10-K 1 c23256_10-k.txt CURRENT REPORT ================================================================================ SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K ---------- ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 2001 COMMISSION FILE NUMBER 0-2315 EMCOR GROUP, INC. (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) DELAWARE 11-2125338 (STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER INCORPORATION OR ORGANIZATION) IDENTIFICATION NUMBER) 101 MERRITT SEVEN CORPORATE PARK 06851-1060 NORWALK, CONNECTICUT (ZIP CODE) (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE (203) 849-7800 SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT: COMMON STOCK, PAR VALUE $.01 PER SHARE (Title of each class) SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT: NONE Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [_] Indicate by check mark if disclosure of delinquent filings pursuant to Item 405 Regulation S-K is not contained herein, and will not be contained, to the best of Registrant's knowledge, in Part III of this Form 10-K to be filed as an amendment hereto. [_] Indicate by check mark whether the Registrant has filed all documents and reports required to be filed by Section 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court. Yes [X] No [_] The aggregate market value of the Registrant's voting stock held by non-affiliates of the Registrant on December 31, 2001 was approximately $670,000,000. Number of shares of Common Stock outstanding as of the close of business on February 19, 2002: 14,822,084 shares. ================================================================================ TABLE OF CONTENTS PAGE PART I Item 1. Business General ......................................................... 1 The Business .................................................... 1 Competition ..................................................... 4 Employees ....................................................... 4 Backlog ......................................................... 4 Item 2. Properties ........................................................ 5 Item 3. Legal Proceedings ................................................. 7 Item 4. Submission of Matters to a Vote of Security Holders ............... 7 PART II Item 5. Market for the Registrant's Common Equity and Related Stockholder Matters ............................................... 9 Item 6. Selected Financial Data ........................................... 10 Item 7. Management's Discussion and Analysis of Results of Operations and Financial Condition ........................................... 11 Item 8. Financial Statements and Supplementary Data ....................... 17 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure .......................................... 39 PART III Item 10. Directors and Executive Officers of the Registrant ................ 39 Item 11. Executive Compensation ............................................ 39 Item 12. Security Ownership of Certain Beneficial Owners and Management .... 39 Item 13. Certain Relationships and Related Transactions .................... 39 PART IV Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K ... 40 PART I ITEM 1. BUSINESS GENERAL EMCOR Group, Inc. ("EMCOR") is one of the largest mechanical and electrical construction and facilities services firms in the United States, Canada, the United Kingdom and in the world. In 2001, EMCOR had revenues of more than $3.4 billion. EMCOR provides services to a broad range of commercial, industrial, utility, and institutional customers through approximately 51 principal operating subsidiaries, joint ventures and a majority-owned interest in a limited liability company. EMCOR has offices in 30 states and the District of Columbia in the United States, eight provinces in Canada and ten primary locations in the United Kingdom. In the United Arab Emirates, Saudi Arabia and South Africa, EMCOR carries on business through joint ventures. EMCOR's executive offices are located at 101 Merritt Seven Corporate Park, Norwalk, Connecticut 06851-1060, and its telephone number at those offices is (203) 849-7800. EMCOR specializes in the design, integration, installation, start-up, operation and maintenance of: o Systems for generation and distribution of electrical power; o Lighting systems; o Low-voltage systems, such as fire alarm, security, communications and process control systems; o Voice and data communications systems; o Heating, ventilation, air conditioning, refrigeration and clean-room process ventilation systems; and o Plumbing, process and high-purity piping systems. EMCOR also provides services needed to support the operation of customers' facilities, which services are not related to customers' construction programs. These services, frequently referred to as facilities services, include site based operations and maintenance, mobile maintenance and service, consulting, program development and management for energy systems, and maintenance of facilities. Facilities services are provided to a wide range of commercial, industrial, utility and institutional facilities, including those at which EMCOR provided construction services and others at which construction services were provided by other contractors. EMCOR's varied facilities services are frequently combined to provide integrated service packages which include mechanical, electrical and other services. EMCOR provides mechanical and electrical construction services and facilities services directly to corporations, municipalities and other governmental entities, owners/developers and tenants of buildings. It also provides these services indirectly by acting as a subcontractor to construction managers, general contractors, systems suppliers and other subcontractors. Worldwide, EMCOR employs approximately 20,000 people. EMCOR's revenues are derived from many different customers in numerous industries which have operations in several different geographical areas. Of EMCOR's 2001 revenues, approximately 80% were generated in the United States and approximately 20% were generated internationally. In 2001, approximately 46% of revenues were derived from new construction projects, while the remaining 54% were derived from renovation and retrofit of customers' existing facilities (38%) and facilities services operations (16%) (the renovation and retrofit work and facilities services operations are sometimes referred to by stock analysts as "MRR" or maintenance, repair and replacement and by industry analysts as maintenance, repair and operation or "MRO"). For the period 1998 through 2001, revenues and EBITDA (earnings before interest, taxes, depreciation and amortization) grew at compound annual growth rates of 15.7% and 30.8%, respectively. On February 11, 2002, EMCOR entered into an agreement with Comfort Systems USA, Inc. ("Comfort Systems") to acquire nineteen of Comfort Systems' subsidiaries. The companies to be acquired had 2001 revenues of approximately $650 million and employ approximately 3,800 technical and service employees in 11 states. These companies, which are predominantly in the Midwest and New Jersey, are active in the installation and maintenance of mechanical systems, including the design and installation of process and fire protection systems, and provide services to a wide variety of industries, including the food processing, pharmaceutical and manufacturing/distribution sectors. THE BUSINESS The broad scope of EMCOR's operations are more particularly described below. MECHANICAL AND ELECTRICAL CONSTRUCTION SERVICES AND FACILITIES SERVICES EMCOR believes that the mechanical and electrical construction services and facilities services business is highly fragmented, consisting of thousands of small companies across the United States and around the world. Because EMCOR has total assets, annual revenues, net worth, access to bank credit and surety bonding, and expertise significantly greater than most of its competitors, EMCOR believes 1 it has a significant competitive advantage. The mechanical and electrical construction services industry has a higher growth rate than the overall construction industry, due principally to the increase in content and complexity of mechanical and electrical systems in all types of projects. This increased content and complexity is, in part, a result of the expanded use of computers and more technologically advanced voice and data communications, lighting, and environmental control systems in all types of facilities. For these reasons, buildings of all types consume more electricity per square foot than in the past and thus need more extensive electrical distribution systems. In addition, advanced voice and data communication systems require more sophisticated power supplies and extensive low voltage and fiber-optic communications cabling. Moreover, the need for greater environmental controls within a building, such as the heightened need for climate control to maintain extensive computer systems at optimal temperatures, and the growing demand for environmental control in individual spaces, have created expanded opportunities for the mechanical and electrical construction services and facilities services businesses. Mechanical and electrical construction services primarily involve the design, integration, installation and start-up of: (1) systems for the generation and distribution of electrical power, including power cables, conduits, distribution panels, transformers, generators, uninterruptible power supply systems and related switch gear and controls; (2) lighting systems, including fixtures and controls; (3) low-voltage systems, including fire alarm, security, and process control systems; (4) voice and data communications systems, including fiber-optic and low voltage copper cabling; (5) heating, ventilation, air conditioning, refrigeration and clean-room process ventilation systems and (6) plumbing, process and high-purity piping systems. Mechanical and electrical construction services generally fall into one of two categories: (1) large installation projects with contracts often in the multi-million dollar range that involve construction of industrial and commercial buildings and institutional and public works facilities or the fit-out of large blocks of space within commercial buildings and (2) smaller installation projects typically involving fit-out, renovation and retrofit work. EMCOR's mechanical and electrical construction services operations accounted for 84% of its 2001 revenues, of which approximately 52% of revenues was related to new construction and approximately 48% was related to renovation and retrofit projects. EMCOR provides mechanical and electrical construction services for both large and small installation and renovation projects. Its largest projects include those (1) for institutional use (such as water and wastewater treatment facilities, hospitals, correctional facilities, schools and research laboratories); (2) for industrial use (such as pharmaceutical factories, steel, pulp and paper mills, chemical, automotive and semiconductor plants, and oil refineries); (3) for transportation systems (such as airports and transit systems); (4) for commercial use (such as office buildings, data centers, hotels, casinos, convention centers, sports stadiums, shopping malls and resorts) and (5) for power generation and power management projects. EMCOR's largest projects, typically in excess of $10.0 million, are usually multi-year projects and range in size up to, and occasionally in excess of, $50.0 million. These projects represented about 21% of EMCOR's construction services revenues in 2001. EMCOR's projects of less than $10.0 million accounted for approximately 79% of 2001 construction services revenues. These projects are typically completed in less than a year. They usually involve mechanical and electrical construction services when an end-user or owner undertakes construction or modification of a facility to accommodate a specific use. These projects frequently require mechanical and electrical systems to meet special needs such as redundant power supply systems, special environmental controls and high-purity air systems, sophisticated electrical and mechanical systems for data centers, including those associated with internet service providers and electronic commerce, trading floors in financial services businesses, new production lines in manufacturing plants and office arrangements in existing office buildings. These types of projects are not usually dependent upon the new construction market. Demand for them is often prompted by the expiration of leases, changes in technology or changes in the customer's plant or office layout in the normal course of a customer's business. EMCOR performs its services pursuant to contracts with owners, such as corporations, municipalities and other governmental entities, general contractors, systems suppliers, construction managers, developers, other subcontractors and tenants of commercial properties. Institutional and public works projects are frequently long-term, complex projects that require significant technical and management skills and the financial strength to, among other things, obtain bid and performance bonds, which are often a condition to bidding for, and award of these projects. EMCOR also installs and maintains street, highway, bridge and tunnel lighting, traffic signals, computerized traffic control systems and signal and communication systems for mass transit systems in several metropolitan areas. In addition, in the United States, EMCOR manufactures and installs sheet metal air handling systems for both its own mechanical construction operations and for unrelated mechanical contractors. EMCOR also maintains welding and pipe fabrication shops for some of its own mechanical operations. EMCOR also provides customers with facility support services which are not related to construction projects. These services, frequently referred to as facilities services, generated approximately 16% of 2001 revenues. Following completion of construction projects, EMCOR has historically provided technical support services to many of its customers, which has involved maintenance and service of mechanical and electrical systems. In addition, EMCOR provides other services to owners, operators, tenants and managers of all types of facilities both on a contract basis for a specified period of time and on an individual task order basis. 2 Facilities services include customer-based operations and maintenance, mobile maintenance service, small modification and retrofit projects, consulting, program development and management for energy systems and maintenance activities. These services are provided to a wide range of commercial, industrial and institutional facilities, including both those for which EMCOR provided construction services and those for which construction services were provided by others. The services are frequently bundled to provide integrated service packages and may include services in addition to EMCOR's core mechanical and electrical services. EMCOR has experienced an expansion in the demand for its facilities services which it believes is driven by customers' downsizing programs and their focus on their own core competencies, the increasing technical complexity of their facilities and their mechanical, electrical, voice and data and other systems, and the need for increased reliability, especially in mechanical and electrical systems. These trends have led to outsourcing and privatization programs whereby customers in both the private and public sectors seek to contract out those activities that support but are not directly involved in the customer's business. In the early 1990's, the market for facilities services grew rapidly in the United Kingdom as a result of government initiatives. EMCOR's United Kingdom subsidiary expanded its traditional technical service business in response to these opportunities and established a dedicated unit to focus on the facilities services business. This unit currently provides a full range of facilities services to public and private sector customers under multi-year agreements, including maintaining British Airways' facilities at Heathrow and Gatwick Airports, GlaxoSmithKline research laboratories, the Department of Trade and Industry offices in London, and the Jubilee Line Extension of the London Underground. In the United Kingdom, EMCOR also provides facilities services at several manufacturing plants for British Aerospace. In addition, the United Kingdom operations provide on-call and mobile service support on a task-order or contract basis, small renovation project work, data communications, security system installation, and maintenance services. EMCOR, by virtue of its construction and facilities services expertise, is involved with private finance initiatives ("PFIs") sponsored by the British government. The PFIs, which involve governmental bodies responsible, among other things, for the national healthcare system, social security, air traffic control, schools, and hospitals, seek to transfer ownership and management of United Kingdom government facilities, including office buildings and institutional buildings, to groups of financial institutions, consulting service organizations, and others, which competitively bid for PFI contracts. EMCOR has been awarded several contracts by such groups to provide mechanical and electrical services, grounds maintenance and other ancillary services for periods typically ranging from 5 to 35 years at buildings which were formerly owned and managed by government bodies and privatized as part of the PFI program. EMCOR has built on its United Kingdom experience to market its facilities services business to international markets and currently provides facilities services through a joint venture to several companies in South Africa. In 1997, EMCOR established a subsidiary to expand its facilities services operations in North America patterned on its United Kingdom business. This unit has built on existing mechanical and electrical services capabilities, facilities services activities at existing facilities services subsidiaries, and EMCOR's client relationships in order to expand the scope of services currently offered and to develop packages of services for customers on a regional, national and global basis. The facilities services operations have also used acquisitions to expand services offered. In addition, management also has targeted growth in facilities services opportunities arising from the deregulation of the electric utility industry, deregulation and expansion of the telecommunications industry and the REIT-driven consolidation of the commercial real estate industry. In April 2000, EMCOR and CB Richard Ellis Inc., a nationwide real estate management company, created a limited liability company in which EMCOR has a majority interest. Facilities services include the operation, maintenance and supervision of building systems including heating, air conditioning, plumbing, lighting, ventilating, electrical control and energy management systems. The deregulation of, and increased competition in, the utility industry, along with government mandates calling for reduced energy consumption by government entities, have led to renewed focus on energy costs and conservation measures. These measures typically include energy assessments and engineering studies, retrofit construction to implement energy savings measures, and the long-term operation and maintenance of energy savings measures to ensure continued performance. Various subsidiaries of EMCOR participate in energy savings programs, and EMCOR believes it has the ability to be a single source provider of construction and facilities services required for energy assessment and design, installation, and operations and maintenance of energy savings measures. EMCOR has also responded to opportunities in the rapidly changing electric power generation market. Some of the projects awarded during 2001 included: (1) fast-track electrical construction of eleven 40 megawatt peaking service turbine generators at seven locations in New York City and Long Island for the New York Power Authority; (2) return to service of a 2,200 megawatt nuclear generating station in Pickering, Ontario and (3) mechanical installation at a new 1,048 megawatt natural gas-fired combined cycle power plant in McKittrick, California. In addition, EMCOR continues to support its clients on the demand side of the energy market by constructing new cogeneration and central power plants, as well as planning and implementing energy management programs. EMCOR has also been successful in obtaining contract awards in the public infrastructure markets in 2001. Some examples of major awards in this area include: (1) total mechanical installation for the 40,000 seat open-air stadium for the University of Connecticut in Hartford; (2) expansion of the central chiller plant at the Miami, Florida International Airport which includes the construction of a 59,000 square foot 10 story facility that will add 16,390 tons of cooling capacity; (3) electrical work for the north runway improvements at the 3 Miami International Airport; (4) mechanical installation at a new 11 story, 300,000 square foot research center for Harvard Medical School in Boston, Massachusetts; (5) electrical installation at a 30 million gallon wastewater treatment facility in Detroit, Michigan and (6) electrical installation on the "T-Rex" light rail and highway expansion project on Interstates 25 and 225 in Denver, Colorado. The deregulation and expansion of the telecommunications industry have led to a rapid expansion of installed infrastructure, including wireless communication systems and long distance networks, much of which has been built by companies that do not have existing maintenance operations and which seek to contract out such services. EMCOR has provided construction services for the infrastructure of telecommunications companies and facilities services to support their operations. In this industry, EMCOR has installed and maintained equipment for suppliers such as Lucent, Nortel, and Siemens, and has provided construction and maintenance services to local service providers and to users who maintain their own systems. EMCOR offers facilities services to customers on single-task and multi-task basis depending on a customer's needs, under either short-term or multi-year agreements. Services include mobile services dispatched from EMCOR's locations, as well as site based operations and maintenance service which often require that its employees be permanently assigned to customer premises twenty-four hours per day. EMCOR believes mechanical and electrical construction services and facilities services activities are complementary, permitting it to offer customers a comprehensive package of services. The ability to offer both construction and facilities services should enhance EMCOR's competitive position with customers. Furthermore, EMCOR's facilities services operations tend to be less cyclical than its construction operations because facilities services are more responsive to the needs of an industry's operations requirements rather than its construction requirements. COMPETITION EMCOR believes that the mechanical and electrical construction services business is highly fragmented and competitive. A majority of EMCOR's revenues are derived from projects requiring competitive bids; however, an invitation to bid is often conditioned upon prior experience, technical capability and financial strength. EMCOR competes with national, regional and local companies, many of which are small, owner-operated entities that operate in a limited geographic area. There are few public companies focused on providing mechanical and electrical construction services, although in the last five years more public national and regional firms have been established. EMCOR is one of the largest providers of mechanical and electrical construction services in the United States, Canada, the United Kingdom and in the world. In the future, significant competition may be encountered from public utilities and companies attempting to consolidate mechanical and electrical construction services companies. Competitive factors in the mechanical and electrical construction services business include: (1) the availability of qualified and/or licensed personnel; (2) reputation for integrity and quality; (3) safety record; (4) cost structure; (5) relationships with customers; (6) geographic diversity; (7) the ability to control project costs; (8) experience in specialized markets; (9) the ability to obtain surety bonding; (10) adequate working capital; and (11) access to bank credit. While the facilities services business is also highly fragmented, a number of large corporations such as Johnson Controls, Inc. and Fluor Corp. are engaged in this field, and there are other companies seeking to consolidate facilities services businesses. EMCOR's facilities services operations are well established in the United Kingdom and are being developed through the growth of EMCOR's existing operations in the United States, including its limited liability company owned jointly with CB Richard Ellis Inc. EMPLOYEES EMCOR presently employs approximately 20,000 people, approximately 75% of whom are represented by various unions pursuant to more than 225 collective bargaining agreements between EMCOR's individual subsidiaries and local unions. EMCOR believes that its employee relations are generally good. None of these collective bargaining agreements are nationwide or regional in scope. BACKLOG EMCOR had backlog as of December 31, 2001 of approximately $2.4 billion, compared with backlog of approximately $1.8 billion as of December 31, 2000. Backlog includes facilities services revenues to be derived during the immediately succeeding 12 months pursuant to then existing contracts. Backlog increased by $0.6 billion as of December 31, 2001 compared to December 31, 2000. Backlog attributable to United States construction and facilities services increased approximately $0.4 billion as of December 31, 2001 when compared to December 31, 2000, and backlog attributable to Canada and United Kingdom construction and facilities services increased approximately $0.2 billion as of December 31, 2001 when compared to December 31, 2000. For the year ended December 31, 2001, EMCOR had approximately $3.42 billion in revenues compared to more than $3.46 billion in revenues for the year ended December 31, 2000. 4 ITEM 2. PROPERTIES The operations of EMCOR are conducted primarily in leased properties. The following table lists major facilities, both leased and owned: LEASE EXPIRATION APPROXIMATE DATE, UNLESS SQUARE FEET OWNED --------- ------------ CORPORATE HEADQUARTERS 101 Merritt Seven Corporate Park Norwalk, Connecticut ................ 20,805 4/7/05 OPERATING FACILITIES 1200 North Sickles Drive Tempe, Arizona ...................... 29,000 Owned 4050 Cotton Center Boulevard Phoenix, Arizona .................... 9,704 2/28/06 1000 N. Kraemer Place Anaheim, California ................. 20,228 6/30/02 4520 California Avenue Bakersfield, California ............. 12,682 8/31/05 3208 Landco Drive Bakersfield, California ............. 49,875 6/30/02 1166 Fesler Street El Cajun, California ................ 42,760 8/31/10 25601 Clawiter Road Hayward, California ................. 34,800 6/30/03 24041 Amador Street Hayward, California ................. 40,000 10/31/11 5 Vanderbilt Irvine, California .................. 18,000 7/31/04 4462 Corporate Center Drive Los Alamitos, California ............ 57,863 7/31/06 4464 Alvarado Canyon Road San Diego, California ............... 40,000 10/31/07 825 Howe Road Martinez, California ................ 109,800 12/31/02 414 Brannan Street San Francisco, California ........... 10,283 3/31/03 9505 and 9525 Chesapeake Drive San Diego, California ............... 25,124 12/31/06 4405 and 4420 Race Street Denver, Colorado .................... 17,704 9/30/11 345 Sheridan Boulevard Lakewood, Colorado .................. 63,000 Owned 367 and 377 Research Parkway Meriden, Connecticut ................ 27,700 7/31/04 and 6/30/04 1781 N.W. North River Drive Miami, Florida ...................... 11,285 Owned 5801 Miami Lakes Drive Miami Lakes, Florida ................ 10,000 5/31/03 3145 Northwoods Parkway Norcross, Georgia ................... 25,808 1/31/06 5 LEASE EXPIRATION APPROXIMATE DATE, UNLESS SQUARE FEET OWNED --------- ------------ 2100 South York Road Oak Brook, Illinois ........................ 87,700 5/31/08 2655 Garfield Road Highland, Indiana .......................... 45,816 6/30/06 300 Walnut Street Owensboro, Kentucky ........................ 20,600 1/07/04 4530 Hollins Ferry Road Baltimore, Maryland ........................ 26,792 Owned 306 Northern Avenue Boston, Massachusetts ...................... 47,456 6/30/05 70-70D Hawes Way Stoughton, Massachusetts ................... 24,400 12/31/05 22925-22931 Industrial Drive West St. Clair Shores, Michigan ................. 19,000 4/30/05 1743 Maplelawn Troy, Michigan ............................. 22,000 4/30/06 6060 Hix Road Westland, Michigan ......................... 23,000 12/31/03 3555 W. Oquendo Road Las Vegas, Nevada .......................... 90,000 11/30/03 6325 South Valley Boulevard Las Vegas, Nevada .......................... 23,190 12/31/04 6754 W. Washington Avenue Pleasantville, New Jersey .................. 45,400 1/14/03 26 West Street Brooklyn, New York ......................... 15,000 Owned 111-01 and 109-15 14th Avenue College Point, New York .................... 82,000 2/28/11 301 and 305 Suburban Avenue Deer Park, New York ........................ 33,535 3/31/05 111 West 19th Street New York, New York ......................... 26,885 5/31/03 Two Penn Plaza New York, New York ......................... 57,200 2/01/06 4906 Barrow Avenue Cincinnati, Ohio ........................... 16,300 9/30/03 4914 Ridge Avenue Cincinnati, Ohio ........................... 8,100 9/30/03 2300-2310 International Street Columbus, Ohio ............................. 25,500 10/31/05 5550 Airline Drive Houston, Texas ............................. 78,483 12/31/09 515 Norwood Road Houston, Texas ............................. 26,676 12/31/09 1574 South West Temple Salt Lake City, Utah ....................... 64,170 12/31/06 2925-2941 Space Road Richmond, Virginia ......................... 26,000 8/19/03 22930 Shaw Road Dulles, Virginia ........................... 32,600 7/31/06 6 LEASE EXPIRATION APPROXIMATE DATE, UNLESS SQUARE FEET OWNED --------- ------------ 109-D Executive Drive Dulles, Virginia ........................... 19,000 8/31/04 1 Thameside Centre Kew Bridge Road Kew Bridge, Middlesex, United Kingdom ...... 14,000 12/22/12 86 Talbot Road Old Trafford, Manchester, United Kingdom ... 24,300 12/24/06 2116 Logan Avenue Winnipeg, Manitoba, Canada ................. 19,800 Owned 3455 Landmark Boulevard Burlington, Ontario, Canada ................ 16,100 Owned EMCOR believes that all of its property, plant and equipment are well maintained, in good operating condition and suitable for the purposes for which they are used. See Note K to the consolidated financial statements for additional information regarding lease costs. EMCOR utilizes substantially all of its leased facilities and believes there will be no difficulty either in negotiating the renewal of its real property leases as they expire or in finding alternative space, if necessary. ITEM 3. LEGAL PROCEEDINGS In February 1995, as part of an investigation by the New York County District Attorney's office into the business affairs of a general contractor that did business with EMCOR's subsidiary, Forest Electric Corp. ("Forest"), a search warrant was executed at Forest's executive offices. On July 12, 2000, Forest was served with a Subpoena Duces Tecum to produce certain documents as part of a broader investigation by the New York County District Attorney's office into illegal business practices in the New York City construction industry. Forest has been informed by the New York County District Attorney's office that it and certain of its officers are targets of the investigation. Forest has produced documents in response to the subpoena and intends to cooperate fully with the District Attorney's office investigation as it proceeds. On July 31, 1998 a former employee of a subsidiary of EMCOR filed a class-action complaint on behalf of the participants in two employee benefit plans sponsored by EMCOR against EMCOR and other defendants for breach of fiduciary duty under the Employee Retirement Income Security Act. All of the claims relate to alleged acts or omissions which occurred during the period May 1991 to December 1994. The principal allegations of the complaint are that the defendants breached their fiduciary duties by causing the plans to purchase and hold stock of EMCOR when it was then known as JWP Inc. and when the defendants knew or should have known it was imprudent to do so. The action has been settled, subject to court approval. The amount to be paid by EMCOR in connection with the proposed settlement will not be material. In December 2001, the Company's Canadian subsidiary Comstock Canada Limited ("Comstock") commenced an action against Atomic Energy of Canada Limited ("AECL") claiming approximately Cdn. $6.0 million in connection with Comstock's work on two medical isotope nuclear reactors and associated work at AECL's facility at Chalk River, Ontario. Comstock's claim is for holdback, unpaid change requests, loss of productivity and extended duration costs. AECL has filed a defense denying Comstock's claim and counterclaimed against Comstock for Cdn. $47.0 million claiming substantial deficiencies in Comstock's work which are alleged to have resulted in the need to replace a portion of Comstock's work and installed materials and the need to reinstall various components of the reactor systems. These deficiencies are alleged to have caused a significant delay in AECL's ability to obtain the necessary certifications for operation of the systems. To date, there has been no document exchange or discovery in this litigation. The Company believes it has good and meritorious defenses to the AECL counterclaim. Substantial settlements or damage judgements arising out of these matters could have a material adverse effect on EMCOR's business, operating results and financial condition. In addition to the above, EMCOR is involved in other legal proceedings and claims asserted by and against EMCOR, which have arisen in the ordinary course of business. EMCOR believes it has a number of valid defenses to these actions, and EMCOR intends to vigorously defend or assert these claims and does not believe that a significant liability will result. However, EMCOR cannot predict the outcome thereof or the impact that an adverse result of the matters discussed above will have upon EMCOR's financial position or results of operations. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None 7 EXECUTIVE OFFICERS OF THE REGISTRANT FRANK T. MACINNIS, Age 55; Chairman of the Board and Chief Executive Officer of the Company since April 1994 and President of the Company from April 1994 to April 1997. From April 1990 to April 1994, Mr. MacInnis served as President and Chief Executive Officer, and from August 1990 to April 1994 as Chairman of the Board, of Comstock Group, Inc., a nationwide electrical contracting company. From 1986 to April 1990, Mr. MacInnis was Senior Vice President and Chief Financial Officer of Comstock Group, Inc. In addition, from 1986 to April 1994, Mr. MacInnis was also President of Spie Group Inc., which had interests in Comstock Group, Inc., Spie Construction Inc., a Canadian pipeline construction company, and Spie Horizontal Drilling Inc., a U.S. company engaged in underground drilling for the installation of pipelines and communications cable. JEFFREY M. LEVY, Age 49; President of the Company since April 1997 and Chief Operating Officer of the Company since February 1994, Executive Vice President of the Company from November 1994 to April 1997, Senior Vice President of the Company from December 1993 to November 1994. From May 1992 to December 1993, Mr. Levy was President and Chief Executive Officer of the Company's subsidiary EMCOR Mechanical/Electrical Services (East) Inc. From January 1991 to May 1992, Mr. Levy served as Executive Vice President and Chief Operating Officer of Lehrer McGovern Bovis, Inc., a construction management and construction company. SHELDON I. CAMMAKER, Age 62; Executive Vice President and General Counsel of the Company since September 1987 and Secretary of the Company since May 1997. Prior to September 1987, Mr. Cammaker was a senior partner of the New York City law firm of Botein, Hays, & Sklar. LEICLE E. CHESSER, Age 55; Executive Vice President and Chief Financial Officer of the Company since May 1994. From April 1990 to May 1994, Mr. Chesser served as Executive Vice President and Chief Financial Officer of Comstock Group, Inc., and from 1986 to May 1994, Mr. Chesser was also Executive Vice President and Chief Financial Officer of Spie Group, Inc. R. KEVIN MATZ, Age 43; Vice President and Treasurer of the Company since April 1996 and Staff Vice President - Financial Services of the Company from March 1993 to April 1996. From March 1991 to March 1993, Mr. Matz was Treasurer of Sprague Technologies Inc., a manufacturer of electronic components. MARK A. POMPA, Age 37; Vice President and Controller of the Company since September 1994. 8 PART II ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS MARKET INFORMATION. On November 16, 2000, EMCOR's common stock began trading on the New York Stock Exchange under the symbol "EME". Prior to that time, EMCOR's common stock had been traded on the Nasdaq National Market tier of the Nasdaq Stock Market. The following table sets forth high and low sales prices for the common stock for the periods indicated as reported by the Nasdaq National Market through November 15, 2000, and thereafter, as reported by the New York Stock Exchange: 2001 HIGH LOW ---- ------ ------- First Quarter ......................... $31.42 $23.75 Second Quarter ........................ $45.98 $29.87 Third Quarter ......................... $45.20 $30.60 Fourth Quarter ........................ $49.14 $31.74 2000 HIGH LOW ---- ------ ------- First Quarter ......................... $24.25 $17.50 Second Quarter ........................ $24.75 $17.75 Third Quarter ......................... $28.13 $22.25 Fourth Quarter (through November 15) .. $26.25 $22.75 Fourth Quarter (commencing November 16) $26.00 $23.00 HOLDERS. As of February 15, 2002, there were 138 shareholders of record and, as of that date, EMCOR estimates there were approximately 3,800 beneficial owners holding stock in nominee or "street" name. DIVIDENDS. EMCOR did not pay dividends on its common stock during 2001 or 2000, and it does not anticipate that it will pay dividends on its common stock in the foreseeable future. EMCOR's working capital credit facility limits the payment of dividends on its common stock. 9 ITEM 6. SELECTED FINANCIAL DATA (IN THOUSANDS, EXCEPT PER SHARE DATA) The following selected financial data has been derived from audited financial statements and should be read in conjunction with the consolidated financial statements, the related notes thereto and the report of independent public accountants thereon, included elsewhere in this Form 10-K and in previously filed annual reports on Form 10-K of EMCOR.

INCOME STATEMENT DATA YEARS ENDED DECEMBER 31, --------------------------------------------------------------- 2001 2000 1999 1998 1997 ---------- ---------- ---------- ---------- ---------- Revenues .............................................. $3,419,854 $3,460,204 $2,893,962 $2,210,374 $1,950,868 Gross profit .......................................... 391,823 357,817 295,907 223,287 182,183 Operating income ...................................... 88,682 78,925 58,091 37,224 27,414 Income before extraordinary items ..................... 50,012 40,089 27,821 17,092 8,581 Extraordinary items--loss on early extinguishment of debt, net of income taxes ......... -- -- -- (4,777) (1,004) ---------- ---------- ---------- ---------- ---------- Net income ............................................ $ 50,012 $ 40,089 $ 27,821 $ 12,315 $ 7,577 ---------- ---------- ---------- ---------- ---------- Basic earnings per share: Income before extraordinary items ..................... $ 3.86 $ 3.84 $ 2.86 $ 1.67 $ 0.90 Extraordinary items--loss on early extinguishment of debt, net of income taxes ......... -- -- -- (0.47) (0.11) ---------- ---------- ---------- ---------- ---------- Basic earnings per share .............................. $ 3.86 $ 3.84 $ 2.86 $ 1.20 $ 0.79 ========== ========== ========== ========== ========== Diluted earnings per share: Income before extraordinary items ..................... $ 3.40 $ 2.95 $ 2.21 $ 1.46 $ 0.84 Extraordinary items--loss on early extinguishment of debt, net of income taxes ......... -- -- -- (0.35) (0.10) ---------- ---------- ---------- ---------- ---------- Diluted earnings per share ............................ $ 3.40 $ 2.95 $ 2.21 $ 1.11 $ 0.74 ========== ========== ========== ========== ========== --------------------------------------------------------------- BALANCE SHEET DATA AS OF DECEMBER 31, --------------------------------------------------------------- 2001 2000 1999 1998 1997 ---------- ---------- ---------- --------- ---------- Stockholders' equity (a) .............................. $ 421,933 $ 233,503 $ 170,249 $119,816 $ 95,323 Total assets .......................................... $1,349,664 $1,261,864 $1,052,246 $801,002 $660,654 Goodwill .............................................. $ 56,011 $ 67,625 $ 68,009 $ 22,745 $ 927 Notes payable ......................................... $ 573 -- $ 1,150 $ 8,314 -- Borrowings under working capital credit lines ......... -- -- -- -- $ 9,497 Other long-term debt, including current maturities .... $ 973 $ 116,056 $ 116,534 $116,086 $ 62,657 Capital lease obligations ............................. $ 249 $ 573 $ 554 $ 837 $ 1,482

---------- (a) No cash dividends on EMCOR's common stock have been paid during the past five years. 10 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION HIGHLIGHTS Revenues for the year ended December 31, 2001 were $3.42 billion, compared to $3.46 billion and $2.89 billion for the years ended December 31, 2000 and 1999, respectively. Net income was $50.0 million for 2001, an increase of $9.9 million, or 24.7%, from $40.1 million for 2000. For 1999, net income was $27.8 million. Diluted earnings per share on net income were $3.40 per share for 2001, compared to $2.95 per share for 2000 and $2.21 per share for 1999. OPERATING SEGMENTS EMCOR's business consists of the following operating segments: United States electrical construction and facilities services, United States mechanical construction and facilities services, United States other services, Canada construction and facilities services, United Kingdom construction and facilities services and Other international construction and facilities services. The segments (i) United States other services primarily represents those operations which principally provide energy consulting, maintenance, office and facility management, and central energy systems monitoring services and (ii) Other international construction and facilities services represents EMCOR's operations outside of the United States, Canada, and the United Kingdom, primarily South Africa, the Middle East and Europe, performing electrical construction, mechanical construction and facilities services. RESULTS OF OPERATIONS EMCOR's significant accounting policies are described in Note B to the consolidated financial statements included in Item 8 of this Form 10-K. EMCOR believes its most critical accounting policy is revenue recognition from long-term contracts for which EMCOR uses the percentage-of-completion method of accounting. Percentage of completion accounting is the prescribed method of accounting for long-term contracts in accordance with accounting principles generally accepted in the United States and accordingly the method used for revenue recognition within EMCOR's industry. Percentage-of-completion is measured principally by the percentage of costs incurred to date for each contract to the estimated total costs for each contract at completion. Certain of EMCOR's electrical contracting business units measure percentage-of-completion by the percentage of labor costs incurred to date for each contract to the estimated total labor costs for such contract. Provisions for estimated losses on uncompleted contracts are made in the period in which such losses are determined. Application of percentage-of-completion accounting results in the recognition of costs and estimated earnings in excess of billings on uncompleted contracts within the consolidated balance sheets. Costs and estimated earnings in excess of billings on uncompleted contracts reflected on the consolidated balance sheets arise when revenues have been recognized but the amounts cannot be billed under the terms of the contracts. Such amounts are recoverable from customers upon various measures of performance, including achievement of certain milestones, completion of specified units or completion of the contract. Costs and estimated earnings in excess of billings on uncompleted contracts also includes amounts EMCOR seeks or will seek to collect from customers or others for errors or changes in contract specifications or design, contract change orders in dispute or unapproved as to both scope and price, or other customer-related causes of unanticipated additional contract costs. Such amounts are recorded at estimated net realizable value. Due to uncertainties inherent within estimates employed to apply percentage-of-completion accounting, it is possible that estimates will be revised as project work progresses. Application of percentage of completion accounting requires that the impact of those revised estimates be reported in the consolidated financial statements prospectively. REVENUES Revenues for the year ended December 31, 2001 decreased 1.2% to $3.42 billion, compared to $3.46 billion of revenues for 2000. The $40.3 million decrease in revenues for 2001 compared to 2000 was primarily due to reduced levels of fast-track data center construction in the New York, Chicago, Washington D. C. and California markets, as well as a reduced level of activity in the Las Vegas and Ohio markets and Canada. The decrease was partially offset by growth in revenues associated with energy generation projects and transportation infrastructure construction on the west and east coasts and revenue growth from various activities in the Boston area market. Revenues for 2000 of $3.46 billion represented a 19.7% increase over revenues of $2.89 billion for 1999. The $566.2 million increase in revenues for 2000 compared to 1999 was attributable to (1) revenue growth from EMCOR's operations (excluding revenues of Building Technology Engineers of North America, LLC ("BTENA"), EMCOR's joint venture with CB Richard Ellis Inc., and 1999 acquisitions) of $420.2 million, and to (2) revenues from BTENA and 1999 acquisitions which approximated $146.0 million in incremental revenues during 2000. The following table presents EMCOR's revenues by operating segment and the approximate percentage of total revenues for the years ended December 31, 2001, 2000 and 1999 (in millions, except for percentages):

% OF % OF % OF 2001 TOTAL 2000 TOTAL 1999 TOTAL -------- ----- -------- ----- -------- ----- Revenues: United States electrical construction and facilities services ....... $1,334.7 39% $1,350.7 39% $ 993.1 34% United States mechanical construction and facilities services ....... 1,202.1 35% 1,262.1 36% 1,067.1 37% United States other services ........................................ 209.7 6% 163.9 5% 82.8 3% -------- -------- -------- Total United States operations ...................................... 2,746.5 80% 2,776.7 80% 2,143.0 74% Canada construction and facilities services ......................... 198.2 6% 237.0 7% 196.7 7% United Kingdom construction and facilities services ................. 463.6 14% 446.2 13% 553.7 19% Other international construction and facilities services ............ 11.6 0.3 0.6 -- -------- -------- -------- Total worldwide operations .......................................... $3,419.9 100% $3,460.2 100% $2,894.0 100% ======== ======== ========

Revenues for EMCOR's United States electrical construction and facilities services segment for 2001 decreased by $16.0 million, or 1.2%, compared to 2000. The decrease in revenues was due to reduced levels of fast-track data center and commercial construction in the New York, Chicago, Washington D. C. and California markets, as well as reduced levels of activity in the Las Vegas and Ohio markets. The decrease was partially offset by increases in revenues associated with energy generation and transportation infrastructure construction markets on the west and east coasts and increased revenues from various activities in the Salt Lake City market. The $357.6 million, or 36.0%, increase in 2000 revenues compared to 1999, was attributable to both new construction and renovation and retrofit jobs for commercial construction and the communication infrastructure and technology markets. Partially offsetting this overall increase was a decrease in new construction revenues from casino work, although this was partially offset by increased renovation and retrofit work at casinos. Additionally, industrial construction related renovation and retrofit revenues decreased principally due to industrial facilities not having as many shut-downs in production to perform major maintenance during 2000. United States mechanical construction and facilities services revenues decreased $60.0 million, or 4.8%. The decrease in revenues was due to reduced levels of fast-track data center construction, reduced levels of activity in the Las Vegas and Denver markets and planned reductions in operations at EMCOR's Poole & Kent subsidiary operations in the North and South Carolina markets. The decrease in rev- 11 enues was partially offset by increased revenues associated with energy generation construction on the west and east coasts and increased revenues from the Boston area market. A $195.0 million, or 18.3%, increase in revenues for 2000 compared to 1999 was primarily attributable to revenue growth from EMCOR's operations excluding acquisitions. Eastern and Western United States based operations were the major contributors to the increase in revenues due to the continued strong renovation market and new construction market in New York City, Houston, Connecticut, Denver and California. Revenues from 1999 acquisitions contributed approximately $77.5 million of the increase. United States other services revenues, which include those operations which principally provide energy consulting, maintenance, office and facility management, and central energy system monitoring services increased by $45.8 million, or 27.9%, for 2001 compared to 2000. The increase in revenues was primarily attributable to an increase in building maintenance services provided to customers. Revenues for 2000 increased by $81.1 million compared to 1999. The primary source of the increase in 2000 was revenues of $68.6 million from BTENA and companies acquired during 1999, as well as increases from other United States operations. Revenues of Canada construction and facilities services decreased by $38.8 million, or 16.4%, for 2001 as compared to 2000 revenues. The decrease in revenues was primarily attributable to project start date delays in Eastern Canada and a reduction of revenues in Western Canada due to timing of anticipated projects. The $40.3 million, or 20.5%, increase in revenues for 2000 compared with 1999 was attributable to an increased level of activities in Eastern Canada, especially in the second half of 2000. United Kingdom construction and facilities services revenues increased $17.4 million, or 3.9%, for 2001 compared to 2000 revenues principally due to continued growth in construction and facilities markets in the United Kingdom during the first half of 2001. The $107.5 million, or 19.4%, decrease in 2000 revenues compared with 1999 revenues was principally due to the completion of the Jubilee Line project in London at the end of 1999. Revenues of the Other international construction and facilities services increased for 2001 to $11.6 million, compared to $0.3 million for 2000 and $0.6 million for 1999. Other international construction and facilities services primarily consist of EMCOR's operations in the Middle East, South Africa and Europe. The increase in revenues was due to projects performed in Europe by EMCOR's new technology division. The remainder of the work performed in this operating segment is accounted for under the equity method of accounting because EMCOR has less than majority ownership in these foreign joint ventures, and accordingly, revenues attributable to such joint ventures are not reflected as revenues in the consolidated financial statements. EMCOR continues to pursue new business selectively in these markets; however, the availability of opportunities has been significantly reduced as a result of local economic factors, particularly in the Middle East. COST OF SALES AND GROSS PROFIT The following table presents EMCOR's cost of sales, gross profit, and gross profit as a percentage of revenues, for the years ended December 2001, 2000 and 1999 (in millions, except for percentages): 2001 2000 1999 -------- -------- -------- Cost of sales .............................. $3,028.0 $3,102.4 $2,598.1 Gross profit ............................... $ 391.8 $ 357.8 $ 295.9 Gross profit as a percentage of revenues ... 11.5% 10.3% 10.2% Gross profit increased $34.0 million, or 9.5%, for 2001 compared to 2000. Gross profit as a percentage of revenues was 11.5% for 2001 compared to 10.3% for 2000. The dollar increase in gross profit, as well as the increase in gross profit as a percentage of revenues, were primarily due to an increase in gross profits realized due to the type and location of construction and facilities services contracts performed and continued improvement in project management. Gross profit increased $61.9 million, or 20.9%, for 2000 compared to 1999, and gross profit as a percentage of revenues increased to 10.3% for the 2000 period compared with 10.2% for 1999. The increase in gross profit dollars from 1999 to 2000 was due to the increase in revenues of EMCOR's operations excluding acquisitions, as well as gross profit from companies acquired in 1999. The increase in gross profit as a percentage of revenues was primarily a result of an increase in gross profits on projects due to overall favorable market conditions partially offset by losses on jobs in the South and North Carolina markets undertaken by EMCOR's Poole & Kent subsidiary prior to its acquisition by EMCOR. SELLING, GENERAL AND ADMINISTRATIVE EXPENSES The following table presents EMCOR's selling, general and administrative expenses, and selling, general and administrative expenses as a percentage of revenues, for the years ended December 31, 2001, 2000 and 1999 (in millions, except for percentages): 2001 2000 1999 ------- ------- ------- Selling, general and administrative expenses ... $ 303.1 $ 278.9 $ 237.8 Selling, general and administrative expenses as a percentage of revenues .................. 8.9% 8.1% 8.2% Selling, general and administrative expenses as a percentage of revenues, excluding amortization of goodwill ..................... 8.7% 7.9% 8.1% 12 Selling, general and administrative expenses increased $24.2 million, or 8.7%, between 2001 and 2000. As a percentage of revenues, total selling, general and administrative expenses increased to 8.9% in 2001 as compared to 8.1% in 2000. Selling, general and administrative expenses increased $41.1 million, or 17.3%, between 2000 and 1999. As a percentage of revenues, total selling, general and administrative expenses decreased to 8.1% in 2000 as compared to 8.2% in 1999. The dollar increase and increase in expenses as a percentage of revenues during 2001 compared to 2000 was primarily attributable to the type and location of construction and facilities services contracts performed, increased variable overhead costs associated with marketing and business development efforts and expansion of information technology infrastructure support. The dollar increase in selling, general and administrative expenses for 2000 as compared to 1999 was attributable to the increase in revenues and corresponding increases in variable selling, general and administrative expenses required to support the increased revenue base, incremental fixed costs to support the current growth in operations, plus selling, general and administrative expenses associated with BTENA and 1999 acquisitions. The decrease in selling, general and administrative expenses, as a percentage of revenues for 2000, as compared to 1999 was primarily due to the leveraging of fixed costs over increased revenues. OPERATING INCOME The following table presents EMCOR's operating income, and operating income as a percentage of segment revenues, for the years ended December 31, 2001, 2000 and 1999 (in millions, except for percentages):

% OF % OF % OF SEGMENT SEGMENT SEGMENT 2001 REVENUES 2000 REVENUES 1999 REVENUES ------ -------- ----- -------- ----- -------- Operating income (loss): United States electrical construction and facilities services ........... $ 75.3 5.6% $58.6 4.3% $38.5 3.9% United States mechanical construction and facilities services ........... 41.4 3.4% 35.9 2.8% 38.0 3.6% United States other services ............................................ (7.2) -- (5.5) -- (4.6) -- ------ ----- ----- Total United States operations .......................................... 109.5 4.0% 89.0 3.2% 71.9 3.4% Canada construction and facilities services ............................. 2.3 1.2% 5.2 2.2% 4.0 2.0% United Kingdom construction and facilities services ..................... 7.2 1.6% 6.0 1.3% 3.2 0.6% Other international construction and facilities services ................ (1.2) -- 0.5 -- (0.3) -- Corporate administration ................................................ (29.1) -- (21.8) -- (20.7) -- ------ ----- ----- Total worldwide operations .............................................. 88.7 2.6% 78.9 2.3% 58.1 2.0% Other corporate items: Interest expense ........................................................ (4.8) (9.7) (10.5) Interest income ......................................................... 5.6 2.4 2.1 ------ ----- ----- Income before taxes ..................................................... $ 89.5 $71.6 $49.7 ====== ===== =====

Operating income increased for the United States electrical construction and facilities services operations for 2001 compared to 2000. The dollar increase in operating income for 2001 of $16.7 million, or 28.5%, as compared to 2000, and increase as a percentage of revenues, was attributable to an increase in activity associated with energy generation and transportation infrastructure construction projects on the west and east coasts, and increased operating income from various activities in the Salt Lake City market. This increase in operating income was partially offset by reduced levels of fast-track data center construction activity in San Francisco, Washington D. C. and Denver markets and the decrease in construction activity in the Las Vegas market. Operating income for 2000 for the United States electrical construction and facilities services operations increased $20.1 million, or 52.2%, from 1999 levels. The increase in operating income and operating income, as a percentage of revenues, for 2000 versus 1999 was attributable to the continuing favorable market conditions due to increased renovation and retrofit projects as well as new construction spending, particularly in the Eastern and Western United States. United States mechanical construction and facilities services operating income increased $5.5 million for 2001, a 15.3% increase over 2000 amounts. The increase in dollars, and as a percentage of revenues, was primarily due to (i) energy generation construction activity on the west and east coasts, partially offset by a reduction of construction activity in the Las Vegas market and (ii) improved results at certain of EMCOR's Poole & Kent subsidiary operations which had losses in the prior year. Operating income for 2000 compared to 1999 decreased $2.1 million, or 5.5%, and as a percentage of revenues decreased to 2.8% from 3.6%, primarily due to losses on jobs in the South and North Carolina markets undertaken by EMCOR's Poole & Kent subsidiary prior to its acquisition by EMCOR offsetting the increased operating income for most of the operations in this segment. United States other services operating losses increased $1.7 million for 2001 as compared to 2000 primarily due to costs associated with the continued development of the consulting operations and maintenance services activities of EMCOR. These operating losses for 2000 compared to 1999 increased by $0.9 million also due to the development costs of the consulting operations and maintenance services. Canada construction and facilities services operating income decreased by $2.9 million for 2001 compared to 2000 principally due to project start date delays in Eastern Canada for certain projects in backlog and a reduction of revenues in Western Canada due to the timing of anticipated projects. Operating income as a percentage of revenues decreased to 1.2% in 2001 compared to 2.2% in 2000 also 13 due to the project start delays and the timing of anticipated projects. For 2000 compared to 1999, operating income increased by $1.2 million principally due to an increased level of activities in Eastern Canada. The increase in operating income as a percentage of revenues for 2000 of 2.2% compared to 2.0% in 1999 was primarily due to the jobs performed in 2000 having higher gross profit margins. United Kingdom construction and facilities services operating income increased by $1.2 million for 2001 compared to 2000. The improvement was primarily attributable to growth in construction and facilities markets in the United Kingdom during the first half of 2001. For 2000, operating income increased by $2.8 million as compared to 1999. This increase was primarily attributable to the commencement of new projects that resulted in higher gross profits in 2000 than in previous years due to improved market conditions. Other international construction and facilities services operating losses were $1.2 million for 2001 compared to operating income of $0.5 million in 2000 and operating losses of $0.3 million in 1999. These operating losses in 2001 were attributable to project losses related to a Middle East joint venture, partially offset by operating income for projects in the new technology division in Europe. EMCOR continues to pursue new business selectively in the Middle Eastern, South African and European markets; however, the availability of opportunities has been significantly reduced as a result of local economic factors, particularly in the Middle East. Therefore, the business activities in this segment were not significant for 2000 and 1999. General corporate expenses for 2001 increased by $7.3 million from 2000 levels, and increased by $1.1 million between 2000 and 1999. The increases are attributable to increased variable overhead costs associated with marketing and business development efforts, including transfer from subsidiary operations to corporate administration of certain individuals, some of whom were previously involved in subsidiary operations, to monitor EMCOR's overall operations, provide strategic direction and support future business activity. Additionally, operations support activities such as information technology infrastructure support have been expanded to meet the level of service expected by our clients. Interest expense decreased by $4.9 million for 2001 compared to 2000 principally due to the conversion of EMCOR's $115.0 million of 5.75% Convertible Subordinated Notes into approximately 4.2 million shares of common stock in the second quarter of 2001. Interest expense decreased by $0.8 million in 2000 compared to 1999 primarily due to reduced borrowings under EMCOR's working capital credit facility. Interest income increased by $3.2 million for 2001 compared with 2000. Interest income increased by $0.3 million for 2000 compared to 1999. The increase in interest income for 2001 compared to 2000 was due to increased cash on hand in 2001, partially offset by lower interest rates. LIQUIDITY AND CAPITAL RESOURCES On March 18, 1998, EMCOR sold, pursuant to an underwritten public offering, $115.0 million principal amount of 5.75% Convertible Subordinated Notes. During the second quarter of 2001, EMCOR called the 5.75% Convertible Subordinated Notes for redemption. As a consequence, all of the Convertible Subordinated Notes were converted into approximately 4.2 million shares of EMCOR common stock. The following table presents EMCOR's net cash provided by (used in) operating activities, investing activities and financing activities for the years ended December 31, 2001 and 2000 (in millions): 2001 2000 ------- ------- Net cash provided by operating activities .............. $ 81.1 $ 91.4 Net cash used in investing activities .................. $(31.2) $(11.1) Net cash provided by (used in) financing activities .... $ 2.2 $ (1.2) The Company's consolidated cash balance increased by $52.1 million from $137.7 million at December 31, 2000 to $189.8 million at December 31, 2001. Net cash provided by operating activities for 2001 was $81.1 million, a decrease of $10.3 million from $91.4 million for 2000. The cash provided by operating activities for 2001 was primarily due to increased net income, increased accrued expenses and decreased accounts receivable, partially offset by increased contracts in progress, net and decreased accounts payable. The cash provided by the Provision in lieu of income taxes of $21.4 million for 2001, will not recur beginning in 2002 as EMCOR has substantially used the net operating loss carryforwards attributable to this item. Net cash used in investing activities for 2001 of $31.2 million consisted primarily of $8.8 million for earn-out payments pertaining to historical acquisitions, net disbursement for other investments of $6.5 million and $17.9 million for the purchase of property, plant and equipment. This activity compares to net cash used in investing activities for 2000 of $16.7 million for the purchase of property plant and equipment, $4.2 million for payments for acquisitions and related earn-out agreements offset by $7.0 million of proceeds from other investments and $2.8 million in proceeds from the sale of assets. Net cash provided by financing activities for 2001 of $2.2 million was primarily attributable to proceeds from the exercise of stock options. On December 22, 1998, EMCOR restated a June 19, 1996 credit facility; the amended credit facility provides EMCOR with a credit facility for borrowings of up to $150.0 million. The amended credit facility, which has an expiration date of June 30, 2003, is guaranteed by certain direct and indirect subsidiaries of EMCOR. The amended credit facility is secured by substantially all of the assets of EMCOR and most of its subsidiaries, and it provides for borrowing capacity available in the form of revolving loans and/or letters of credit. The amended credit facility contains various covenants, including among other things, maintenance of certain financial ratios and 14 significant restrictions with respect to cumulative aggregate payments for dividends, common stock repurchases, investments, acquisitions, indebtedness, capital expenditures, and prepayments of subordinated debt, all as set forth therein. The annual facility fee is 0.25% per $1,000 of the total credit facility. The revolving loans bear interest at (1) a rate which is the prime commercial lending rate announced by Harris Trust and Savings Bank from time to time (4.75% at December 31, 2001) plus 0% to 0.5%, based on certain financial tests or (2) at a LIBOR rate (2.04% at December 31, 2001) plus 1.25% to 2.0% based on certain financial tests. The interest rates in effect at December 31, 2001 were 4.75% and 3.29%, respectively. Letters of credit fees issued under the credit facility ranging from 0.5% to 2.0% are charged based on type of letters of credit issued and certain financial tests. As of December 31, 2001 and 2000, EMCOR had approximately $20.5 million and $12.1 million of letters of credit outstanding, respectively. No revolving loans were outstanding under the credit facility at December 31, 2001 or 2000. In December 2000, the Company's Canadian subsidiary, Comstock Canada Ltd., renewed a credit agreement with a bank providing for an overdraft facility of up to Cdn. $0.5 million. The facility is secured by a standby letter of credit and provides for interest at the bank's prime rate (4.0% at December 31, 2001). There were no borrowings outstanding under this credit agreement at December 31, 2001 or 2000. A subsidiary of EMCOR has guaranteed indebtedness of a venture in which it has a 40% interest; the other venture partner, Baltimore Gas and Electric, has a 60% interest. The venture designs, constructs, owns, operates, leases and maintains facilities to produce chilled water for sale to customers for use in cooling. These guarantees are not expected to have a material adverse effect on EMCOR's financial position or results of operations. Under one guarantee, each of the venturers is jointly and severally liable for the venture's $25.0 million borrowing due December 2031. The other guarantee is related to the venture's $50.0 million revolving credit facility expiring September 2002, under which EMCOR's subsidiary guaranteed 40% of the indebtedness. EMCOR believes that current cash balances and borrowing capacity available under lines of credit, combined with cash expected to be generated from operations, will be sufficient to provide short-term and foreseeable long-term liquidity and meet expected capital expenditure requirements. The primary source of liquidity for EMCOR has been, and is expected to continue to be, cash generated by operating activities. EMCOR also maintains a credit facility that may be utilized, among other things, to meet short-term liquidity needs in the event that net cash generated by operating activities is insufficient, or to enable EMCOR to seize opportunities to participate in joint ventures or to make acquisitions that may require access to cash on short notice. Long-term liquidity requirements can be expected to be met through cash generated from operating activities, the credit facility, and the sale of various secured or unsecured debt or equity interests in the public and private markets. Based on its current credit rating and financial condition, EMCOR can reasonably expect to be able to issue medium and long-term debt instruments or equity. EMCOR's primary revenue risk factor continues to be the level of demand for non-residential construction services, which is in turn influenced by macroeconomic trends including interest rates and governmental economic policy. In order to provide protection against demand cycles in private sector construction services, EMCOR has increased its participation, and its backlog of contracts, in the public sector and in facilities services. Liquidity will be impacted in future periods by EMCOR's recent agreement to acquire nineteen subsidiaries of Comfort Systems USA, Inc. ("Comfort Systems"). See the Subsequent Event disclosure that follows in this item for additional information. CERTAIN INSURANCE MATTERS As of December 31, 2001, EMCOR was utilizing approximately $20.5 million of letters of credit obtained under its credit facility as collateral for its insurance obligations. NEW ACCOUNTING PRONOUNCEMENTS In July 2001, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards No. 141, "Business Combinations" ("SFAS 141") and Statement of Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets" ("SFAS 142"). SFAS 141 requires all business combinations be accounted for using the purchase method of accounting and that certain intangible assets acquired in a business combination be recognized as assets apart from goodwill. SFAS 141 was effective for all business combinations initiated after June 30, 2001. SFAS 142 requires goodwill to be tested for impairment under certain circumstances, and written down when impaired, rather than being amortized as previous standards required. Furthermore, SFAS 142 requires purchased intangible assets other than goodwill to be amortized over their useful lives unless these lives are determined to be indefinite. The annual reduction in expense due to the discontinuance of goodwill amortization beginning in 2002 should be approximately $3.4 to $4.4 million. SFAS 142 is effective for fiscal years beginning after December 15, 2001. All companies have six months subsequent to the date of adoption to complete the initial goodwill impairment test. EMCOR has not yet determined any further impact SFAS 142 will have on its existing goodwill. In August 2001, the FASB issued Statement of Financial Accounting Standards No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets" ("SFAS 144"). SFAS 144 establishes a single accounting model, based on the framework established in Statement of Financial Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed 15 Of" ("SFAS 121"), for long-lived assets to be disposed of by sale, and resolves significant implementation issues related to SFAS 121. This statement also supercedes the accounting reporting provisions of Accounting Principles Board Opinion No. 30, "Reporting the Results of Operations - Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions," ("APB 30") for the disposal of a segment of a business. The provisions of SFAS No. 144 are effective for the fiscal years beginning after December 15, 2001. EMCOR believes that the adoption of SFAS 144 will not have a material impact on its results of operations, financial position or cash flows. SUBSEQUENT EVENT On February 11, 2002, EMCOR signed a definitive agreement with Comfort Systems to acquire nineteen of Comfort Systems' subsidiaries. Under the terms of the agreement, EMCOR will pay Comfort Systems $186.25 million, approximately $164.25 million in cash and approximately $22.0 million by assumption of Comfort Systems notes payable to former owners of certain of the acquired companies. EMCOR will fund the acquisition through a combination of cash on hand and borrowings under its revolving credit facility. The acquisition is expected to close in the first quarter of 2002, pending customary closing conditions and regulatory approval. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK EMCOR is exposed to market risk for changes in interest rates for borrowings under its credit facility. The credit facility bears interest at variable rates, and the fair value of this borrowing is not significantly affected by changes in market interest rates. Amounts invested in EMCOR's foreign operations are translated into U. S. dollars at the exchange rates in effect at year end. The resulting translation adjustments are recorded as accumulated other comprehensive loss, a component of stockholders' equity, in the consolidated balance sheets. THIS ANNUAL REPORT ON FORM 10-K CONTAINS CERTAIN FORWARD-LOOKING STATEMENTS WITHIN THE MEANING OF THE PRIVATE SECURITIES REFORM ACT OF 1995, PARTICULARLY STATEMENTS REGARDING MARKET OPPORTUNITIES, MARKET SHARE GROWTH, COMPETITIVE GROWTH, GROSS PROFIT, AND SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. THESE FORWARD-LOOKING STATEMENTS INVOLVE RISKS AND UNCERTAINTIES, THAT COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM THOSE IN ANY SUCH FORWARD-LOOKING STATEMENTS. SUCH RISKS AND UNCERTAINTIES INCLUDE, BUT ARE NOT LIMITED TO ADVERSE CHANGES IN GENERAL ECONOMIC CONDITIONS, INCLUDING CHANGES IN THE SPECIFIC MARKETS FOR EMCOR'S SERVICES, ADVERSE BUSINESS CONDITIONS, DECREASED OR LACK OF GROWTH IN THE MECHANICAL AND ELECTRICAL CONSTRUCTION AND FACILITIES SERVICES INDUSTRIES, INCREASED COMPETITION, PRICING PRESSURES AND RISK ASSOCIATED WITH FOREIGN OPERATIONS AND OTHER FACTORS. 16 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA EMCOR GROUP, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA) DECEMBER 31, ----------------------- 2001 2000 ---------- ---------- ASSETS Current assets: Cash and cash equivalents ........................... $ 189,766 $ 137,685 Accounts receivable, less allowance for doubtful accounts of $35,091 and $36,917, respectively ..... 777,102 825,803 Costs and estimated earnings in excess of billings on uncompleted contracts .......................... 221,272 158,073 Inventories ......................................... 7,158 6,909 Prepaid expenses and other .......................... 22,026 10,290 ---------- ---------- Total current assets .............................. 1,217,324 1,138,760 Investments, notes and other long-term receivables .... 16,817 10,364 Property, plant and equipment, net .................... 42,548 38,959 Goodwill, less accumulated amortization of $14,328 and $8,822, respectively ............................ 56,011 67,625 Other assets .......................................... 16,964 6,156 ---------- ---------- Total assets .......................................... $1,349,664 $1,261,864 ========== ========== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Current maturities of long-term debt and capital lease obligations ................................. $ 947 $ 751 Accounts payable .................................... 313,227 365,139 Billings in excess of costs and estimated earnings on uncompleted contracts .......................... 319,165 314,929 Accrued payroll and benefits ........................ 121,196 103,897 Other accrued expenses and liabilities .............. 99,726 67,671 ---------- ---------- Total current liabilities ......................... 854,261 852,387 Long-term debt and capital lease obligations .......... 848 115,878 Other long-term obligations ........................... 72,622 60,096 ---------- ---------- Total liabilities ..................................... 927,731 1,028,361 ---------- ---------- Stockholders' equity: Preferred stock, $0.10 par value, 1,000,000 shares authorized, zero issued and outstanding ............. -- -- Common stock, $0.01 par value, 30,000,000 shares authorized, 14,815,007 and 10,470,624 shares issued and outstanding, respectively ................ 159 117 Capital surplus ....................................... 307,636 167,742 Accumulated other comprehensive loss .................. (5,424) (3,906) Retained earnings ..................................... 136,398 86,386 Treasury stock, at cost, 1,131,985 and 1,131,990 shares, respectively ................................ (16,836) (16,836) ---------- ---------- Total stockholders' equity ............................ 421,933 233,503 ---------- ---------- Total liabilities and stockholders' equity ............ $1,349,664 $1,261,864 ========== ========== The accompanying notes to consolidated financial statements are an integral part of these statements. 17 EMCOR GROUP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, (IN THOUSANDS, EXCEPT PER SHARE DATA) 2001 2000 1999 ---------- ---------- ---------- Revenues .......................... $3,419,854 $3,460,204 $2,893,962 Cost of sales ..................... 3,028,031 3,102,387 2,598,055 ---------- ---------- ---------- Gross profit ...................... 391,823 357,817 295,907 Selling, general and administrative expenses ......... 303,141 278,892 237,816 ---------- ---------- ---------- Operating income .................. 88,682 78,925 58,091 Interest expense .................. (4,795) (9,705) (10,520) Interest income ................... 5,587 2,367 2,107 ---------- ---------- ---------- Income before income taxes ........ 89,474 71,587 49,678 Income tax provision .............. 39,462 31,498 21,857 ---------- ---------- ---------- Net income ........................ $ 50,012 $ 40,089 $ 27,821 ========== ========== ========== Basic earnings per share .......... $ 3.86 $ 3.84 $ 2.86 ========== ========== ========== Diluted earnings per share ........ $ 3.40 $ 2.95 $ 2.21 ========== ========== ========== The accompanying notes to consolidated financial statements are an integral part of these statements. 18 EMCOR GROUP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, (IN THOUSANDS)

2001 2000 1999 --------- --------- --------- Cash flows from operating activities: Net income ............................................................................... $ 50,012 $ 40,089 $ 27,821 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization .......................................................... 12,694 11,483 10,675 Amortization of goodwill ............................................................... 5,506 4,618 3,418 Provision for doubtful accounts ........................................................ 2,856 6,419 5,967 Deferred income taxes .................................................................. 3,725 -- -- Non-cash expense for amortization of debt issuance costs ............................... 890 1,236 1,236 Non-cash expense for Restricted Stock Units ............................................ 1,132 -- -- Non-cash interest expense for converted subordinated notes ............................. 1,239 -- -- Provision in lieu of income taxes ...................................................... 21,425 24,422 15,645 --------- --------- --------- 99,479 88,267 64,762 Change in operating assets and liabilities excluding effect of businesses acquired: Decrease (increase) in accounts receivable ............................................. 48,974 (118,629) (96,875) (Increase) decrease in inventories and contracts in progress, net ...................... (59,217) 76,376 17,784 (Decrease) increase in accounts payable ................................................ (52,337) 22,222 36,830 Increase in accrued payroll and benefits and other accrued expenses and liabilities .... 47,836 19,533 6,633 Changes in other assets and liabilities, net ........................................... (3,644) 3,667 5,371 --------- --------- --------- Net cash provided by operating activities ................................................ 81,091 91,436 34,505 --------- --------- --------- Cash flows from investing activities: Proceeds from sales of assets .......................................................... 1,925 2,765 347 Purchase of property, plant and equipment .............................................. (17,939) (16,698) (10,737) Payments for acquisitions of businesses and related earn-out agreements ................ (8,750) (4,234) (55,782) Net (disbursements) proceeds from other investments .................................... (6,453) 7,047 6,810 --------- --------- --------- Net cash used in investing activities .................................................... (31,217) (11,120) (59,362) --------- --------- --------- Cash flows from financing activities: Proceeds from working capital credit lines ............................................. -- 722,829 306,400 Repayments of working capital credit lines ............................................. -- (722,829) (306,400) Net repayments for long-term debt and capital lease obligations ........................ 143 (1,609) (7,012) Net proceeds from exercise of stock options ............................................ 2,064 426 221 Net proceeds from exercise of common stock warrants .................................... -- -- 10,015 Purchase of common stock ............................................................... -- -- (2,868) --------- --------- --------- Net cash provided by (used in) financing activities ...................................... 2,207 (1,183) 356 --------- --------- --------- Increase (decrease) in cash and cash equivalents ......................................... 52,081 79,133 (24,501) Cash and cash equivalents at beginning of year ........................................... 137,685 58,552 83,053 --------- --------- --------- Cash and cash equivalents at end of year ................................................. $ 189,766 $ 137,685 $ 58,552 ========= ========= =========

The accompanying notes to consolidated financial statements are an integral part of these statements. 19 EMCOR GROUP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY AND COMPREHENSIVE INCOME (IN THOUSANDS)

TOTAL ACCUMULATED STOCK- OTHER HOLDERS' COMMON CAPITAL COMPREHENSIVE RETAINED TREASURY COMPREHENSIVE EQUITY STOCK WARRANTS SURPLUS LOSS (1) EARNINGS STOCK INCOME -------- ------ -------- ------- ------------- -------- -------- ------------- Balance, December 31, 1998 .......... $119,816 $ 109 $2,154 $114,867 $ (1,822) $ 18,476 $(13,968) Net income .......................... 27,821 -- -- -- -- 27,821 -- $27,821 Foreign currency translation adjustments ......................... (401) -- -- -- (401) -- -- (401) ---------- Comprehensive income ................ -- -- -- -- -- -- -- $27,420 ========== Provision in lieu of income taxes ... 15,645 -- -- 15,645 -- -- -- Common stock issued pursuant to warrants exercised .................. 10,015 7 (1,190) 11,198 -- -- -- Value of expired warrants ........... -- -- (964) 964 -- -- -- Common stock issued under stock option plans .................. 221 1 -- 220 -- -- -- Treasury stock, at cost ............. (2,868) -- -- -- -- -- (2,868) -------- ------ ------ -------- -------- -------- -------- Balance, December 31, 1999 .......... 170,249 117 -- 142,894 (2,223) 46,297 (16,836) Net income .......................... 40,089 -- -- -- -- 40,089 -- $40,089 Foreign currency translation adjustments ......................... (1,683) -- -- -- (1,683) -- -- (1,683) ---------- Comprehensive income ................ -- -- -- -- -- -- -- $38,406 ========== Provision in lieu of income taxes ... 24,422 -- -- 24,422 -- -- -- Common stock issued under stock option plans .................. 426 -- -- 426 -- -- -- -------- ------ ------ -------- -------- -------- -------- Balance, December 31, 2000 .......... 233,503 117 -- 167,742 (3,906) 86,386 (16,836) Net income .......................... 50,012 -- -- -- -- 50,012 -- $50,012 Foreign currency translation adjustments ......................... (1,518) -- -- -- (1,518) -- -- (1,518) ---------- Comprehensive income ................ -- -- -- -- -- -- -- $48,494 ========== Provision in lieu of income taxes ... 21,425 -- -- 21,425 -- -- -- Common stock issued under stock option plans .................. 2,063 -- -- 2,063 -- -- -- Conversion of 5.75% Convertible Subordinated Notes (2) .............. 113,874 42 -- 113,832 -- -- -- Value of Restricted Stock Units (3).. 2,574 -- -- 2,574 -- -- -- -------- ------ ------ -------- -------- -------- -------- Balance, December 31, 2001 .......... $421,933 $ 159 $ -- $307,636 $ (5,424) $136,398 $(16,836) ======== ====== ====== ======== ======== ======== ========

---------- (1) Represents cumulative foreign currency translation adjustments. (2) Represents conversion of $115.0 million 5.75% Convertible Subordinated Notes into common stock, net of related interest and deferred financing costs. (3) Shares of common stock will be issued in respect of restricted stock units. This amount represents the value of restricted stock units at the date of grant plus the related compensation expense in the current year due to an increase in market value of the underlying common stock. The accompanying notes to the consolidated financial statements are an integral part of these statements. 20 EMCOR GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE A--NATURE OF OPERATIONS EMCOR Group, Inc., a Delaware corporation, and subsidiaries ("EMCOR") is one of the largest mechanical and electrical construction and facilities services firms in the United States, Canada, the United Kingdom and in the world. EMCOR specializes in the design, integration and installation, start-up of: (1) systems for the generation and distribution of electrical power, including power cables, conduits, distribution panels, transformers, generators, uninterruptible power supply systems and related switch gear and controls; (2) lighting systems, including fixtures and controls; (3) low-voltage systems, including fire alarm, security, and process control systems; (4) voice and data communications systems, including fiber-optic and low voltage copper cabling; (5) heating, ventilation, air conditioning, refrigeration and clean-room process ventilation systems and (6) plumbing, process and high-purity piping systems. EMCOR provides mechanical and electrical construction services and facilities services directly to corporations, municipalities and other governmental entities, owners/developers, and tenants of buildings. It also provides these services indirectly by acting as a subcontractor to construction managers, general contractors, systems suppliers and other subcontractors. Mechanical and electrical construction services generally fall into one of two categories: (1) large installation projects with contracts often in the multi-million dollar range that involve construction of industrial and commercial buildings and institutional and public works facilities or the fit-out of large blocks of space within commercial buildings and (2) smaller installation projects typically involving fit-out, renovation and retrofit work. In addition, EMCOR also provides services needed to support a customer's facilities not related to construction projects. These services, frequently referred to as facilities services, include customer based operations and maintenance, mobile maintenance and service, small modification and retrofit projects, consulting, program development and management for energy systems, and maintenance of facilities. These services are provided to a wide range of commercial, industrial, and institutional buildings including facilities at which EMCOR provided construction services and at which construction services were provided by others. Facilities services are frequently bundled to provide integrated service packages and may include services in addition to EMCOR's core mechanical and electrical services. NOTE B--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES PRINCIPLES OF CONSOLIDATION The consolidated financial statements include the accounts of EMCOR and its majority-owned subsidiaries. Significant intercompany accounts and transactions have been eliminated. Investments over which EMCOR exercises significant influence, but does not control (generally a 20% to 50% ownership interest), are accounted for using the equity method of accounting. PRINCIPLES OF PREPARATION The preparation of the consolidated financial statements, in conformity with accounting principles generally accepted in the United States, requires EMCOR to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Reclassifications of prior years data have been made in the accompanying consolidated financial statements where appropriate to conform to the current presentation. REVENUE RECOGNITION Revenues from long-term contracts are recognized on the percentage-of-completion method. Percentage-of-completion is measured principally by the percentage of costs incurred to date for each contract to the estimated total costs for each contract at completion. Certain of EMCOR's electrical contracting business units measure percentage-of-completion by the percentage of labor costs incurred to date for each contract to the estimated total labor costs for such contract. Revenues from services contracts are recognized as services are provided. Provisions for estimated losses on uncompleted contracts are made in the period in which such losses are determined. In forecasting ultimate profitability on certain contracts, estimated recoveries are included for work performed under customer change orders to contracts for which firm prices have not yet been negotiated. Due to uncertainties inherent in the estimation process, it is reasonably possible that completion costs, including those arising from contract penalty provisions and final contract settlements, will be revised in the near-term. Such revisions to costs and income are recognized in the period in which the revisions are determined. 21 EMCOR GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) NOTE B--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED) COSTS AND ESTIMATED EARNINGS ON UNCOMPLETED CONTRACTS Costs and estimated earnings in excess of billings on uncompleted contracts arise when revenues have been recorded but the amounts cannot be billed under the terms of the contracts. Such amounts are recoverable from customers upon various measures of performance, including achievement of certain milestones, completion of specified units or completion of the contract. Also included in costs and estimated earnings on uncompleted contracts are amounts EMCOR seeks or will seek to collect from customers or others for errors or changes in contract specifications or design, contract change orders in dispute or unapproved as to both scope and price, or other customer-related causes of unanticipated additional contract costs (claims and unapproved change orders). These amounts are recorded at their estimated net realizable value when realization is probable and can be reasonably estimated. No profit is recognized on the construction costs incurred in connection with these amounts. Unapproved change orders involve the use of estimates, and it is reasonably possible that revisions to the estimated recoverable amounts of recorded unapproved change orders may be made in the near-term. Claims made by EMCOR involve negotiation and, in certain cases, litigation. EMCOR expenses litigation costs as incurred, although it may seek to recover these costs as part of its claim. EMCOR believes that it has established legal basis for pursuing recovery of recorded claims, and it is management's intention to pursue and litigate these claims, if necessary, until a decision or settlement is reached. Claims also involve the use of estimates, and it is reasonably possible that revisions to the estimated recoverable amounts of recorded claims may be made in the near-term. Claims against EMCOR are recognized when a loss is considered probable and amounts are reasonably determinable. Costs and estimated earnings on uncompleted contracts and related amounts billed as of December 31, 2001 and 2000 were as follows (in thousands): 2001 2000 ---------- ---------- Costs incurred on uncompleted contracts .......... $4,779,515 $5,552,430 Estimated earnings ............................... 485,394 403,416 ---------- ---------- 5,264,909 5,955,846 Less: billings to date ........................... 5,362,802 6,112,702 ---------- ---------- $ (97,893) $ (156,856) ========== ========== Such amounts were included in the accompanying Consolidated Balance Sheets at December 31, 2001 and 2000 under the following captions (in thousands): 2001 2000 --------- --------- Costs and estimated earnings in excess of billings on uncompleted contracts ........... $ 221,272 $ 158,073 Billings in excess of costs and estimated earnings on uncompleted contracts .............. (319,165) (314,929) --------- --------- $ (97,893) $(156,856) ========= ========= As of December 31, 2001, costs and estimated earnings in excess of billings on uncompleted contracts included unbilled revenues for unapproved change orders of approximately $48.4 million and claims of approximately $51.7 million. In addition, accounts receivable as of December 31, 2001 include claims and contractually billed amounts related to such contracts of approximately $40.6 million. Generally, contractually billed amounts will not be paid by the customer to EMCOR until final resolution of related claims. CLASSIFICATION OF CONTRACT AMOUNTS In accordance with industry practice, EMCOR classifies as current all assets and liabilities related to the performance of long-term contracts. The contracting cycle for certain long-term contracts may extend beyond one year and, accordingly, collection or payment of amounts related to these contracts may extend beyond one year. Accounts receivable at December 31, 2001 and 2000 included $138.6 million and $160.9 million, respectively, of retainage billed under terms of the contracts. EMCOR estimates that approximately 75% of retainage recorded at December 31, 2001 will be collected during 2002. 22 EMCOR GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) NOTE B--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED) CASH AND CASH EQUIVALENTS For purposes of the consolidated financial statements, EMCOR considers all highly liquid instruments with original maturities of three months or less to be cash equivalents. EMCOR maintains a centralized cash management program whereby its excess cash balances are invested in high quality, short-term money market instruments which are considered cash equivalents. At times, cash balances in EMCOR's bank accounts may exceed federally insured limits. INVENTORIES Inventories, which consist primarily of construction materials, are stated at the lower of cost or market. Cost is determined principally using the average cost method. INVESTMENTS, NOTES AND OTHER LONG-TERM RECEIVABLES Investments, notes and other long-term receivables at December 31, 2001 were $16.8 million compared to $10.4 million at December 31, 2000, and primarily consist of investments in joint ventures accounted for using the equity method of accounting. PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment is stated at cost. Depreciation is recorded principally using the straight-line method over estimated useful lives ranging from 3 to 40 years. As events and circumstances indicate, EMCOR reviews the carrying amount of property, plant and equipment for impairment. In performing the review for recoverability, long-lived assets are assessed for possible impairment by comparing their carrying values to their undiscounted net pre-tax cash flows expected to result from the use of the asset. Impaired assets are written down to their fair values, generally their discounted cash flows. Through December 31, 2001, no adjustment for the impairment of Property, plant and equipment carrying value has been required. Property, plant and equipment in the accompanying Consolidated Balance Sheets consisted of the following amounts as of December 31, 2001 and 2000 (in thousands): 2001 2000 --------- -------- Machinery and equipment ........................... $ 54,225 $ 45,042 Furniture and fixtures ............................ 22,858 16,905 Land, buildings and leasehold improvements ........ 28,016 24,740 --------- -------- 105,099 86,687 Accumulated depreciation and amortization ......... (62,551) (47,728) --------- -------- $ 42,548 $ 38,959 ========= ======== GOODWILL Goodwill at December 31, 2001 and 2000, was approximately $56.0 million and $67.6 million, respectively, and reflects the excess of cost over fair market value of net identifiable assets of companies acquired in purchase transactions. Goodwill is being amortized using the straight-line method over periods ranging from 5 to 20 years. At the end of each quarter, EMCOR reviews events and changes in circumstances to determine whether the recoverability of the carrying value of goodwill should be reassessed. Should events or circumstances indicate that the carrying value may not be recoverable based on undiscounted future cash flows, an impairment loss measured by the difference between the discounted future cash flows (or another acceptable method for determining fair value) and the carrying value of goodwill would be recognized by EMCOR. Through December 31, 2001, no adjustment for the impairment of goodwill carrying value has been required. In July 2001, the Financial Accounting Standards Board issued Statement of Financial Accounting Standard No. 142, "Goodwill and Other Intangible Assets". For a further discussion of this new standard, please refer to the subheading "New Accounting Pronouncements" under this note B. 23 EMCOR GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) NOTE B--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED) INSURANCE RESERVES EMCOR's insurance liability is determined actuarially based on claims filed and an estimate of claims incurred but not yet reported. At December 31, 2001 and 2000, the estimated current portion of the discounted insurance liability was included in "Other accrued expenses and liabilities" in the accompanying Consolidated Balance Sheets. The non-current portion of the discounted insurance liability was included in "Other long-term obligations", and at December 31, 2001 and 2000 was $66.0 million and $53.7 million, respectively. FAIR VALUE OF FINANCIAL INSTRUMENTS EMCOR's financial instruments include accounts receivable, investments, notes and other long-term receivables, long-term debt and other financing commitments, for which carrying values approximate their fair values. During the second quarter of 2001, EMCOR called its $115.0 million 5.75% Convertible Subordinated Notes for redemption. All of the Convertible Subordinated Notes were converted, net of related deferred financing costs, into approximately 4.2 million shares of EMCOR common stock. FOREIGN OPERATIONS The financial statements and transactions of EMCOR's foreign subsidiaries are maintained in their functional currency and translated into U.S. dollars in accordance with Statement of Financial Accounting Standards No. 52, "Foreign Currency Translation". Translation adjustments have been accumulated as a separate component of Stockholders' equity as Accumulated other comprehensive loss. INCOME TAXES EMCOR accounts for income taxes in accordance with the provisions of Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes" ("SFAS 109"). SFAS 109 requires an asset and liability approach which requires the recognition of deferred tax assets and deferred tax liabilities for the expected future tax consequences of temporary differences between the carrying amounts and the tax bases of assets and liabilities. Valuation allowances are established when necessary to reduce net deferred tax assets to the amount expected to be realized. DERIVATIVES AND HEDGING ACTIVITIES Gains and losses on contracts designated as hedges of net investments in foreign subsidiaries are recognized in the Consolidated Statements of Stockholders' Equity and Comprehensive Income as a component of Accumulated other comprehensive loss. As of December 31, 2001, EMCOR did not have any forward contracts in effect, and forward contracts in effect during 2000 were not material to the Consolidated Financial Statements. VALUATION OF STOCK OPTION GRANTS EMCOR accounts for its stock options under Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB 25"). See Note I for pro forma information relating to treatment of EMCOR's stock options under Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation" ("SFAS 123"). NEW ACCOUNTING PRONOUNCEMENTS In July 2001, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards No. 141, "Business Combinations" ("SFAS 141") and Statement of Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets" ("SFAS 142"). SFAS 141 requires all business combinations be accounted for using the purchase method of accounting and that certain intangible assets acquired in a business combination be recognized as assets apart from goodwill. SFAS 141 was effective for all business combinations initiated after June 30, 2001. SFAS 142 requires goodwill to be tested for impairment under certain circumstances, and written down when impaired, rather than being amortized as previous standards required. Furthermore, SFAS 142 requires purchased intangible assets other than goodwill to be amortized over their useful lives unless these lives are determined to be indefinite. The annual reduction in expense due to the discontinuance of goodwill amortization beginning in 2002 should be approximately $3.4 million to $4.4 million. SFAS 142 is effective for fiscal years beginning after December 15, 2001. All companies have six months subsequent to the date of adoption to complete the initial goodwill impairment test. EMCOR has not yet determined any further impact SFAS 142 will have on its existing goodwill. 24 EMCOR GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) NOTE B--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED) In August 2001, the FASB issued Statement of Financial Accounting Standards No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets" ("SFAS 144"). SFAS 144 establishes a single accounting model, based on the framework established in Statement of Financial Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of" ("SFAS 121"), for long-lived assets to be disposed of by sale, and resolves significant implementation issues related to SFAS 121. This statement also supercedes the accounting reporting provisions of Accounting Principles Board Opinion No. 30, "Reporting the Results of Operations - Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions," ("APB 30") for the disposal of a segment of a business. The provisions of SFAS No. 144 are effective for the fiscal years beginning after December 15, 2001. EMCOR believes that the adoption of SFAS 144 will not have a material impact on its results of operations, financial position or cash flows. NOTE C--ACQUISITIONS OF BUSINESSES During 2001 and 2000, EMCOR paid additional consideration by reason of earn-outs for prior year acquisitions of an aggregate of $6.2 million and $4.2 million in cash, respectively. The purchase price of certain acquisitions is subject to finalization based on certain contingencies provided for in the purchase agreements. These acquisitions were accounted for by the purchase method, and the purchase price has been allocated to the assets acquired and liabilities assumed, based upon the estimated fair values of these assets and liabilities at the dates of acquisition. Goodwill, representing the excess purchase price over the fair value of amounts assigned to the net tangible assets acquired, was $56.0 million and $67.6 million at December 31, 2001 and 2000, respectively, and is being amortized over periods of 5 to 20 years. Amortization expense for the years ended December 31, 2001, 2000 and 1999 was $5.5, $4.6 million and $3.4 million, respectively. Goodwill was reduced by $12.3 million during 2001 due to the realization of operating loss carryforwards and other deferred tax attributes related to acquisitions. The pro forma effect on EMCOR's revenues, net income and earnings per share for 1999, as though the acquisitions occurred as of January 1, was not material. NOTE D--EARNINGS PER SHARE The following tables summarize EMCOR's calculation of Basic and Diluted Earnings per Share ("EPS") for the years ended December 31, 2001, 2000 and 1999: PER INCOME SHARES SHARE 2001 (NUMERATOR) (DENOMINATOR) AMOUNT ---- ----------- ---------- -------- BASIC EPS Income available to common stockholders ... $50,012,000 12,948,230 $3.86 ===== EFFECT OF DILUTIVE SECURITIES: Convertible Subordinated Notes, including assumed interest savings, net of tax ..................... 1,735,395 1,820,273 Options ................................... -- 471,705 Warrants .................................. -- -- ----------- ---------- DILUTED EPS ............................... $51,747,395 15,240,208 $3.40 =========== ========== ===== PER INCOME SHARES SHARE 2000 (NUMERATOR) (DENOMINATOR) AMOUNT ---- ----------- ---------- -------- BASIC EPS Income available to common stockholders ... $40,089,000 10,440,089 $3.84 ===== EFFECT OF DILUTIVE SECURITIES: Convertible Subordinated Notes, including assumed interest savings, net of tax ..................... 3,967,500 4,206,291 Options ................................... -- 297,306 Warrants .................................. -- -- ----------- ---------- DILUTED EPS ............................... $44,056,500 14,943,686 $2.95 =========== ========== ===== 25 EMCOR GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) NOTE D--EARNINGS PER SHARE -- (CONTINUED) PER INCOME SHARES SHARE 1999 (NUMERATOR) (DENOMINATOR) AMOUNT ---- ----------- ---------- -------- BASIC EPS Income available to common stockholders ... $27,821,000 9,732,930 $2.86 ===== EFFECT OF DILUTIVE SECURITIES: Convertible Subordinated Notes, including assumed interest savings, net of tax .... 4,099,750 4,206,291 Options ................................... -- 245,893 Warrants .................................. -- 259,708 ----------- ---------- DILUTED EPS ............................... $31,920,750 14,444,822 $2.21 =========== ========== ===== The number of EMCOR's options granted, which were excluded from the computation of Diluted EPS for the years ended December 31, 2001, 2000 and 1999 because they would be antidilutive, were 210,100, 37,000 and 211,720, respectively. NOTE E--CURRENT DEBT 1998 CREDIT FACILITY On December 22, 1998, EMCOR restated its June 19, 1996 credit facility; the amended credit facility provides EMCOR with a credit facility for borrowings of up to $150.0 million. The amended credit facility, which has an expiration date of June 30, 2003, is guaranteed by certain direct and indirect subsidiaries of EMCOR. The amended credit facility is secured by substantially all of the assets of EMCOR and most of its subsidiaries, and it provides for borrowing capacity available in the form of revolving loans and/or letters of credit. The amended credit facility contains various covenants, including, among other things, maintenance of certain financial ratios and significant restrictions with respect to cumulative aggregate payments for dividends, common stock repurchases, investments, acquisitions, indebtedness, capital expenditures, and prepayments of subordinated debt, all as set forth therein. The annual facility fee is 0.25% per $1,000 of the total credit facility. The revolving loans bear interest at (1) a rate which is the prime commercial lending rate announced by Harris Trust and Savings Bank from time to time (4.75% at December 31, 2001) plus 0% to 0.5%, based on certain financial tests or (2) a LIBOR rate (2.04% at December 31, 2001) plus 1.25% to 2.0% based on certain financial tests. The interest rates in effect at December 31, 2001 were 4.75% and 3.29%, respectively. Letters of credit fees issued under the credit facility ranging from 0.5% to 2.0% are charged based on type of letters of credit issued and certain financial tests. As of December 31, 2001 and 2000, EMCOR had approximately $20.5 million and $12.1 million of letters of credit outstanding, respectively. No revolving loans were outstanding under the 1998 Credit Facility at December 31, 2001 or 2000. FOREIGN BORROWINGS In December 2000, EMCOR's Canadian subsidiary, Comstock Canada Ltd., renewed a credit agreement with a bank providing for an overdraft facility of up to Cdn. $0.5 million. The facility is secured by a standby letter of credit and provides for interest at the bank's prime rate which was 4.0% at December 31, 2001. There were no borrowings outstanding under this credit agreement at December 31, 2001 or 2000. NOTE F--LONG-TERM DEBT Long-term debt in the accompanying Consolidated Balance Sheets consisted of the following amounts as of December 31, 2001 and 2000 (in thousands): 2001 2000 ------- -------- Convertible Subordinated Notes at 5.75% due 2005 .......... $ -- $115,000 Note Payable at 3.0%, due 2002 ............................ 573 -- Capitalized Lease Obligations at weighted average interest rates from 3.1% to 11.6%, payable in varying amounts through 2006 ................. 249 573 Other, at weighted average interest rates of approximately 10.0%, payable in varying amounts through 2016 .................................... 973 1,056 ------- -------- 1,795 116,629 Less: current maturities ................................ 947 751 ------- -------- $ 848 $115,878 ======= ======== 26 EMCOR GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) NOTE F--LONG-TERM DEBT -- (CONTINUED) CONVERTIBLE SUBORDINATED NOTES In March 1998, EMCOR sold, pursuant to an underwritten public offering, $115.0 million principal amount of 5.75% Convertible Subordinated Notes. During the second quarter of 2001, EMCOR called its $115.0 million 5.75% Convertible Subordinated Notes for redemption. All of the Convertible Subordinated Notes were converted, net of related deferred financing costs, into approximately 4.2 million shares of EMCOR common stock. CAPITALIZED LEASE OBLIGATIONS See Note K in the Notes to Consolidated Financial Statements. OTHER LONG-TERM DEBT Other long-term debt consists primarily of loans for real estate, office equipment, automobiles and building improvements. As of December 31, 2001 and 2000, respectively, other long-term debt totaling $1.6 million and $1.1 million was owed by certain of EMCOR's subsidiaries. The aggregate amount of other long-term debt maturing during the next five years is approximately $0.9 million in 2002, $0.2 million in 2003, $0.1 million in each of 2004, 2005 and 2006, and $0.2 million thereafter. NOTE G--INCOME TAXES EMCOR files a consolidated federal income tax return including all its U.S. subsidiaries. At December 31, 2001, EMCOR had net operating loss carryforwards ("NOLs") for U.S. income tax purposes of approximately $3.3 million, which expire in the year 2018. The NOLs are subject to review by the Internal Revenue Service. EMCOR adopted Fresh-Start Accounting in connection with EMCOR's bankruptcy reorganization in December 1994. As a result, the tax benefit of any net operating loss carryforwards or net deductible temporary differences which existed as of December 15, 1994 will result in a charge to the tax provision (provision in lieu of income taxes) and a credit to Capital surplus. Amounts credited to capital surplus were $21.4 million, $24.4 million and $15.6 million for the years ended December 31, 2001, 2000 and 1999, respectively. The income tax provision in the accompanying Consolidated Statements of Operations for the years ended December 31, 2001, 2000 and 1999 consisted of the following (in thousands): 2001 2000 1999 ------- ------- ------- Current: Federal .................................... $ 5,274 $ 1,364 $ 872 State and local ............................ 7,049 3,394 2,510 Foreign .................................... 1,989 1,180 1,730 ------- ------- ------- 14,312 5,938 5,112 ------- ------- ------- Deferred ................................... 3,725 1,138 1,100 ------- ------- ------- Provision in lieu of income taxes ............ 21,425 24,422 15,645 ------- ------- ------- $39,462 $31,498 $21,857 ======= ======= ======= Factors accounting for the variation from U.S. statutory income tax rates relating to continuing operations for the years ended December 31, 2001, 2000 and 1999 were as follows (in thousands): 2001 2000 1999 ------- ------- ------- Federal income taxes at the statutory rate ... $31,316 $25,055 $17,387 State and local income taxes, net of federal tax benefits ....................... 5,376 3,894 2,990 Foreign income taxes ......................... 68 890 271 Goodwill and other non-deductible expenses ... 2,088 1,771 1,336 Other ........................................ 614 (112) (127) ------- ------- ------- $39,462 $31,498 $21,857 ======= ======= ======= 27 EMCOR GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) NOTE G--INCOME TAXES -- (CONTINUED) The components of the net deferred income tax asset are included in "Prepaid expenses and other" and "Other assets" at December 31, 2001 and the net deferred income tax liability is included in "Other accrued expenses and liabilities" at December 31, 2000 in the accompanying Consolidated Balance Sheets. The amounts recorded for the years ended December 31, 2001, and 2000 were as follows (in thousands): 2001 2000 -------- -------- Deferred income tax assets: Net operating loss carryforwards ....................... $ 1,166 $ 16,257 Excess of amounts expensed for financial statement purposes over amounts deducted for income tax purposes .............................. 61,931 49,900 Other .................................................. -- 6,403 -------- -------- Total deferred income tax assets ....................... 63,097 72,560 Valuation allowance for deferred tax assets ............ (21,805) (68,787) -------- -------- Net deferred income tax assets ......................... 41,292 3,773 -------- -------- Deferred income tax liabilities: Costs capitalized for financial statement purposes and deducted for income tax purposes ........ (15,790) (7,885) -------- -------- Total deferred income tax liabilities .................. (15,790) (7,885) -------- -------- Net deferred income tax asset (liability) .............. $ 25,502 $ (4,112) ======== ======== Income before income taxes for the years ended December 31, 2001, 2000, and 1999 consisted of the following (in thousands): 2001 2000 1999 -------- -------- -------- United States .............................. $ 79,699 $ 59,105 $ 42,714 Foreign .................................... 9,775 12,482 6,964 -------- -------- -------- $ 89,474 $ 71,587 $ 49,678 ======== ======== ======== NOTE H--COMMON STOCK As part of a program previously authorized by the Board of Directors, EMCOR purchased 174,100 and 957,900 shares of its common stock during 1999 and 1998, respectively. The aggregate amount of $16.8 million paid for those shares has been classified as "Treasury stock, at cost" in the Consolidated Balance Sheet at December 31, 2001. EMCOR management is authorized to repurchase up to $20.0 million of EMCOR's common stock under this program. 28 EMCOR GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) NOTE I--STOCK OPTIONS AND WARRANTS EMCOR has stock option plans and programs under which employees receive stock options and a stock bonus plan for executives pursuant to which they receive restricted stock units. EMCOR also has stock option plans and restricted stock plans under which outside directors may receive stock options or shares of common stock. A summary of certain terms of the grants under the stock option plans and programs and stock plans are as follows:

AUTHORIZED EXERCISE SHARES VESTING EXPIRATION PRICE/VALUATION DATE ---------- ------- ---------- --------------------- 1994 Management Stock Option Plan 1,000,000 Generally, Ten years from Fair market value (the "1994 Plan") 33 1/3% on each grant date of common stock anniversary of grant on grant date date 1995 Non-Employee Directors' Non- 200,000 100% on grant date Ten years from Fair market value Qualified Stock Option Plan grant date of common stock (the "1995 Plan") on grant date 1997 Non-Employee Directors' Non- 300,000 (1) Five years from Fair market value Qualified Stock Option Plan grant date of common stock (the "1997 Directors' Stock on grant date (3) Option Plan") 1997 Stock Plan for Directors (the 150,000 (2) Five years from Fair market value "1997 Directors' Stock Plan") grant date of common stock on grant date (3) Executive Stock Bonus Plan 220,000 100% on grant date Ten years from Fair market value ("ESBP") grant date of common stock on grant date Other Stock Option Grants Not applicable Generally, either Ten years from Fair market value 100% on first grant date of common stock anniversary of grant on grant date date or 33 1/3% on each anniversary of grant date

---------- (1) At the election of an individual serving as a Director, the individual may elect to receive one-third, two-thirds or all of their retainer for a calendar year in the form of stock options. Such options vest quarterly over the calendar year. In addition, the individual will receive additional stock options equal to the product of 0.5 times the amount of stock options otherwise issued as a result of his election. (2) At the election of an individual serving as a Director, the individual may elect to receive one-third, two-thirds or all of their retainer for a calendar year in the form of deferred stock units equal in value to the retainer. In addition, the individual will receive additional deferred stock units equal to 0.2 times the amount of deferred stock units otherwise issued as a result of his election. Following termination of Board service, the director receives shares of common stock equal to the number of deferred stock units. (3) Generally, the grant date is the first business day of a calendar year for individuals who are serving as Directors as of such date. 29 EMCOR GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) NOTE I--STOCK OPTIONS AND WARRANTS -- (CONTINUED) The following table summarizes EMCOR's stock option and stock bonus plan activity since December 31, 1998:

1997 DIRECTORS' STOCK 1994 PLAN 1995 PLAN OPTION PLAN -------------------------- ------------------------- -------------------------- WEIGHTED WEIGHTED WEIGHTED AVERAGE AVERAGE AVERAGE SHARES PRICE SHARES PRICE SHARES PRICE ------- -------- -------- -------- -------- -------- Balance, December 31, 1998 .... 721,701 $10.44 85,500 $13.24 35,785 $19.94 Granted ..................... -- -- 18,000 $22.13 40,968 $16.19 Forfeited ................... -- -- -- -- -- -- Exercised ................... (16,933) $ 9.13 (10,500) $ 6.34 -- -- ------- -------- -------- Balance, December 31, 1999 .... 704,768 $10.47 93,000 $15.74 76,753 $17.94 Granted ..................... -- -- 18,000 $27.13 45,612 $17.56 Forfeited ................... -- -- -- -- -- -- Exercised ................... (23,001) $ 7.54 (10,500) $ 6.34 (6,828) $16.19 ------- -------- -------- Balance, December 31, 2000 .... 681,767 $10.57 100,500 $18.76 115,537 $17.89 Granted ..................... -- -- 18,000 $42.30 31,950 $25.44 Forfeited ................... -- -- -- -- -- -- Exercised ................... (97,366) $14.56 (15,000) $15.09 (7,602) $17.56 ------- -------- -------- Balance, December 31, 2001 .... 584,401 $ 9.90 103,500 $23.39 139,885 $19.64 ======= ======== ========

1997 DIRECTORS' STOCK OTHER STOCK OPTION PLAN ESBP GRANTS -------------------------- ------------------------- ------------------------- WEIGHTED WEIGHTED WEIGHTED AVERAGE AVERAGE AVERAGE SHARES PRICE SHARES PRICE SHARES PRICE ------- -------- -------- -------- -------- -------- Balance, December 31, 1998 .... 1,800 $20.00 -- -- -- -- Granted ..................... 330 $19.63 -- -- 315,000 $18.49 Forfeited ................... -- -- -- -- -- -- Exercised ................... (1,200) $20.00 -- -- -- -- ------- -------- -------- Balance, December 31, 1999 .... 930 $19.87 -- -- 315,000 $18.49 Granted ..................... -- -- -- -- 94,000 $18.44 Forfeited ................... -- -- -- -- -- -- Exercised ................... (600) $20.00 -- -- (2,000) $16.50 ------- -------- -------- Balance, December 31, 2000 .... 330 $19.63 -- -- 407,000 $18.49 Granted ..................... -- -- 56,707 $21.62 262,100 $37.36 Forfeited ................... -- -- -- -- -- -- Exercised ................... -- -- -- -- (16,666) $17.28 ------- -------- -------- Balance, December 31, 2001 .... 330 $19.63 56,707 $21.62 652,434 $26.10 ======= ======== ========

At December 31, 2001, 2000 and 1999, approximately 1,271,000, 1,005,000 and 943,000 options were exercisable, respectively. The weighted average exercise price of exercisable options at December 31, 2001, 2000 and 1999 was approximately $18.18, $12.77 and $12.28, respectively. 30 EMCOR GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) NOTE I--STOCK OPTIONS AND WARRANTS -- (CONTINUED) The following table summarizes information about EMCOR's stock options at December 31, 2001:

OPTIONS OUTSTANDING OPTIONS EXERCISABLE ---------------------------------- ----------------------------- RANGE OF WEIGHTED-AVERAGE WEIGHTED-AVERAGE WEIGHTED-AVERAGE EXERCISE PRICE NUMBER REMAINING LIFE EXERCISE PRICE NUMBER EXERCISE PRICE -------------- ------ ---------------- ---------------- ------ ---------------- $4.75-$5.13 397,400 3.26 Years $4.94 397,400 $ 4.94 $9.38 3,000 3.88 Years $9.38 3,000 $ 9.38 $14.13-$20.00 710,766 6.36 Years $18.69 548,435 $18.45 $20.38-$22.13 96,041 8.44 Years $21.71 83,375 $21.67 $25.44-$27.13 119,950 8.94 Years $25.69 49,950 $26.05 $41.70-$42.30 210,100 9.92 Years $41.75 189,100 $41.76

The weighted average fair value of options granted during 2001, 2000 and 1999 were $30.02, $19.18 and $18.41, respectively. The fair value of each option grant is estimated on the date of grant using the Black-Scholes option pricing model with the following weighted-average assumptions used for grants in 2001, 2000 and 1999: risk-free interest rates of 4.1% to 6.6% (representing the risk-free interest rate at the date of the grant); expected dividend yields of zero percent; expected terms of 3.3 to 3.9 years; and expected volatility of 83.5%, 71.2%, 73.6% and 87.3% for options granted during 2001, 2000, 1999 and 1998, respectively. EMCOR applies APB 25 and related interpretations in accounting for its stock options. Accordingly, no compensation cost has been recognized in the accompanying Consolidated Statements of Operations for the years ended December 31, 2001, 2000 and 1999 for stock options granted during those years, as EMCOR grants stock options at fair market value. Had compensation cost for these options been determined consistent with SFAS 123, EMCOR's net income, Basic EPS and Diluted EPS would have been reduced from the following as reported amounts to the following pro forma amounts (in thousands, except per share amounts): 2001 2000 1999 ------- ------- ------- Net income: As reported ................................ $50,012 $40,089 $27,821 Pro forma .................................. $45,240 $37,204 $25,597 Basic EPS: As reported ................................ $ 3.86 $ 3.84 $ 2.86 Pro forma .................................. $ 3.49 $ 3.56 $ 2.63 Diluted EPS: As reported ................................ $ 3.40 $ 2.95 $ 2.21 Pro forma .................................. $ 3.08 $ 2.76 $ 2.06 WARRANTS Pursuant to EMCOR's bankruptcy reorganization, when it was formerly known as JWP, Inc., EMCOR issued to the holders of $7,040,000 principal amount of its pre-bankruptcy petition 7.75% convertible subordinated debentures and $9,600,000 principal amounts of its pre-bankruptcy petition 12.0% Subordinated Notes, their pro rata share of each of two series of five-year Warrants to purchase shares of Common Stock, namely Series X Warrants and Series Y Warrants, with an exercise price of $12.55 per share and $17.55 per share, respectively. In addition, approximately 28,000 Series X Warrants and 28,000 Series Y Warrants, were issued to Belmont Capital Partners II, L. P. as a portion of additional interest under a debtor-in-possession credit facility. During 1999, 600,603 Series X and 141,944 Series Y Warrants were exercised. All unexercised Series X and Series Y Warrants expired on December 15, 1999. 31 EMCOR GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) NOTE J--RETIREMENT PLANS EMCOR's United Kingdom subsidiary has a defined benefit pension plan covering substantially all eligible employees. The benefits under the plan are based on wages and years of service with the subsidiary. EMCOR's policy is to fund the minimum amount required by law. The change in benefit obligation and plan assets for the years ended December 31, 2001 and 2000 consisted of the following components (in thousands): 2001 2000 --------- --------- CHANGE IN PENSION BENEFIT OBLIGATION Benefit obligation at beginning of year .............. $ 101,488 $ 97,217 Service cost ......................................... 5,693 6,028 Interest cost ........................................ 6,083 5,553 Plan participant's contributions ..................... 2,943 2,529 Actuarial gain ....................................... 89 1,747 Benefits paid ........................................ (3,176) (4,209) Foreign currency exchange rate changes ............... (2,522) (7,377) --------- --------- Benefit obligation at end of year .................. $ 110,598 $ 101,488 --------- --------- CHANGE IN PENSION PLAN ASSETS Fair value of plan assets at beginning of year ....... $ 95,882 $ 101,247 Actual return on plan assets ......................... (10,322) (1,359) Employer contributions ............................... 6,108 5,357 Plan participants' contributions ..................... 2,943 2,529 Benefits paid ........................................ (3,176) (4,209) Foreign currency exchange rate changes ............... (2,382) (7,683) --------- --------- Fair values of plan assets at end of year .......... $ 89,053 $ 95,882 --------- --------- Funded status ........................................ $ (21,545) $ (5,606) Unrecognized transition amount ....................... (199) (278) Unrecognized prior service cost ...................... 331 409 Unrecognized losses/(gains) .......................... 21,441 4,433 --------- --------- Net amount recognized .............................. $ 28 $ (1,042) ========= ========= AMOUNTS RECOGNIZED IN THE CONSOLIDATED FINANCIAL STATEMENTS Employer contributions ............................... $ 6,108 $ 5,357 Net periodic pension benefit cost .................... (5,064) (4,391) Accrued pension cost brought forward ................. (1,042) (2,173) Foreign currency exchange rate changes ............... 26 165 --------- --------- Net amount recognized as accrued pension asset (liability) .......................... $ 28 $ (1,042) ========= ========= The assumptions used as of December 31, 2001, 2000 and 1999 in determining pension cost and liability shown above were as follows: 2001 2000 1999 ---- ---- ---- Discount rate ....................................... 6.0% 6.0% 6.0% Annual rate of salary provision ..................... 4.0% 4.0% 4.0% Annual rate of return on plan assets ................ 7.0% 7.0% 7.5% For measurement purposes, a 2.5% annual rate of increase in the per capita cost of covered pension benefits was assumed for 2001 and 2000. 32 EMCOR GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) NOTE J--RETIREMENT PLANS -- (CONTINUED) The components of net periodic pension benefit cost for the years ended December 31, 2001, 2000 and 1999 were as follows (in thousands): 2001 2000 1999 ------- -------- -------- Service cost ................................. $ 5,693 $ 6,028 $ 6,285 Interest cost ................................ 6,083 5,553 5,243 Expected return on plan assets ............... (6,781) 1,359 (17,810) Net amortization of prior service cost and actuarial (gain)/loss .................. 69 (8,549) 11,690 ------- -------- -------- Net periodic pension benefit cost ............ $ 5,064 $ 4,391 $ 5,408 ======= ======== ======== EMCOR contributes to various union defined contribution pension funds based upon wages paid to union employees of EMCOR. Such contributions approximated $92.0 million, $88.9 million and $71.1 million for the years ended December 31, 2001, 2000 and 1999, respectively. EMCOR has a defined contribution retirement plan that covers its U.S. non-union eligible employees. Contributions to this plan are based on a percentage of the employee's base compensation. The expense recognized for the years ended December 31, 2001, 2000 and 1999 for the defined contribution plan was $3.2 million, $2.9 million and $2.2 million, respectively. NOTE K--COMMITMENTS AND CONTINGENCIES EMCOR and its subsidiaries lease land, buildings and equipment under various leases. The leases frequently include renewal options and require EMCOR to pay for utilities, taxes, insurance and maintenance expenses. Future minimum payments, by year and in the aggregate, under capital leases, non-cancelable operating leases and related sub-leases with initial or remaining terms of one or more years at December 31, 2001 were as follows (in thousands): CAPITAL OPERATING SUBLEASE LEASE LEASE INCOME ------ ------- ------ 2002 .......................................... $ 121 $25,138 $ 637 2003 .......................................... 98 19,721 647 2004 .......................................... 34 15,080 546 2005 .......................................... 8 9,741 389 2006 .......................................... 6 5,581 355 Thereafter .................................... -- 7,708 1,457 ------ ------- ------ Total minimum lease payments .................. 267 $82,969 $4,031 ======= ====== Amounts representing interest ................. (18) ----- Present value of net minimum lease payments ... $ 249 ===== Rent expense for the years ended December 31, 2001, 2000 and 1999 was $28.5 million, $25.4 million and $15.1 million, respectively. Rent expense for the years ended December 31, 2001, 2000 and 1999 included sublease rental income of $0.7 million, $0.6 million and $0.7 million, respectively. EMCOR has employment agreements for a fixed term with its executive officers and certain management personnel. The employment agreements with executive officers may be terminated by the executive or EMCOR but if terminated by EMCOR, the agreements provide for severance benefits. Certain of the agreements provide the executives with certain additional rights if a change of control (as defined) of EMCOR occurs. EMCOR is contingently liable to sureties in respect of performance and payment bonds issued by sureties in connection with certain contracts entered into by EMCOR's subsidiaries in the normal course of their business. EMCOR has agreed to indemnify the sureties for any payments made by them in respect of such bonds. 33 EMCOR GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) NOTE K--COMMITMENTS AND CONTINGENCIES -- (CONTINUED) EMCOR is subject to regulation with respect to the handling of certain materials used in construction which are classified as hazardous or toxic by Federal, State and local agencies. EMCOR's practice is to avoid participation in projects principally involving the remediation or removal of such materials. However, where remediation is a required part of contract performance, EMCOR believes it complies with all applicable regulations governing the discharge of material into the environment or otherwise relating to the protection of the environment. A subsidiary of EMCOR has guaranteed indebtedness of a venture in which it has a 40% interest; the other venture partner, Baltimore Gas and Electric, has a 60% interest. The venture designs, constructs, owns, operates, leases and maintains facilities to produce chilled water for sale to customers for use in cooling. These guarantees are not expected to have a material adverse effect on EMCOR's financial position or results of operations. Under one guarantee, each of the venturers is jointly and severally liable for the venture's $25.0 million borrowing due December 2031. The other guarantee is related to the venture's $50.0 million revolving credit facility expiring September 2002, under which guarantee EMCOR's subsidiary could be responsible for 40% of the indebtedness. Pursuant to EMCOR's bankruptcy reorganization, when it was formerly known as JWP, Inc., a wholly-owned subsidiary SellCo Corporation ("SellCo") issued approximately $48.1 million principal amount of 12.0% Subordinated Contingent Payments Notes, due 2004, (the "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 the sales of stock or assets of SellCo subsidiaries were to be used to redeem SellCo Notes. The SellCo Notes are not obligations of EMCOR and, accordingly, are not included in the accompanying Consolidated Balance Sheets as of December 31, 2001 and 2000. Since the date of issuance, approximately $23.2 million of the SellCo Notes have been redeemed with proceeds from the sale of stock and assets of SellCo subsidiaries and the prepayment by EMCOR of the Supplemental SellCo Note. The SellCo Notes mature on December 15, 2004 if not deemed canceled at an earlier date pursuant to the Indenture. NOTE L--ADDITIONAL CASH FLOW INFORMATION The following presents information about cash paid for interest and income taxes and non-cash financing activities for the years ended December 31, 2001, 2000 and 1999 (in thousands): 2001 2000 1999 -------- -------- -------- Cash paid during the year for: Interest ................................... $ 4,195 $8,290 $9,018 Income taxes ............................... $ 7,846 $4,039 $5,418 Non-cash financing activities: 5.75% Convertible Subordinated Notes due 2005, converted into common stock .... $115,000 $ -- $ -- NOTE M--SEGMENT INFORMATION EMCOR has the following reportable segments: United States electrical construction and facilities services, United States mechanical construction and facilities services, United States other services, Canada construction and facilities services, United Kingdom construction and facilities services and Other international construction and facilities services. The segments (i) United States other services primarily represents those operations which principally provide consulting and maintenance services and (ii) Other international construction and facilities services represents EMCOR's operations outside of the United States, Canada, and the United Kingdom, primarily in South Africa, the Middle East and Europe, performing electrical construction, mechanical construction and facilities services. The following presents information about industry segments and geographic areas for the years ended December 31, 2001, 2000 and 1999 (in thousands):

2001 2000 1999 ---------- ---------- ---------- Revenues from unrelated entities: United States electrical construction and facilities services ... $1,334,674 $1,350,716 $ 993,073 United States mechanical construction and facilities services ... 1,202,078 1,262,006 1,067,063 United States other services .................................... 209,721 163,936 82,814 ---------- ---------- ---------- Total United States operations .................................. 2,746,473 2,776,658 2,142,950 Canada construction and facilities services ..................... 198,221 236,961 196,694 United Kingdom construction and facilities services ............. 463,560 446,251 553,654 Other international construction and facilities services ........ 11,600 334 664 ---------- ---------- ---------- Total worldwide operations ...................................... $3,419,854 $3,460,204 $2,893,962 ========== ========== ==========

34 EMCOR GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) NOTE M--SEGMENT INFORMATION -- (CONTINUED)

2001 2000 1999 ----------- ----------- ----------- Total revenues: United States electrical construction and facilities services .............. $ 1,371,188 $ 1,373,977 $ 1,000,234 United States mechanical construction and facilities services .............. 1,234,964 1,283,740 1,074,758 United States other services ............................................... 215,458 166,759 83,411 Less intersegment revenues ................................................. (75,137) (47,818) (15,453) ----------- ----------- ----------- Total United States operations ............................................. 2,746,473 2,776,658 2,142,950 Canada construction and facilities services ................................ 198,221 236,961 196,694 United Kingdom construction and facilities services ........................ 463,560 446,251 553,654 Other international construction and facilities services ................... 11,600 334 664 ----------- ----------- ----------- Total worldwide operations ................................................. $ 3,419,854 $ 3,460,204 $ 2,893,962 =========== =========== =========== Operating income (loss): United States electrical construction and facilities services .............. $ 75,280 $ 58,644 $ 38,485 United States mechanical construction and facilities services .............. 41,408 35,914 37,957 United States other services ............................................... (7,163) (5,558) (4,532) ----------- ----------- ----------- Total United States operations ............................................. 109,525 89,000 71,910 Canada construction and facilities services ................................ 2,312 5,160 3,991 United Kingdom construction and facilities services ........................ 7,170 6,026 3,208 Other international construction and facilities services ................... (1,220) 551 (355) Corporate administration ................................................... (29,105) (21,812) (20,663) ----------- ----------- ----------- Total worldwide operations ................................................. 88,682 78,925 58,091 Other corporate items: Interest expense ........................................................... (4,795) (9,705) (10,520) Interest income ............................................................ 5,587 2,367 2,107 ----------- ----------- ----------- Income before taxes ........................................................ $ 89,474 $ 71,587 $ 49,678 =========== =========== =========== Capital expenditures: United States electrical construction and facilities services .............. $ 3,731 $ 3,495 $ 3,689 United States mechanical construction and facilities services .............. 5,095 6,071 3,081 United States other services ............................................... 2,022 1,867 586 ----------- ----------- ----------- Total United States operations ............................................. 10,848 11,433 7,356 Canada construction and facilities services ................................ 1,043 1,520 804 United Kingdom construction and facilities services ........................ 5,065 3,470 2,226 Other international construction and facilities services ................... -- -- 113 Corporate administration ................................................... 983 275 238 ----------- ----------- ----------- Total worldwide operations ................................................. $ 17,939 $ 16,698 $ 10,737 =========== =========== =========== Depreciation and amortization: United States electrical construction and facilities services .............. $ 3,868 $ 3,485 $ 3,284 United States mechanical construction and facilities services .............. 6,655 6,130 5,424 United States other services ............................................... 3,418 2,724 1,988 ----------- ----------- ----------- Total United States operations ............................................. 13,941 12,339 10,696 Canada construction and facilities services ................................ 772 836 680 United Kingdom construction and facilities services ........................ 2,858 2,858 2,550 Other international construction and facilities services ................... -- -- 60 Corporate administration ................................................... 629 68 107 ----------- ----------- ----------- Total worldwide operations ................................................. $ 18,200 $ 16,101 $ 14,093 =========== =========== ===========

2001 2000 ----------- ----------- Costs and estimated earnings in excess of billings on uncompleted contracts: United States electrical construction and facilities services ................................ $ 70,838 $ 46,323 United States mechanical construction and facilities services ................................ 122,104 91,977 United States other services ................................................................. 1,184 2,540 ----------- ----------- Total United States operations ............................................................... 194,126 140,840 Canada construction and facilities services .................................................. 13,384 9,087 United Kingdom construction and facilities services .......................................... 13,762 8,146 Other international construction and facilities services ..................................... -- -- ----------- ----------- Total worldwide operations ................................................................... $ 221,272 $ 158,073 =========== ===========

35 EMCOR GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) NOTE M--SEGMENT INFORMATION -- (CONTINUED)

2001 2000 ---------- ---------- Billings in excess of costs and estimated earnings on uncompleted contracts: United States electrical construction and facilities services ......................................... $ 176,401 $ 190,276 United States mechanical construction and facilities services ......................................... 99,267 93,491 United States other services .......................................................................... 1,914 2,191 ---------- ---------- Total United States operations ........................................................................ 277,582 285,958 Canada construction and facilities services ........................................................... 7,217 5,835 United Kingdom construction and facilities services ................................................... 34,236 23,136 Other international construction and facilities services .............................................. 130 -- ---------- ---------- Total worldwide operations ............................................................................ $ 319,165 $ 314,929 ========== ========== Long-lived assets: United States electrical construction and facilities services ......................................... $ 13,083 $ 10,867 United States mechanical construction and facilities services ......................................... 66,738 71,427 United States other services .......................................................................... 22,394 23,842 ---------- ---------- Total United States operations ........................................................................ 102,215 106,136 Canada construction and facilities services ........................................................... 4,365 4,553 United Kingdom construction and facilities services ................................................... 8,485 7,761 Other international construction and facilities services .............................................. 3,384 3,649 Corporate administration .............................................................................. 1,623 1,004 ---------- ---------- Total worldwide operations ............................................................................ $ 120,072 $ 123,103 ========== ========== Total assets: United States electrical construction and facilities services ......................................... $ 417,678 $ 422,647 United States mechanical construction and facilities services ......................................... 457,596 450,684 United States other services .......................................................................... 60,965 79,323 ---------- ---------- Total United States operations ........................................................................ 936,239 952,654 Canada construction and facilities services ........................................................... 62,234 60,122 United Kingdom construction and facilities services ................................................... 152,981 136,645 Other international construction and facilities services .............................................. 11,497 14,181 Corporate administration .............................................................................. 186,713 98,262 ---------- ---------- Total worldwide operations ............................................................................ $1,349,664 $1,261,864 ========== ==========

NOTE N--SELECTED UNAUDITED QUARTERLY INFORMATION (IN THOUSANDS, EXCEPT PER SHARE DATA)

MARCH 31 JUNE 30 SEPT. 30 DEC. 31 -------- -------- -------- -------- 2001 QUARTERLY RESULTS Revenues ....................................................................... $837,555 $869,506 $848,629 $864,164 Gross profit ................................................................... $ 80,519 $ 92,744 $100,867 $117,693 Net income ..................................................................... $ 5,657 $ 11,622 $ 15,291 $ 17,442 Basic EPS ...................................................................... $ 0.54 $ 1.00 $ 1.03 $ 1.18 ======== ======== ======== ======== Diluted EPS .................................................................... $ 0.44 $ 0.81 $ 1.00 $ 1.14 ======== ======== ======== ======== 2000 QUARTERLY RESULTS Revenues ....................................................................... $741,522 $866,850 $921,568 $930,264 Gross profit ................................................................... $ 72,545 $ 85,343 $ 88,469 $111,460 Net income ..................................................................... $ 4,930 $ 9,158 $ 11,479 $ 14,522 Basic EPS ...................................................................... $ 0.47 $ 0.88 $ 1.10 $ 1.39 ======== ======== ======== ======== Diluted EPS .................................................................... $ 0.40 $ 0.68 $ 0.83 $ 1.03 ======== ======== ======== ========

36 EMCOR GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) NOTE O--LEGAL PROCEEDINGS In February 1995, as part of an investigation by the New York County District Attorney's office into the business affairs of a general contractor that did business with EMCOR's subsidiary, Forest Electric Corp. ("Forest"), a search warrant was executed at Forest's executive offices. On July 12, 2000, Forest was served with a Subpoena Duces Tecum to produce certain documents as part of a broader investigation by the New York County District Attorney's office into illegal business practices in the New York City construction industry. Forest has been informed by the New York County District Attorney's office that it and certain of its officers are targets of the investigation. Forest has produced documents in response to the subpoena and intends to cooperate fully with the District Attorney's office investigation as it proceeds. On July 31, 1998, a former employee of a subsidiary of EMCOR filed a class-action complaint on behalf of the participants in two employee benefit plans sponsored by EMCOR against EMCOR and other defendants for breach of fiduciary duty under the Employee Retirement Income Security Act. All of the claims relate to alleged acts or omissions which occurred during the period May 1991 to December 1994. The principal allegations of the complaint are that the defendants breached their fiduciary duties by causing the plans to purchase and hold stock of EMCOR when it was then known as JWP, Inc. and when the defendants knew or should have known it was imprudent to do so. The action has been settled, subject to court approval. The amount to be paid by EMCOR in connection with the proposed settlement would not be material. In December 2001, the Company's Canadian subsidiary Comstock Canada Limited ("Comstock") commenced an action against Atomic Energy of Canada Limited ("AECL") claiming approximately Cdn. $6.0 million in connection with Comstock's work on two medical isotope nuclear reactors and associated work at AECL's facility at Chalk River, Ontario. Comstock's claim is for holdback, unpaid change requests, loss of productivity and extended duration costs. AECL has filed a defense denying Comstock's claim and counterclaimed against Comstock for Cdn. $47.0 million claiming substantial deficiencies in Comstock's work which are alleged to have resulted in the need to replace a portion of Comstock's work and installed materials and the need to reinstall various components of the reactor systems. These deficiencies are alleged to have caused a significant delay in AECL's ability to obtain the necessary certifications for operation of the systems. To date, there has been no document exchange or discovery in this litigation. The Company believes it has good and meritorious defenses to the AECL counterclaim. Substantial settlements or damage judgements against EMCOR arising out of these matters could have a material adverse effect on EMCOR's business, operating results and financial condition. In addition to the above, EMCOR is involved in other legal proceedings and claims, asserted by and against EMCOR, which have arisen in the ordinary course of business. EMCOR believes it has a number of valid defenses to these actions and EMCOR intends to vigorously defend or assert these claims and does not believe that a significant liability will result. However, EMCOR cannot predict the outcome thereof or the impact that an adverse result of the matters discussed above will have upon EMCOR's financial position or results of operations. Expenses related to the assertion of defense of claims are expensed as incurred. NOTE P--SUBSEQUENT EVENT On February 11, 2002, EMCOR signed a definitive agreement with Comfort Systems USA, Inc. ("Comfort Systems") to acquire nineteen of Comfort Systems' subsidiaries. Under the terms of the agreement, EMCOR will pay Comfort Systems $186.25 million, approximately $164.25 million in cash and approximately $22.0 million by assumption of Comfort Systems notes payable to former owners of certain of the acquired companies. EMCOR will fund the acquisition through a combination of cash on hand and borrowings under its revolving credit facility. The acquisition is expected to close in the first quarter of 2002, pending customary closing conditions and regulatory approval. 37 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To the Board of Directors and Stockholders of EMCOR Group, Inc.: We have audited the accompanying consolidated balance sheets of EMCOR Group, Inc. (a Delaware corporation) and subsidiaries (the "Company") as of December 31, 2001 and 2000, and the related consolidated statements of operations, cash flows and stockholders' equity and comprehensive income for each of the three years in the period ended December 31, 2001. These consolidated financial statements and the schedule referred to below are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements and schedule based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2001 and 2000, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2001, in conformity with accounting principles generally accepted in the United States. Our audits were made for the purpose of forming an opinion on the basic financial statements taken as a whole. The schedule of Valuation and Qualifying Accounts is presented for purposes of complying with the Securities and Exchange Commission's rules and is not part of the basic financial statements. This schedule has been subjected to the auditing procedures applied in the audits of the basic financial statements and, in our opinion, fairly states in all material respects the financial data required to be set forth therein in relation to the basic financial statements taken as a whole. ARTHUR ANDERSEN LLP Stamford, Connecticut February 20, 2002 38 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE Not Applicable PART III The Items comprising Part III information will be filed as an amendment to this Form 10-K no later than 120 days after December 31, 2001, the end of EMCOR's fiscal year covered by this Form 10-K. 39 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (a)(1) The following consolidated financial statements of EMCOR Group, Inc. and Subsidiaries are included in Part II, Item 8: Financial Statements: Consolidated Balance Sheets--December 31, 2001 and 2000 Consolidated Statements of Operations--Years Ended December 31, 2001, 2000 and 1999 Consolidated Statements of Cash Flows--Years Ended December 31, 2001, 2000 and 1999 Consolidated Statements of Stockholders' Equity and Comprehensive Income--Years Ended December 31, 2001, 2000 and 1999 Notes to Consolidated Financial Statements Report of Independent Public Accountants (a)(2) The following financial statement schedules are included in this Form 10-K report: Schedule II--Valuation And Qualifying Accounts All other schedules are omitted because they are not required, are inapplicable, or the information is otherwise shown in the consolidated financial statements or notes thereto. (a)(3) The exhibits listed on the Exhibit Index following the consolidated financial statements hereof are filed herewith in response to this Item. (b) Reports on Form 8-K: No reports on Form 8-K have been filed by EMCOR during the last quarter of the year covered by this report. 40 SCHEDULE II EMCOR GROUP, INC. AND SUBSIDIARIES VALUATION AND QUALIFYING ACCOUNTS (IN THOUSANDS)

BALANCE AT ADDITIONS BEGINNING COSTS AND CHARGED TO BALANCE AT DESCRIPTION OF YEAR EXPENSES OTHER ACCOUNTS DEDUCTIONS(1) END OF YEAR ------------------------------- ---------- --------- -------------- ------------ ----------- ALLOWANCE FOR DOUBTFUL ACCOUNTS Year Ended December 31, 2001 $36,917 2,856 -- (4,682) $35,091 Year Ended December 31, 2000 $31,083 6,419 -- (585) $36,917 Year Ended December 31, 1999 $24,006 5,967 5,094 (3,984) $31,083

---------- (1) Deductions represent uncollectible balances of accounts receivable written off, net of recoveries. 41 EMCOR GROUP, INC. AND SUBSIDIARIES EXHIBIT INDEX EXHIBIT INCORPORATED BY REFERENCE NO. DESCRIPTION TO, OR PAGE NUMBER ---- ----------- ------------------------- 2(a) -- Disclosure Statement and Third Amended Exhibit 2(a) to EMCOR's Joint Plan of Reorganization (the "Plan Registration Statement of Reorganization") proposed by EMCOR on Form 10 as originally Group, Inc. (formerly JWP INC.) (the filed March 17, 1995 "Company" or "EMCOR") and its subsidiary (the "Form 10") SellCo Corporation ("SellCo"), as approved for dissemination by the United States Bankruptcy Court, Southern District of New York (the "Bankruptcy Court"), on August 22, 1994. 2(b) -- Modification to the Plan of Exhibit 2(b) to Form 10 Reorganization dated September 29, 1994 2(c) -- Second Modification to the Plan of Exhibit 2(c) to Form 10 Reorganization dated September 30, 1994 2(d) -- Confirmation Order of the Bankruptcy Exhibit 2(d) to Form 10 Court dated September 30, 1994 (the "Confirmation Order") confirming the Plan of Reorganization, as amended 2(e) -- Amendment to the Confirmation Order Exhibit 2(e) to Form 10 dated December 8, 1994 2(f) -- Post-confirmation modification to the Exhibit 2(f) to Form 10 Plan of Reorganization entered on December 13, 1994 3(a-1) -- Restated Certificate of Incorporation Exhibit 3(a-5) to of EMCOR filed December 15, 1994 Form 10 3(a-2) -- Amendment dated November 28, 1995 to the Exhibit 3(a-2) to Restated Certificate of Incorporation EMCOR's Annual Report on of EMCOR Form 10-K for the year ended December 31, 1995 (the "1995 Form 10-K") 3(a-3) -- Amendment dated February 12, 1998 to the Exhibit 3(a-3) to Restated Certificate of Incorporation EMCOR's Annual Report on Form 10-K for the year ended December 31, 1997 (the "1997 Form 10-K") 3(b) -- Amended and Restated By-Laws Exhibit 3(b) to EMCOR's Annual Report on Form 10-K for the year ended December 31, 1998 (the "1998 Form 10-K") 3(c) -- Rights Agreement dated March 3, 1997 Exhibit 1 to EMCOR's between EMCOR and the Bank of New York Report on Form 8-K dated March 3, 1997 4.1 -- Amendment and Restatement of Credit Exhibit 4.1 to 1998 Agreement (the "Credit Agreement") dated Form 10-K as of December 22, 1998 among EMCOR, certain of its subsidiaries and Harris Trust and Savings Bank, individually and as agent, and the Lenders which are or become Parties thereto* 4.2 -- Subordinated Indenture dated as of March Exhibit 4(b) to EMCOR's 18, 1998 ("Indentured") between EMCOR Quarterly Report on Form and State Street Bank and Trust Company, 10-Q for the quarter as Trustee ("State Street Bank") ended March 31, 1998 ("March 1998 Form 10-Q") 4.3 -- First Supplemental Indenture dated as Exhibit 4(c) to of March 18, 1998 to Indenture between March 1998 Form 10-Q EMCOR and State Street Bank 42 EMCOR GROUP, INC. AND SUBSIDIARIES EXHIBIT INDEX EXHIBIT INCORPORATED BY REFERENCE NO. DESCRIPTION TO, OR PAGE NUMBER ---- ----------- ------------------------- 4.4 -- Indenture dated as of December 15, 1994, Exhibit 4.4 to Form 10 between SellCo and Fleet National Bank of Connecticut, as trustee, in respect of SellCo's 12% Subordinated Contingent Payment Notes, Due 2004 10(a) -- Employment Agreement made as of January Page 1, 2002 between EMCOR and Frank T. MacInnis 10(b) -- Employment Agreement made as of Page January 1, 2002 between EMCOR and Sheldon I. Cammaker 10(c) -- Employment Agreement made as of Page January 1, 2002 between EMCOR and Leicle E. Chesser 10(d) -- Employment Agreement made as of Page January 1, 2002 between EMCOR and Jeffrey M. Levy 10(e) -- Employment Agreement made as of Page January 1, 2002 between EMCOR and R. Kevin Matz 10(f) -- Employment Agreement made as of Page January 1, 2002 between EMCOR and Mark A. Pompa 10(g-1) -- 1994 Management Stock Option Plan Exhibit 10(o) to Form 10 ("1994 Option Plan") 10(g-2) -- Amendment to Section 12 of the Exhibit 10(g-2) to 1994 Option Plan EMCOR's Annual Report on Form 10-K for the year ended December 31, 2000 10(g-3) -- Amendment to Section 13 of the Exhibit 10(g-3) to 1994 Option Plan EMCOR's Annual Report on Form 10-K for the year ended December 31, 2000 10(h-1) -- 1995 Non-Employee Directors' Exhibit 10(p) to Form 10 Non-Qualified Stock Option Plan ("1995 Option Plan") 10(h-2) -- Amendment to Section 10 of the Exhibit 10(h-2) to 1995 Option Plan EMCOR's Annual Report on Form 10-K for the year ended December 31, 2000 10(i-1) -- 1997 Non-Employee Directors' Exhibit 10(k) to 1999 Non-Qualified Stock Option Plan Form 10-K ("1997 Option Plan") 10(i-2) -- Amendment to Section 9 of the Exhibit 10(i-2) to 1997 Option Plan EMCOR's Annual Report on Form 10-K for the year ended December 31, 2000 10(j) -- 1997 Stock Plan for Directors Exhibit 10(l) to 1999 Form 10-K 10(k-1) -- Continuity Agreement dated as Exhibit 10(a) to EMCOR's of June 22, 1998 between Quarterly Report on Form Frank T. MacInnis and EMCOR 10-Q for the quarter ("MacInnis Continuity Agreement") ended June 30, 1998 ("June 1998 Form 10-Q") 10(k-2) -- Amendment dated as of May 4, 1999 to Exhibit 10(h) to June MacInnis Continuity Agreement 1999 Form 10-Q 10(l-1) -- Continuity Agreement dated as of Exhibit 10(c) to the June 22, 1998 between June 1998 Form 10-Q Sheldon I. Cammaker and EMCOR ("Cammaker Continuity Agreement") 10(l-2) -- Amendment dated as of May 4, 1999 to Exhibit 10(i) to June Cammaker Continuity Agreement 1999 Form 10-Q 10(m-1) -- Continuity Agreement dated as of Exhibit 10(d) to the June 22, 1998 between June 1998 Form 10-Q Leicle E. Chesser and EMCOR ("Chesser Continuity Agreement") 10(m-2) -- Amendment dated as of May 4, 1999 to Exhibit 10(j) to Chesser Continuity Agreement June 1999 Form 10-Q 43 EMCOR GROUP, INC. AND SUBSIDIARIES EXHIBIT INDEX EXHIBIT INCORPORATED BY REFERENCE NO. DESCRIPTION TO, OR PAGE NUMBER ---- ----------- ------------------------- 10(n-1) -- Continuity Agreement dated as of Exhibit 10(b) to the June 22, 1998 between June 1998 Form 10-Q Jeffrey M. Levy and EMCOR ("Levy Continuity Agreement") 10(n-2) -- Amendment dated as of May 4, 1999 to Exhibit 10(l) to June Levy Continuity Agreement 1999 Form 10-Q 10(o-1) -- Continuity Agreement dated as of Exhibit 10(f) to the June 22, 1998 between June 1998 Form 10-Q R. Kevin Matz and EMCOR ("Matz Continuity Agreement") 10(o-2) -- Amendment dated as of May 4, 1999 Exhibit 10(m) to June to Matz Continuity Agreement 1999 Form 10-Q 10(p-1) -- Continuity Agreement dated as of Exhibit 10(g) to the June 22, 1998 between June 1998 Form 10-Q Mark A. Pompa and EMCOR ("Pompa Continuity Agreement") 10(p-2) -- Amendment dated as of May 4, 1999 to Exhibit 10(n) to June Pompa Continuity Agreement 1999 Form 10-Q 10(q) -- Executive Stock Bonus Plan* Exhibit 10(r) to EMCOR's Annual Report on Form 10-K for the year ended December 31, 2000 11 -- Computation of Basic EPS and Diluted EPS Page for the years ended December 2001 and 2000* 21 -- List of Significant Subsidiaries* Page 23 -- Consent of Arthur Andersen LLP* Page ---------- *Filed Herewith Pursuant to Item 601(b)(4)(iii) of Regulation S-K, upon request of the Securities and Exchange Commission, the Registrant hereby undertakes to furnish a copy of any unfiled instrument which defines the rights of holders of long-term debt of the Registrant's subsidiaries. 44 SIGNATURES PURSUANT TO THE REQUIREMENTS OF SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934, THE REGISTRANT HAS DULY CAUSED THIS REPORT TO BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED THEREUNTO DULY AUTHORIZED. EMCOR GROUP, INC. (Registrant) Date: February 21, 2002 by /s/ Frank T. MacInnis ------------------------------------------- FRANK T. MACINNIS CHAIRMAN OF THE BOARD OF DIRECTORS AND CHIEF EXECUTIVE OFFICER PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THIS REPORT HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS ON BEHALF OF THE REGISTRANT AND IN THE CAPACITIES AND ON FEBRUARY 21, 2002. /s/ Frank T. MacInnis Chairman of the Board of Directors and --------------------------- Frank T. MacInnis Chief Executive Officer /s/ Stephen W. Bershad Director --------------------------- Stephen W. Bershad /s/ David A. B. Brown Director --------------------------- David A. B. Brown /s/ Albert Fried, Jr. Director --------------------------- Albert Fried, Jr. /s/ Richard F. Hamm, Jr. Director --------------------------- Richard F. Hamm, Jr. /s/ Kevin C. Toner Director --------------------------- Kevin C. Toner /s/ Leicle E. Chesser Executive Vice President and --------------------------- Leicle E. Chesser Chief Financial Officer /s/ Mark A. Pompa Vice President and Controller --------------------------- Mark A. Pompa 45