## 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. 

At December 31, 2000, the fair value of EMCOR’s 5.75% Convertible Subordinated Notes was $116.2 million compared to the carrying value of $115.0 million. The fair value was estimated based on quoted market prices and market interest rates as of December 31, 2000. 

## 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, 2000, EMCOR did not have any forward contracts in effect, and the forward contracts in effect during the year 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 June 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 133, “Accounting for Derivative Instruments and Hedging Activities” (“SFAS 133”). 

SFAS 133, as amended by Statement of Financial Accounting Standards No. 137, “Accounting for Derivative Instruments and Hedging Activities-Deferral of the Effective Date of SFAS No. 133”, and Statement of Financial Accounting Standards No. 138 “Accounting for Certain Derivative Instruments and Hedging Activities” (“SFAS 138”), establishes for fiscal quarters of fiscal years beginning after June 15, 2000 accounting and reporting standards requiring derivative instruments, as defined, to be measured in the financial statements at fair value. SFAS 133 also requires that changes in the derivative instruments’ fair value be recognized currently in earnings unless certain accounting criteria are met. EMCOR has evaluated this standard and has concluded that the provisions of SFAS 133 will have no significant effect on the financial condition or results of operations of EMCOR. 

In September 2000, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 140, “Accounting for Transfers and Servicing of Financial Assets and Extinguishment of Liabilities” (“SFAS 140”). SFAS 140 is a replacement of Statement of Financial Accounting Standards No. 125. SFAS 140 provides accounting and reporting standards for transfers and servicing of financial assets and extinguishment of liabilities occurring after March 31, 2001. EMCOR has evaluated this standard and has concluded that the provisions of SFAS 140 will not have a significant effect on the financial conditions or results of operations of EMCOR. 

## Note C – Acquisitions of Businesses 

During 2000, EMCOR paid additional consideration by reason of earn-outs for prior year acquisitions of an aggregate of $4.2 million in cash. During 1999, EMCOR acquired two businesses and paid additional consideration by reason of earn-outs with respect to prior year acquisitions of an aggregate of $55.8 million in cash. During 1998, EMCOR acquired ten businesses for an aggregate purchase price of $36.8 million, $28.5 million of which was paid in cash and $8.3 million was paid in notes made by EMCOR. The purchase price of certain transactions are subject to finalization based on certain contingencies provided for in the purchase agreements. These acquisitions were accounted for by the purchase method, and the purchase price has been allocated to the assets acquired and liabilities assumed, based upon the estimated fair values of these assets and liabilities at the dates of acquisition. Goodwill, representing the excess purchase price over the fair value of amounts assigned to the net tangible assets acquired, was $67.6 million and $68.0 million at December 31, 2000 and 1999, respectively, and is being amortized over periods of 5 to 20 years. Amortization expense for the years ended December 31, 2000, 1999 and 1998 was $4.6, $3.4 million and $0.7 million, respectively. The pro forma effect on EMCOR’s revenues, net income and earnings per share for 1999 and 1998, as though the acquisitions occurred as of January 1 of each year, was not material. 

