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 Notes issued by SellCo (the
"SellCo Notes") (hereafter described) are deemed canceled. If at any time after
December 15, 1999 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 cash
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 Supplemental SellCo Note has been recorded at a discount to
its face amount to yield an estimated effective interest rate of 14.0%.
SellCo Notes - On December 15, 1994 SellCo issued approximately $48.1 million
principal amount of SellCo Notes. Interest is payable semiannually in additional
SellCo Notes. Net cash proceeds (as defined in the Indenture pursuant to which
the SellCo Notes were issued) from sales of stock or assets of SellCo
subsidiaries are to be used to redeem SellCo Notes. The SellCo Notes are not
obligations of EMCOR and 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 thereon. Approximately $2.1 and $0.7 million of the proceeds
from the sale of the stock of Sea Cliff and the sale of assets of JWS,
respectively, have been used to redeem, in part, the SellCo Notes. In addition,
as the liabilities of JWS are finally determined, JWS' various contingent
liabilities are resolved, funds held in escrow under the sales agreements (the
"Sales Agreements") for the sale of assets of JWS and the stock of Sea Cliff are
released and post closing adjustments under the Sales Agreements are agreed
upon, additional amounts of the sales proceeds may become available, from time
to time, for additional redemptions of the SellCo Notes.
Other - Other long-term debt consists primarily of loans for real estate, office
equipment, automobiles and building improvements.
NOTE G Income Taxes
The Company files a consolidated federal income tax return including all U.S.
subsidiaries. At September 30, 1996, the Company had a net operating loss
carryforward ("NOL") for U.S. income tax purposes expiring in years 2007 through
2011 which approximates $215.0 million, subject to Internal Revenue Service
approval. However, a subsequent ownership change (as defined in Internal Revenue
Code Section 382) prior to December 15, 1996 would reduce to zero the future NOL
benefits under Internal Revenue Code Section 382(1)(5).
As a result of the adoption of Fresh-Start Accounting, the tax benefit of the
Company's net operating loss carryforwards and net deductible temporary
differences which existed as of the date of the Company's emergence from Chapter
11 result in a charge to the tax provision (provision in lieu of income taxes)
and are allocated to reorganization value in excess of amounts allocable to
identifiable assets established in connection with the Company's emergence from
bankruptcy and to capital surplus.
The Company has provided a valuation allowance as of September 30, 1996 for the
full amount of the tax benefit of its remaining NOLs and other deferred tax
assets. Income tax expense recorded for the three and nine month periods ended
September 30, 1996 and 1995 represents a provision primarily for federal,
foreign and state and local income taxes. For the three and nine month periods
ended September 30, 1996 the Company allocated approximately $1.0 million and
$4.5 million, respectively, of its tax provision to reorganization value in
excess of amounts allocable to identifiable assets (included in Miscellaneous in
the accompanying condensed consolidated balance sheets) thereby reducing this
balance to zero. The remaining utilization of NOLs and other deferred tax assets
have been applied to capital surplus for the three and nine month periods ended
September 30, 1996.
NOTE H Legal Proceedings
The Dynalectric Company ("Dynalectric"), a subsidiary of the Company, 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. In the action, which was instituted in 1988, 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.
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 a subsidiary of the Company Jamaica Water
Securities Corp. ("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.
The plaintiffs sought a declaration that JWSC succeeded to the Company's
obligations on the Warrants by reason of its 1977 acquisition of the Company's
96% stock interest in Jamaica Water Supply Company ("JWS"). The plaintiffs also
claimed that certain events constituted a disposition of the assets of JWS which
triggered the Warrants, obligating JWSC to issue shares of its own stock to
plaintiffs. In the alternative, plaintiffs claimed that the December 31, 1994
expiration date of the Warrants should be extended for some indefinite period of
time.
By a Decision and Order, entered on June 22, 1995, the court granted the
Company's motion to dismiss the plaintiffs' action holding that the assets of
JWS 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
Agreement to extend the December 31, 1994 deadline. The plaintiffs have appealed
the court's decision and oral arguments on the appeal were heard before the
Appellate Division Third Department of the State of New York on October 3, 1996.
To date, no decision has been rendered by the Appellate Division.
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 DPL Interiors, Inc., a company
allegedly owned by Mr. 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. Mr. Kohl was also charged with
filing false personal income and earnings tax returns, perjury 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 $7.0 million in kickbacks from subcontractors through a scheme in
which he allegedly inflated subcontracts on Herbert's construction contracts. At
a press conference in July 1995 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
Company's largest subsidiaries.
In addition to the above, the Company is involved in other legal proceedings and
claims asserted by and against the Company, 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 or assert these claims 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.
NOTE I Other
During the second quarter of 1996, the Company entered into an agreement with
one of its insurers to reinsure the Company's obligations to bear certain losses
incurred for insurance plan years from October 1, 1992 to September 30, 1995.
Under this agreement, amounts previously deposited by the Company with one of
its insurers as collateral to fund certain losses under the deductible portion
of its insurance program were returned to the Company and used to fund the cost
of the above agreement and to pay down, in July 1996, approximately $10.1
million of indebtedness under the New Credit Facility. The net effect upon the
Company of this transaction, which is reflected in the accompanying condensed
consolidated balance sheets as of September 30, 1996, was to reduce to zero the
funds deposited by the Company as cash collateral for certain losses and reduce
Other Long-Term Obligations by the same amount. As of September 30, 1996, the
Company is utilizing a $12.2 million letter of credit obtained under the New
Credit Facility referred to in Note E as collateral for its current insurance
obligations, and therefore presently is not required to deposit cash as
collateral for such obligations.
<PAGE>
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Results of Operations
Revenues for the third quarter of 1996 were $432.5 million compared to $403.9
million in the third quarter of 1995. In the third quarter of 1996 the Company
generated net income of $1.9 million or $0.19 per share compared to net income
of $0.6 million or $0.06 per share in the third quarter of 1995. The improvement
in net income in the third quarter of 1996 as compared to the same period in the
prior year is primarily due to continued improvements in job performance and a
reduction in the Company's cost of borrowing offset partially by an increase in
selling, general and administrative expenses discussed below.
Revenues for the nine months ended September 30, 1996 were $1,202.9 million
compared to $1,171.5 million in the same period in the prior year. For the nine
months ended September 30, 1996 the Company generated net income of $7.5 million
or $0.75 per share compared to a net loss of $12.1 million or $1.27 per share
for the nine months ended September 30, 1995. The improvement for the nine
months ended September 30, 1996 as compared to the same period in the prior year
is due to continued improvements in job performance, a reduction in the cost of
borrowing and a net after tax gain of $8.1 million ($12.5 pre-tax) on the sale
of certain assets held for sale including the sale of substantially all of the
assets of the Company's principal water supply subsidiary Jamaica Water Supply
Company ("JWS"), offset partially by an increase in selling, general and
administrative expenses discussed below. JWS and the Company's other water
supply subsidiary, Sea Cliff Water Company ("Sea Cliff"), are referred to
hereafter as the "Water Companies".
The Company generated operating income of $6.0 million for the three months
ended September 30, 1996 compared to operating income of $5.6 million in the
same period of the prior year. The improvement in operating income for the three
months ended September 30, 1996 was principally attributable to continued
improvements in gross profit due to cost control efforts and improved job
performance offset partially by an increase in selling, general and
administrative expenses due to the increased volume of operating activity. For
the nine months ended September 30, 1996, the Company had operating income of
$10.5 million compared to operating income of $1.0 million in the same period of
the prior year. The improvement in operating income for the nine months ended
September 30, 1996 was principally attributable to continued improvements in
gross profit due to cost control efforts and improved job performance offset
partially by an increase in selling, general and administrative expenses in the
first quarter of 1996 discussed below.
The increase in revenues for the third quarter of 1996 as compared to the same
period in the prior year was primarily attributable to the continued increase in
commercial construction activity in the Western United States. Revenues for the
nine month period ended September 30, 1996 increased slightly compared with the
year earlier periods. While revenues of business units operating in the Western
United States increased due to improved economic conditions, these increases
were substantially offset by decreased revenues in the Northeastern United
States resulting from, among other things, adverse weather conditions in the
first quarter of 1996 and increased competition, and in the Midwestern United
States due to reduced construction activity compared with 1995 and the Company's
earlier downsizing of its Midwestern operations and in the United Kingdom due to
decreased activity in the commercial construction market.
Selling, general and administrative expenses ("SG&A"), excluding general
corporate expenses, for the quarters ended September 30, 1996 and 1995 were
$32.0 million and $29.5 million, respectively, and for the nine month periods
ended September 30, 1996 and 1995 were $95.2 million and $90.6 million,
respectively. The increase in SG&A for the third quarter of 1996 compared to the
prior year's third quarter was primarily due to the increased volume of
operating activity. The increase in SG&A for the nine months ended September 30,
1996 was primarily attributable to an adverse arbitration award in the first
quarter of 1996 requiring the Company to pay $4.8 million in damages in
connection with a contract dispute involving its subsidiary T.L. Cholette, Inc.
In October 1996, the Company concluded its settlement of the arbitration award
for $4.3 million.
The Company's backlog was $1,082.5 million at September 30, 1996 and $1,060.7
million at December 31, 1995. Between December 31, 1995 and September 30, 1996,
the Company's backlog in the United States increased by $73.9 million, its
backlog in Canada decreased minimally and its backlog in the United Kingdom
decreased by $41.2 million. The increase in the Company's domestic backlog was
primarily attributable to improved economic conditions in the Midwestern and
Western United States. The decline in the United Kingdom backlog is due to the
continued progress on several large projects and the continued weakness in the
United Kingdom commercial construction market.
Net Assets Held For Sale
In May 1996, the Company completed the sale of substantially all of the assets
of JWS to The City of New York and the Water Authority of Western Nassau County
for an aggregate purchase price of approximately $179.0 million, subject to
post-closing adjustments; approximately $1.2 million of this purchase price is
being held in escrow pending determination of the post-closing adjustments. In
May 1996, the Company also completed the sale of all of the stock of Sea Cliff
to a subsidiary of Aquarion Company for approximately $2.6 million, subject to
post-closing adjustments; approximately $0.5 million of this purchase price is
being held in escrow for a period of approximately one year pending
determination of the post-closing adjustments and as collateral security for
certain indemnification obligations.
The sales proceeds from the sale of JWS' assets have been and will be applied
first to pay JWS liabilities and preferred stock obligations and to satisfy
minority stock interests in JWS and as a reserve for litigation involving
Warrants of Participation issued by the Company's predecessor (See Note H). Of
the balance, $15.0 million was used to repay a portion of indebtedness under the
Company's then outstanding working capital line and approximately $66.5 million
was used to redeem in full its Series A Notes. Approximately $2.8 million of the
proceeds from the sale of the stock of Sea Cliff and the sale of assets of JWS,
respectively, have been used to redeem, in part, the notes ("SellCo Notes")
issued by the Company's subsidiary SellCo Corporation ("SellCo"). In addition,
as the liabilities of JWS are finally determined, JWS' various contingent
liabilities are resolved, funds held in escrow under the sales agreements (the
"Sales Agreements") for the sale of the JWS assets and the stock of Sea Cliff
are released and post closing adjustments under the Sales Agreements are agreed
upon, additional amounts of the sales proceeds may become available, from time
to time, for additional redemptions of the SellCo Notes. (See Note F for
additional discussion regarding the proceeds from the sale of JWS' assets.)
The operating results of the remaining net assets held for sale have been
excluded from the condensed consolidated financial statements for the three and
nine month periods ended September 30, 1996 and 1995 since the operation of
these businesses will primarily only accrue to the benefit of the holders of the
SellCo Notes.
Liquidity and Capital Resources
The Company's consolidated cash balance decreased by $7.5 million from $53.0
million at December 31, 1995 to $45.5 million at September 30, 1996. The
September 30, 1996 cash balance included approximately $6.2 million in foreign
subsidiaries' bank accounts which accounts are available only to support their
respective operations. The Company generated positive operating cash flow for
the nine months ended September 30, 1996 due to working capital improvements
which has been used primarily to repay borrowings under the Company's working
capital credit lines and to fund capital expenditures resulting in the
consolidated cash balance decrease.
On June 19, 1996 the Company and its subsidiary Dyn Specialty Contracting Inc.
("Dyn") entered into a credit agreement with Harris Trust and Savings Bank
("Harris") providing the Company with up to a $100.0 million revolving credit
facility (the "New Credit Facility") for a three year period. The New Credit
Facility, which is guaranteed by certain direct and indirect U.S. subsidiaries
of the Company and is secured by substantially all of the assets of the Company
and those subsidiaries, currently provides for up to $50.0 million in borrowing
capacity and is available in the form of revolving loans ("Revolving Loans")
and/or letters of credit ("LCs" or "LC"). As amended on September 27, 1996, up
to the U.S Dollar equivalent of (pound)9.0 million can be borrowed by the
Company's United Kingdom subsidiary EMCOR (UK) Limited. The remaining $50.0
million in borrowing capacity is subject to receipt of additional commitments
from other banks, an earnings test, consents of bonding companies providing
surety bonds to the Company's Canadian and United Kingdom subsidiaries and these
subsidiaries guaranteeing the facility and collateralizing their guarantees with
their assets. The Revolving Loans bear interest at a variable rate representing
Harris' prime rate (8.25% at September 30, 1996) plus 1.0% - 2.0% based on
certain financial covenants, as defined. The interest rate on the Revolving
Loans was 9.25% at September 30, 1996. LC fees ranging from 1.50% to 3.25% are
charged based on the type of LC issued. The New Credit Facility expires on June
19, 1999. As of September 30, 1996, the Company had approximately $23.8 million
of LCs outstanding under the New Credit Facility. There were no Revolving Loans
outstanding as of September 30, 1996.
On December 14, 1994, the Company and certain of its subsidiaries entered into a
credit agreement (the "MES Credit Agreement") with lenders (collectively, the
"Lenders') providing the Company and MES Holdings Corp. ("MES"), a wholly-owned
subsidiary of the Company, with revolving credit loans (the "MES Loans") of up
to an aggregate amount of $35.0 million. The MES Loans were guaranteed by
certain direct and indirect United States subsidiaries of MES (the "U.S. MES
Subsidiaries") and were 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 and the proceeds of the sale of stock or assets of the Water
Companies to the extent of the first $15.0 million of such proceeds, subject to
the right to such proceeds of the Lenders under the Dyn Credit Agreement
referred to below.
Borrowings outstanding under the MES Credit Agreement and Dyn Credit Agreement
were repaid in part on June 12, 1996 from proceeds received by the Company from
the sale of the Water Companies and the balance was repaid on June 20, 1996 from
borrowings under the New Credit Facility at which time the credit agreements
were terminated.
Also on December 14, 1994, the Company, Dyn and Dyn's subsidiaries entered into
a credit agreement (the "Dyn Credit Agreement") with the Lenders providing
revolving credit loans (the "Dyn Loans") of up to an aggregate amount of $10.0
million. The Dyn Loans were guaranteed by Dyn's subsidiaries and were secured by
substantially all of the assets of Dyn and Dyn's subsidiaries and the proceeds
of the sale of stock or assets of the Water Companies to the extent of the first
$15.0 million of such proceeds, subject to the right to such proceeds of the
Lenders under the MES Credit Agreement.
Included in the accompanying condensed consolidated balance sheet as of
September 30, 1996 are approximately $66.0 million of the Company's Series C
Notes that were issued in connection with the Company's plan of reorganization.
The Series C Notes have been recorded at a discount to their face amount to
yield an estimated effective rate of 14.0%. Interest on the Series C Notes was
payable semiannually through June 15, 1996 by the issuance of additional Series
C Notes and is currently payable quarterly in cash. The Series C Notes mature on
December 15, 2001.
The accompanying condensed consolidated balance sheet as of September 30, 1996
reflects approximately $4.4 million of indebtedness evidenced by the Company's
promissory note (the "Supplemental SellCo Note") payable to its subsidiary
SellCo Corporation, which note was issued in connection with the Company's plan
of reorganization. The Supplemental SellCo Note has been recorded at a discount
to its face amount to yield an estimated effective interest rate of 14.0%.
Interest on the Supplemental SellCo Note is payable upon maturity. The
Supplemental SellCo 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.
In September, 1996, the Company's Canadian subsidiary, Comstock Canada Ltd.,
renewed a credit agreement with a bank providing for an overdraft facility of up
to Cdn. $2.0 million. The facility is secured by certain assets of Comstock
Canada Ltd. and deposit instruments of another Canadian subsidiary of the
Company. The facility provides for interest at the bank's prime rate (5.75% at
September 30, 1996) plus 3/4% and expires on June 30, 1997. There were no
borrowings outstanding under this credit agreement at September 30, 1996. The
Company is seeking to include its Canadian operations under the New Credit
Facility.
In September 1995, a number of the Company's U.K. subsidiaries renegotiated and
renewed a demand credit facility with a U.K. bank for a credit line of pounds
17.1 million (approximately U.S. $26.8 million). The credit facility consists of
the following components with the individual credit limits as indicated: an
overdraft line of up to pounds 9.0 million (approximately U.S. $14.1 million)
which overdraft line was subsequently reduced to (pound)7.0 million
(approximately U.S. $11.4 million); a facility for the issuance of guarantees,
bond and indemnities of up to pounds 7.3 million (approximately U.S. $11.4
million); and other credit facilities of up to pounds 0.8 million (approximately
U.S. $1.3 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 (5.75% as of September 30,
1996), plus 3.0% on the first pounds 5.0 million of borrowings and at the bank's
base rate plus 4.0% for borrowings over pounds 5.0 million. During the third
quarter of 1996, the Company obtained an $11.6 million LC under the New Credit
Facility for use as collateral for bonds issued under the U.K. facility
discussed above thereby releasing funds previously deposited as collateral for
those bonds. On October 1, 1996, the Company's U.K. subsidiaries replaced the
overdraft line with Revolving Loans under the New Credit Facility.
During the second quarter of 1996, the Company entered into an agreement with
one of its insurers to reinsure the Company's obligations to bear certain losses
incurred for insurance plan years from October 1, 1992 to September 30, 1995.
Under this agreement, amounts previously deposited by the Company with one of
the Company's insurers as collateral to fund certain losses under the deductible
portion of the Company's insurance program were returned to the Company and used
to fund the cost of the above agreement and to pay down, in July 1996,
approximately $10.1 million of indebtedness under the New Credit Facility. As of
September 30, 1996, the Company is utilizing a $12.2 million letter of credit
obtained under the New Credit Facility as collateral for its current insurance
obligations, and therefore presently is not required to deposit cash for such
obligations.
At September 30, 1996, the Company had a net operating loss carryforward ("NOL")
for U.S. income tax purposes expiring in years 2007 through 2011 which
approximates $215.0 million, subject to Internal Revenue Service approval.
However, a subsequent ownership change (as defined in Internal Revenue Code
Section 382) prior to December 15, 1996 would reduce to zero the future NOL
benefits under Internal Revenue Code Section 382(1)(5). The Company has provided
a valuation allowance as of September 30, 1996 for the full amount of the tax
benefit of its remaining NOLs and other deferred tax assets.
<PAGE>
PART II - OTHER INFORMATION
ITEM 1 - LEGAL PROCEEDINGS
The information in Note H to the Company's September 30, 1996 Notes to Condensed
Consolidated Financial Statements (unaudited) regarding legal proceedings is
hereby incorporated herein by reference thereto.
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibit 11. Computation of Earnings Per Common Share and Common Equivalent
Share for the three and nine month periods ended
September 30, 1996.
(b) No reports on Form 8-K were filed during the quarter ended September 30,
1996.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
EMCOR GROUP, INC.
---------------------------------
(Registrant)
Date: October 30, 1996 By: /s/FRANK T. MacINNIS
---------------------------------
Frank T. MacInnis
Chairman of the Board of
Directors, President and
Chief Executive Officer
Date: October 30, 1996 By: /s/LEICLE E. CHESSER
---------------------------------
Leicle E. Chesser
Executive Vice President
and Chief Financial Officer
<PAGE>
Exhibit 11
EMCOR Group, Inc. and Subsidiaries
Computation of Earning Per Common Share and Common Equivalent Share for the
three and nine month periods ending September 30, 1996.
Three Months Nine Months
Ended September Ended
PRIMARY 30, 1996 September 30,
1996
- --------------------------------------- ----------------- ---------------
Net Income $1,931,000 $7,485,000
================= ===============
Weighted average number of common
shares outstanding 9,513,788 9,468,083
Add - common equivalent shares using
the treasury stock method 562,470 453,338
----------------- ---------------
Weighted average number of shares
used in calculation of primary
income per common and equivalent
share 10,076,258 9,921,421
================= ===============
Primary net income per common and
common equivalent share $0.19 $0.75
================= ===============
Three Months Nine Months
Ended September Ended September
FULLY DILUTED 30, 1996 30, 1996
- --------------------------------------- ----------------- ---------------
Net Income $1,931,000 $7,485,000
================= ===============
Weighted average number of shares
used in calculating primary income
per share 10,076,258 9,921,421
Shares issuable upon exercise of
stock options included in primary
calculation above (562,470) (453,338)
Shares issuable upon exercise of
stock options at period end
market price 551,431 551,431
----------------- ---------------
Weighted average number of shares
used in calculation of fully
diluted income per common and
common equivalent share 10,065,219 10,019,514
================= ===============
Fully diluted net income per common
and common equivalent share $0.19 $0.75
================= ===============
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
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THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FORM FORM 10-Q
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<NAME> EMCOR GROUP, INC.
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