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 March 31, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES 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
Norwalk, Connecticut ----------
-------------------------------- (Zip Code)
(Address of principal executive offices)
(203) 849-7800
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(Registrant's telephone number)
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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
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Number of shares of Common Stock outstanding as of the close of business on
April 30, 1996: 9,424,706 shares.
<PAGE>
EMCOR GROUP, INC.
INDEX
Page No.
PART I - Financial Information
Item 1 Financial Statements
Condensed consolidated balance sheets -
as of March 31, 1996 and December 31, 1995 1
Condensed consolidated statements of operations -
three months ended March 31, 1996 and 1995 3
Condensed consolidated statements of cash flows -
three months ended March 31, 1996 and 1995 4
Condensed consolidated statement of stockholders'
equity for the three month period ended March 31, 1996 5
Notes to condensed consolidated financial statements 6
Item 2 Management's discussion and analysis of financial
condition and results of operations 12
PART II - Other Information
Item 1 Legal Proceedings 15
Item 6 Exhibits and Reports on Form 8-K 15
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1 FINANCIAL STATEMENTS
EMCOR Group, Inc. and Subsidiaries
CONDENSED CONSOLIDATED BALANCE SHEETS
(In Thousands)
- ------------------------------------------ ------------------ -----------------
March 31, December 31,
1996 1995
- ------------------------------------------ ------------------ -----------------
ASSETS (Unaudited)
Current Assets
Cash and cash equivalents $54,820 $53,007
Accounts receivable, net 410,502 435,974
Costs and estimated earnings in excess
of billings on uncompleted contracts 62,156 65,551
Inventories 9,519 8,031
Prepaid expenses and other 6,987 8,365
Net assets held for sale 63,819 61,969
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Total Current Assets 607,803 632,897
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Investments, Notes and Other Long-Term
Receivables 4,685 4,684
Property, Plant and Equipment, net 25,833 27,137
Other Assets
Insurance cash collateral 33,944 30,812
Miscellaneous 14,914 15,415
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48,858 46,227
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Total Assets $687,179 $710,945
================== =================
See notes to condensed consolidated financial statements.
<PAGE>
EMCOR Group, Inc. and Subsidiaries
CONDENSED CONSOLIDATED BALANCE SHEETS
(In Thousands, Except Share and Per Share Amounts)
- ------------------------------------------ ------------------ -----------------
March 31, December 31,
1996 1995
- ------------------------------------------ ------------------ -----------------
LIABILITIES AND STOCKHOLDERS' EQUITY (Unaudited)
Current Liabilities
Notes payable $14,240 $14,665
Borrowings under working capital
credit lines 25,000 25,000
Current maturities of long-term debt
and capital lease obligations 1,766 1,875
7% Senior Secured Notes (Series A) 63,819 61,969
Accounts payable 196,583 224,002
Billings in excess of costs and
estimated earnings on uncompleted
contracts 114,765 113,590
Accrued payroll and benefits 44,477 38,928
Other accrued expenses and liabilities 42,388 45,445
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Total Current Liabilities 503,038 525,474
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Long-Term Debt 70,354 68,240
Other Long-Term Obligations 47,137 46,621
Stockholders' Equity
Common Stock, $.01 par value,
13,700,000 shares authorized,
9,424,706 and 9,424,083 issued
and outstanding, respectively. 94 94
Warrants 2,179 2,179
Capital surplus 78,863 78,863
Cumulative translation adjustment 20 327
Accumulated Deficit (14,506) (10,853)
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Total Stockholders' Equity 66,650 70,610
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Total Liabilities and Stockholders'
Equity $687,179 $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)
- ------------------------------------------ ------------------ -----------------
Three months ended March 31, 1996 1995
- ------------------------------------------ ------------------ -----------------
Revenues $382,744 $386,015
Costs and Expenses
Cost of sales 345,572 354,148
Selling, general and administrative 36,643 34,771
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382,215 388,919
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Operating Income (Loss) 529 (2,904)
Interest Expense, Net 3,761 3,805
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Loss Before Income Taxes (3,232) (6,709)
Provision For Income Taxes 421 250
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Net Loss ($3,653) ($6,959)
================== =================
Loss Per Common Share and Common
Share Equivalent: ($0.37) ($0.74)
================== =================
See notes to condensed consolidated financial statements.
<PAGE>
EMCOR Group, Inc. and Subsidiaries
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands) (Unaudited)
- ------------------------------------------ ------------------ -----------------
Three months ended March 31, 1996 1995
- ------------------------------------------ ------------------ -----------------
CASH FLOWS FROM OPERATIONS:
Net loss ($3,653) ($6,959)
Non-cash expenses 4,163 4,689
Change in operating assets and liabilities 2,816 (1,813)
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NET CASH PROVIDED BY (USED IN) OPERATIONS
3,326 (4,083)
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CASH FLOWS FROM FINANCING ACTIVITIES:
Payments of working capital credit lines - (2,500)
Payments of long-term debt and capital
lease obligations (199) (315)
Change in notes payable, net (425) 1,232
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NET CASH USED IN FINANCING
ACTIVITIES (624) (1,583)
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CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property, plant and equipment (1,170) (1,689)
Proceeds from sales of property, plant and
equipment 281 -
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NET CASH USED IN INVESTING
ACTIVITIES (889) (1,689)
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INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS 1,813 (7,355)
CASH AND CASH EQUIVALENTS AT
BEGINNING OF PERIOD 53,007 52,505
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CASH AND CASH EQUIVALENTS AT
END OF PERIOD $54,820 $45,150
================== =================
SUPPLEMENTAL CASH FLOW INFORMATION
Cash Paid For:
Interest $1,449 $1,481
Income Taxes $62 $104
See notes to condensed consolidated financial statements.
<PAGE>
EMCOR Group, Inc. and Subsidiaries
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(In Thousands) (Unaudited)
- ------------------- ------- -------- -------- ------------ ------------ --------
Cumulative
Common Capital Translation Accumulated
Stock Warrants Surplus Adjustment Deficit Total
- ------------------- ------- -------- -------- ------------ ------------ --------
Balance, December
31, 1995 $94 $2,179 $78,863 $327 $(10,853) $70,610
Net Loss - - - - (3,653) (3,653)
Translation
Adjustments - - - (307) - (307)
------- -------- -------- ------------ ------------ --------
Balance, March 31,
1996 $94 $2,179 $78,863 $20 ($14,506) $66,650
======= ======== ======== ============ ============ ========
See notes to condensed consolidated financial statements
<PAGE>
================================================================================
EMCOR Group, Inc. and Subsidiaries
================================================================================
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 month period ended March 31, 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 Annual Report on Form 10-K filed with the Securities and Exchange Commission
(the "SEC") on March 13, 1996. The accompanying condensed consolidated financial
statements should be read in conjunction with the audited consolidated financial
statements included in the Form 10-K.
NOTE C NET LOSS PER COMMON SHARE AND COMMON EQUIVALENT SHARE
Net loss per common share and common equivalent share for the three month
periods ended March 31, 1996 and 1995 has been calculated based on the weighted
average number of shares of common stock outstanding and common stock
equivalents relating to stock options outstanding when the effect of such
equivalents are dilutive.
NOTE D CURRENT DEBT
MES CREDIT AGREEMENT - On December 14, 1994, the Company and certain of its
subsidiaries entered into a credit agreement with Belmont Capital Partners II,
L.P. ("Belmont") 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 $35.0
million. The MES Loans are guaranteed by certain direct or indirect United
States subsidiaries of MES (the " U.S. 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 and 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 $15.0 million of such proceeds, subject
to the rights to such proceeds of the Lenders under the Dyn credit facility
referred to below. The MES Loans bear interest on the principal amount thereof
at the rate of 15.0% per annum and mature on June 14, 1996. Borrowings under the
MES Credit Agreement, $25.0 million at March 31, 1996 and December 31, 1995, are
classified as current liabilities under the caption "Borrowings under working
capital credit lines" in the accompanying condensed consolidated balance sheets.
DYN CREDIT AGREEMENT - On December 14, 1994, the Company, Dyn Specialty
Contracting Inc. ("Dyn"), a wholly-owned subsidiary of the Company, 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 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 $15.0 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 15.0% per annum and mature on June 14, 1996. No borrowings were
outstanding under the Dyn Credit Agreement at March 31, 1996 and December 31,
1995.
The Company is actively seeking to replace or extend its existing credit
facilities that will expire in 1996.
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. A maximum of $7.2 million of Series A Notes are available
as of March 31, 1996 for issuance. The Series A Notes are guaranteed by MES and
SellCo Corporation ("SellCo"), a wholly-owned subsidiary of EMCOR which holds
the other stock of subsidiaries of EMCOR designated for sale. 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 pre-petition general unsecured
claims. The Company recorded the Series A Notes based upon an assumed total of
$100.0 million of pre-petition general unsecured claims after settlement of
disputed and unliquidated pre-petition general unsecured claims. Approximately
$4.7 million of the issued Series A Notes were redeemed prior to March 31, 1996.
The Series A Notes have been recorded at a discount to the face amount to yield
an estimated effective interest rate of 12.0%. 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 the
issuance of additional Series A Notes until maturity and substantially offsets
income generated from net assets held for sale for the three month periods ended
March 31, 1996 and 1995. The outstanding balance of the Series A Notes included
in the accompanying condensed consolidated balance sheet as of March 31, 1996 is
approximately $63.8 million. The outstanding face amount of the Series A Notes
at March 31, 1996 is approximately $64.9 million.
<PAGE>
NOTE E LONG-TERM DEBT
Long-Term Debt in the accompanying condensed consolidated balance sheets
consists of the following amounts at March 31, 1996 and December 31, 1995 (in
thousands):
=========================================
March 31, December 31,
1996 1995
=========================================
Series C Notes, original face value of
$62,827 at 11.0% discounted to a
14.0% effective rate, due 2001 $63,698 $61,494
Supplemental SellCo Note, original
face value of $5,464 at 8.0%
discounted to a 14.0% effective rate,
due 2004 4,112 4,112
Capitalized Lease Obligations at
weighted average interest rates from
7.25% to 11.0%, payable in varying
amounts through 2004 1,133 1,284
Other, at weighted average interest
rates of approximately 10.75%
payable in varying amounts through 3,177 3,225
2012
------------------- ---------------
72,120 70,115
Less current maturities (1,766) (1,875)
------------------- ---------------
$70,354 $68,240
=================== ===============
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 is
payable semiannually through June 15, 1996 by the issuance of additional Series
C Notes and thereafter is payable quarterly in cash. The Series C Notes are
unsecured indebtedness of the Company subordinate to (i) the Series A Notes and
(ii) up to $100.0 million of working capital indebtedness of the Company or MES
and 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 14.0%. Including accrued interest
paid-in-kind, the outstanding face amount of Series C Notes at March 31, 1996 is
approximately $69.0 million.
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 the SellCo Notes (hereafter
described) are deemed canceled. If at any time after the fifth anniversary of
the effective date of the Company's plan of reorganization 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
Supplemental SellCo Note has been recorded at a discount to its face amount to
yield an estimated effective interest rate of 14.0%. The outstanding face amount
of the Supplemental SellCo Note at March 31, 1996 is approximately $5.5 million.
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. 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 Lenders under the
MES and Dyn Credit Agreements with respect to proceeds (as defined) 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 that
required to redeem the Series A Notes and to prepay a portion of the
indebtedness under the MES and Dyn Credit Agreements, the SellCo Notes have been
netted in the caption "Net assets held for sale" in the accompanying condensed
consolidated balance sheets. 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. At this time, the Company cannot determine the amount of
net sale proceeds (as defined), if any, from the sale of SellCo's subsidiaries
that will be available to redeem SellCo Notes.
OTHER - Other long-term debt consists primarily of loans for real estate, office
equipment, automobiles and building improvements.
NOTE F NET ASSETS HELD FOR SALE
The operating results of net assets held for sale have been excluded from the
condensed consolidated financial statements for the three month periods ended
March 31, 1996 and 1995 since the operation of these businesses will only accrue
to the benefit of the holders of the SellCo Notes after payment in full of the
Series A Notes and certain other obligations (see Notes D and E). The condensed
consolidated balance sheet relating to net assets held for sale as of March 31,
1996 is as follows (in thousands):
Cash $4,084 Current maturities of
long-term debt and
Accounts receivable, net 19,535 capital lease obligations $12,173
Costs and estimated earnings Accounts payable
in excess of billings 6,744 Billings in excess of costs 10,926
Inventories 1,058 and estimated earnings 6,655
Other current assets 1,120 Other accrued expenses 28,679
---------- ---------
32,541 58,433
Long-term debt and capital
lease obligations 42,259
Property, plant and equipment, Other long-term liabilities 28,704
net 153,354
Other assets 7,320 Net assets held for sale 63,819
----------
=========
$193,215 $193,215
========== =========
NOTE G INCOME TAXES
The Company files a consolidated federal income tax return including all U.S.
subsidiaries. At March 31, 1996, the Company had a net operating loss
carryforward ("NOL") for U.S. income tax purposes expiring in years 2007 through
2010 which approximates $225.0 million, subject to Internal Revenue Service
approval. In addition, the Company has a U.S. capital loss carryover of
approximately $15.0 million expiring in 1998 and 1999. However, a subsequent
ownership change 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 or net deductible temporary
differences which existed as of the date of its emergence from Chapter 11 will
result in a charge to the tax provision (provision in lieu of income taxes) and
is 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 March 31, 1996 for the full
amount of the tax benefit of its NOLs and other deferred tax assets. Income tax
expense recorded for the three month periods ended March 31, 1996 and 1995
represents a provision primarily for foreign and state and local income taxes.
NOTE H LEGAL PROCEEDINGS
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 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, 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 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.
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 Warrants
Agreement to extend the December 31, 1994 deadline. The plaintiffs have appealed
the court's decision.
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.
<PAGE>
ITEM 2: MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
RESULTS OF OPERATIONS
Revenues for the first quarter of 1996 were $382.7 million compared to $386.0
million in the first quarter of 1995. In the first quarter of 1996 the Company
had a net loss of $3.7 million or $0.37 per share compared to a net loss of $7.0
million or $0.74 per share in the first quarter of 1995.
The Company generated operating income of $0.5 million for the three months
ended March 31, 1996 compared to a $2.9 million operating loss in the same
period of the prior year. The improvement to operating income for the first
three months of 1996 was principally attributable to continued improvements in
gross profit due to cost control efforts and favorable job closeouts offset
partially by an increase in selling, general and administrative expenses
discussed below.
Revenues remained substantially unchanged compared with the year earlier
periods. While revenues of business units operating in the Western United States
and Canada increased due to improved economic conditions, these increases were
offset by decreased revenues in the Eastern United States resulting from, among
other things, adverse weather conditions, and in the Midwestern United States
due to the Company's previous downsizing of those operations.
Selling, general and administrative expenses ("SG&A"), excluding general
corporate expenses, for the quarters ended March 31, 1996 and 1995 were $33.0
million and $31.0 million, respectively. The increase in SG&A was attributable
to an arbitration award requiring the Company to pay $4.8 million in damages in
connection with a contract dispute involving its subsidiary T.L. Cholette, Inc.
The Company is seeking to have the award set aside. SG&A decreased by $2.8
million, exclusive of the arbitration award, in the first quarter of 1996 as
compared to the same period in the prior year.
The Company's backlog was $1,119.7 million at March 31, 1996 and $1,060.7
million at December 31, 1995. The Company's backlog in the United States
increased by $68.8 million between December 31, 1995 and March 31, 1996, while
its backlog in Canada and the United Kingdom decreased by $5.4 million and $4.4
million, respectively. The increase in the Company's domestic backlog was
primarily attributable to improved economic conditions in the Western United
States. The decline in the Canadian backlog is principally attributable to the
downsizing of its Canadian operations while the decline in the United Kingdom
backlog is due to normal operating cycles.
GENERAL CORPORATE AND OTHER EXPENSES
General corporate expenses for the quarters ended March 31, 1996 and 1995 were
$3.6 million and $3.8 million, respectively. The decrease in general corporate
expenses in 1996 was attributable to the Company's continued cost reduction
efforts.
NET ASSETS HELD FOR SALE
The operating results of net assets held for sale have been excluded from the
condensed consolidated financial statements for the three month periods ended
March 31, 1996 and 1995 since the operation of these businesses will only accrue
to the benefit of the holders of notes issued by the Company's subsidiary,
SellCo Corporation, after payment in full of the Company's Series A Notes and
certain other obligations (See Note D in the accompanying Notes to Condensed
Consolidated Financial Statements). Net assets held for sale are recorded in the
condensed consolidated balance sheets at the lower of cost or estimated net
realizable value and are classified as current based on their estimated
disposition dates. The Company has entered into agreements to sell substantially
all of the stock and/or assets of its principal business held for sale,
collectively known as the "Water Companies".
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
The Company's consolidated cash balance increased by $1.8 million from $53.0
million at December 31, 1995 to $54.8 million at March 31, 1996. The March 31,
1996 cash balance included approximately $3.5 million in foreign bank accounts
and reflected $25.0 million borrowed under the Company's MES Credit Agreement
referred to below. The foreign bank accounts are available only to support the
Company's foreign operations. The positive operating cash flow was due to
working capital improvements in the first quarter of 1996.
On December 14, 1994, the Company and certain of its subsidiaries entered into a
credit agreement with 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
are guaranteed by certain direct and indirect United States subsidiaries of MES
(the "U.S. 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 and 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 $15.0 million of such proceeds, subject to the rights to
such proceeds of the lenders under the Dyn Credit Agreement referred to below.
The MES Loans bear interest on the principal amount thereof at the rate of 15.0%
per annum, and mature on June 14, 1996. Borrowings under the MES Credit
Agreement, $25.0 million at March 31, 1996, are classified as current
liabilities under the caption "Borrowings under working capital credit lines" in
the accompanying condensed consolidated balance sheets.
Also on December 14, 1994, the Company, its subsidiary Dyn Specialty Contracting
Inc. ("Dyn") and Dyn's subsidiaries entered into a credit agreement (the "Dyn
Credit Agreement") with lenders providing revolving credit loans (the "Dyn
Loans") of up to an aggregate amount of $10.0 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 $15.0 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 15.0% per annum, and mature on June 14, 1996. No
borrowings were outstanding under the Dyn Credit Agreement at March 31, 1996.
Included in the accompanying condensed consolidated balance sheet as of March
31, 1996 are approximately $63.8 million of Series A Notes that were issued or
reserved for issuance in connection with the Company's emergence from
bankruptcy. The Series A Notes have been recorded at a discount to the face
amount to yield an estimated effective interest rate of 12.0%. Interest on the
Series A Notes is payable semiannually by the issuance of additional Series A
Notes until maturity and substantially offsets income generated from net assets
held for sale for the three month periods ended March 31, 1996 and 1995.
Also included in the accompanying condensed consolidated balance sheet as of
March 31, 1996 are approximately $63.7 million of the Company's Series C Notes
that were issued in connection with the Company's emergence from bankruptcy. 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 is payable
semiannually through June 15, 1996 by the issuance of additional Series C Notes
and thereafter is payable quarterly in cash.
The accompanying condensed consolidated balance sheet as of March 31, 1996
reflects approximately $5.5 million of a promissory note (the "Supplemental
SellCo Note") payable to the Company's subsidiary SellCo Corporation, which note
was issued in connection with the Company's emergence from bankruptcy. 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.
In June 1995, the Company's Canadian subsidiary, Comstock Canada, entered into a
credit agreement providing for an overdraft facility of up to Canadian $2.0
million. The facility is secured by certain assets of Comstock Canada and
deposit instruments of a Canadian subsidiary of the Company. The facility
provides for interest at the bank's prime rate (6.75% at March 31, 1996) plus
3/4% and expires on September 30, 1996. There were no borrowings outstanding
under this credit agreement at March 31, 1996.
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. $26.1 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. $13.7 million); a
facility for the issuance of guarantees, bond and indemnities of up to pounds
7.3 million (approximately U.S. $11.2 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 (6.5% as of March 31, 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. This credit facility, as amended, expires June 30, 1996.
As of March 31, 1996, the Company's U.K. subsidiaries had utilized approximately
$22.4 million of the credit facilities as follows: approximately $13.1 million
of borrowings under the overdraft line, approximately $8.2 million for the
issuance of guarantees, and approximately $1.1 million under other credit
facilities.
The Company is actively seeking to replace or extend its existing credit
facilities that will expire in 1996.
On November 4, 1994, the Company's two water supply subsidiaries Jamaica Water
Supply Company ("JWS") and Sea Cliff Water Company ("SCW"), entered into a
credit agreement providing for a credit facility to JWS of $17.9 million and for
a credit facility to SCW of $2.1 million at an interest rate based upon either
prime rate, LIBOR plus 5/8% or bid rate, as those terms are defined in the
credit agreement. These borrowings are reflected as current liabilities in the
condensed consolidated balance sheet of "Net assets held for sale" which is
presented in Note F to the condensed consolidated financial statements. This
credit agreement has been extended from November 4, 1995 to August 1, 1996.
During the period from November 4, 1995 to August 1, 1996, the Company's
borrowings are limited to $12.0 million for JWS. JWS' obligations under the
credit agreement become due and payable on the earlier of (a) August 1, 1996 or
(b) the tenth business day following any disposition by JWS outside the ordinary
course of business of assets with an aggregate value in excess of $5,000,000.
Sea Cliff's obligations under the credit agreement become due and payable on the
earlier of (a) August 1, 1996 or (b) the tenth business day following any
disposition by JWS outside the ordinary course of business of assets with an
aggregate fair market value in excess of $5,000,000, (c) a distribution by JWS
to its stockholders of the proceeds of such disposition, or (d) a disposition by
Sea Cliff outside the ordinary course of business of assets with an aggregate
fair market value in excess of $50,000.
At March 31, 1996, the Company had a net operating loss carryforward ("NOL") for
U.S. income tax purposes expiring in years 2007 through 2010 which approximates
$225.0 million, subject to Internal Revenue Service approval. In addition, the
Company has a U.S. capital loss carryover of approximately $15.0 million
expiring in 1998 and 1999. However, a subsequent ownership change 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 March 31, 1996 for the full amount of the tax benefit of its NOLs and
other deferred tax assets.
<PAGE>
PART II - OTHER INFORMATION
ITEM 1 - LEGAL PROCEEDINGS
The information in Note H to the Company's March 31, 1996 Notes to Condensed
Consolidated Financial Statements (unaudited) regarding legal proceedings is
hereby incorporated herein by reference thereto.
In addition, in connection with a contract dispute involving the Company's
subsidiary T.L. Cholette, Inc. ("Cholette") and Gallagher Kaiser, Inc. ("GK"), a
general contractor with whom Cholette contracted, an arbitration panel in April
1996 awarded damages against Cholette and in favor of GK in the amount of
$4,835,702. Also in April 1996, Cholette commenced an action against GK in the
Circuit Court for the County of Wayne, State of Michigan to have the arbitration
award vacated alleging the arbitrators exceeded their powers and/or committed
material and/or substantive errors of law and fact, ignored the controlling,
material, and/or essential provisions of law and the contract, and acted in
manifest disregard of the law. GK has commenced an action in the same court
seeking to have judgment entered upon the arbitration award in GK's favor.
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit No. 27. Financial Data Schedule. Page.
(b) During the quarter ended March 31, 1996, the Company filed Reports on
Form 8-K dated February 5, 1996, February 29, 1996 and March 29, 1996
reporting information with respect to Item 5.
<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: May 10, 1996 By: /s/FRANK T. MacINNIS
-----------------------------------
Frank T. MacInnis
Chairman of the Board of
Directors, President and
Chief Executive Officer
Date: May 10, 1996 By: /s/LEICLE E. CHESSER
-----------------------------------
Leicle E. Chesser
Executive Vice President
and Chief Financial Officer
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FORM 10-Q AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH FINANCIAL STATEMENTS
</LEGEND>
<CIK> 0000105634
<NAME> EMCOR GROUP, INC.
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