Annual Report — [x] Reg. S-K Item 405 — Form 10-K
Filing Table of Contents
Document/Exhibit Description Pages Size
1: 10-K405 Integrated Electrical Services, Inc. - 09/30/2000 53 304K
4: EX-10.11 1999 Incentive Compensation Plan 13 51K
2: EX-10.4 1997 Directors Stock Plan 8 31K
3: EX-10.8 Amendment No. 3 to Credit Agreement 5 17K
5: EX-12 Ratio of Earnings to Fixed Charges 1 7K
6: EX-21.1 List of Subsidiaries 3 14K
7: EX-23.1 Consent of Arthur Andersen LLP 1 6K
8: EX-27 Financial Data Schedule 1 9K
10-K405 — Integrated Electrical Services, Inc. – 09/30/2000
Document Table of Contents
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NUMBER 1-13783
INTEGRATED ELECTRICAL SERVICES, INC.
(Exact name of registrant as specified in its charter)
[Download Table]
DELAWARE 76-0542208
(State of other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1800 WEST LOOP SOUTH
SUITE 500
HOUSTON, TEXAS 77027
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (713) 860-1500
Securities registered pursuant to Section 12(b) of the Act:
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TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED
------------------- -----------------------------------------
Common Stock, par value $.01 per share New York Stock Exchange
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 checkmark if disclosure of delinquent filings pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of the Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. Yes [X] No [ ]
As of December 14, 2000, there were outstanding 40,817,741 shares of common
stock of the Registrant. The aggregate market value on such date of the voting
stock of the Registrant held by non-affiliates was an estimated $187.8 million.
DOCUMENT INCORPORATED BY REFERENCE
The information called for by Part III of this Form 10-K is incorporated by
reference from the Proxy Statement for the Annual Meeting of Stockholders of the
Company to be held February 7, 2001.
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FORM 10-K
INTEGRATED ELECTRICAL SERVICES, INC.
TABLE OF CONTENTS
[Download Table]
ITEM PAGE
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PART I
1 BUSINESS.................................................... 3
2 PROPERTIES.................................................. 16
3 LEGAL PROCEEDINGS........................................... 16
4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS......... 16
4A EXECUTIVE OFFICERS.......................................... 16
PART II
5 MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS....................................... 17
6 SELECTED FINANCIAL DATA..................................... 18
7 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS................................. 19
7A QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK...................................................... 23
8 FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA.................. 25
9 CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE.................................. 47
PART III
10 DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.......... 48
11 EXECUTIVE COMPENSATION...................................... 48
12 SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT................................................ 48
13 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.............. 48
PART IV
14 EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS
ON FORM 8-K............................................... 48
DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS
This Annual Report on Form 10-K includes certain statements, including
statements relating to the Company's expectations of its future operating
results, that may be deemed to be "forward-looking statements" within the
meaning of Section 27A of the Securities Act of 1933, as amended, and Section
21E of the Securities Exchange Act of 1934, as amended. These statements are
based on the Company's expectations and involve risks and uncertainties that
could cause the Company's actual results to differ materially from those set
forth in the statements. Such risks and uncertainties include, but are not
limited to, the inherent uncertainties relating to estimating future results,
fluctuations in operating results because of downturns in levels of
construction, incorrect estimates used in entering into fixed price contracts,
difficulty in managing the operation and growth of existing and newly acquired
businesses, the high level of competition in the construction industry and due
to seasonality (see "Business -- Risk Factors"). Although the Company believes
that the expectations reflected in such forward-looking statements are
reasonable, it can give no assurance that such expectations will prove to have
been correct. All subsequent written and oral forward-looking statements
attributable to the Company or persons acting on its behalf are expressly
qualified in their entirety by such factors.
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PART I
ITEM 1. BUSINESS
In this annual report, the words "IES," the "Company," "we," "our," "ours,"
and "us" refer to Integrated Electrical Services, Inc. and, except as otherwise
specified herein, to our subsidiaries. Our fiscal year is not a calendar year
and ends on September 30.
We are one of the largest providers of specialty contracting services in the
United States. In late 1997, we recognized a significant opportunity for a
well-capitalized company with a nationwide presence to realize substantial
competitive advantages by capitalizing on the fragmented nature of the
electrical services industry. We began operations on January 30, 1998 in order
to create a nationwide provider of electrical services. We have expanded our
focus to include a complementary core business in the communications market. For
the year ended September 30, 2000, we generated revenues of $1.7 billion and
earnings before interest, taxes, depreciation and amortization of $102.6
million.
According to the most recently available data, the electrical contracting
industry generated annual revenues in excess of $77 billion in 1999. This data
also indicates that the electrical contracting industry is highly fragmented
with more than 67,000 companies, most of which are small, owner-operated
businesses. We estimate that there are only ten U.S. electrical contractors with
revenues in excess of $200 million. Overall spending in the U.S. communications
infrastructure market was approximately $138 billion in 1999, an increase of 17%
from 1998 and nearly 37% from 1997. F.W. Dodge data indicates that total
construction industry revenues have grown at an average compound rate of
approximately 9% from 1995 through 2000. Over the same period, our pro forma
combined revenues increased at a compound annual rate of approximately 13%. We
believe we have attained this growth in revenues primarily because our
companies: have been in business an average of 18 years; have strong
relationships with customers; have effectively employed industry best practices;
and have focused on larger projects.
INDUSTRY OVERVIEW
General. Virtually all construction and renovation in the United States
generates demand for electrical and communications solutions. We believe that
electrical work generally accounts for approximately:
- substantially all of the construction costs of outside plant projects;
- 50% to 60% of total construction costs for switching centers;
- 8% to 12% of the total construction cost of commercial and industrial
projects; and
- 5% to 10% of the total construction cost for residential projects.
In recent years, electrical and communications solutions providers have
experienced a growing demand for their services due to:
- more stringent electrical codes;
- increased use of electrical power;
- an increased drive toward outsourcing;
- demand for increased bandwidth;
- demand for bundled services; and
- the construction of smart houses with integrated computer, temperature
control and safety systems.
THE MARKETS WE SERVE
Commercial and Industrial Market. Our commercial and industrial work
consists primarily of electrical installations and upgrade, renovation and
replacement work in:
- office buildings;
- high-rise apartments and condominiums;
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- theaters;
- restaurants;
- hotels;
- hospitals;
- school districts;
- manufacturing and processing facilities;
- military installations;
- airports; and
- refineries, petrochemical and power plants.
Our commercial customers include:
- general contractors;
- developers;
- building owners;
- engineers; and
- architects.
Our industrial customers include:
- facility owners and managers;
- general contractors;
- engineers;
- consultants; and
- architects.
Demand for our commercial services is driven by construction and renovation
activity levels, as well as more stringent local and national electrical codes.
From fiscal 1995 through 2000, our pro forma revenues from commercial work have
grown at a compound annual rate of approximately 9% per year and represented
approximately 39% of our revenues for the year ended September 30, 2000.
Our industrial revenues are derived from significant contracts for new
construction, upgrade, renovation and replacement service and maintenance work.
Demand for our industrial services is often driven by facility upgrades and
replacements. We also believe demand is driven by general activity levels in the
particular industries served, which is in turn affected by general economic
conditions. From fiscal 1995 through 2000, our pro forma revenues from
industrial work have grown at a compound annual rate of approximately 14% per
year and represented approximately 28% of our revenues for the year ended
September 30, 2000.
Residential Market. Our work for the residential market consists primarily
of electrical installations in new single-family housing and low-rise
multifamily housing for customers, which include local, regional and national
homebuilders and developers. We believe demand for our residential services is
dependent on the number of single family and multi-family home starts.
Single-family home starts are affected by the level of interest rates and
general economic conditions. Competitive factors particularly important in the
residential market include our ability to develop relationships with
homebuilders and developers by providing services in each area of the country in
which they operate. This ability has become increasingly important as
consolidation has occurred within the residential construction industry and
homebuilders and developers have sought out service providers on whom they can
rely for consistent service in all of their operating regions.
We are currently one of the largest providers of electrical contracting
services to the U.S. residential construction market. Our residential business
has experienced significant growth and we have not seen a negative impact from
the recent rise in interest rates. Our pro forma revenues from residential
electrical
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contracting have grown at a compound annual rate of approximately 18% from
fiscal 1995 through 2000 and represented approximately 15% of our revenues for
the year ended September 30, 2000.
Service and Maintenance Market. Our service and maintenance revenues are
derived from service calls and routine maintenance contracts and tend to be
recurring and less sensitive to economic fluctuations. Our pro forma revenues
from the service and maintenance market have grown at a compound annual rate of
approximately 14% from fiscal 1995 through 2000 and represented approximately 8%
of our revenues for the year ended September 30, 2000.
Communications Solutions Market. We have become a national designer and
installer of communications and information technology systems. We service three
types of telecom infrastructure services customers: outside plant; network
enterprise services; and switch network services.
Outside plant provides installation, service, maintenance, design and
engineering of external infrastructure within both the telecommunications and
electric power line markets. Outside plant includes cables, wires, poles,
towers, substations, and other equipment located between a point at which
operational control or ownership of facilities changes from one organizational
entity to another.
Network enterprise services provides installation, design, support services,
and engineering to property owners or businesses requiring infrastructure
support of communication or network equipment related to in-building wiring of
local-area or wide-area configuration of industrial, commercial or residential
buildings.
Switch network services provides equipment installation, design, and support
of infrastructure services to a common carrier switching center in which trunks
and loops are terminated and switched.
We believe the demand for our communications services will be driven by the
following factors: the pace of technological change; the overall growth in voice
and data traffic; the increasing use of personal computers and modems, with
particular emphasis on the speed with which information can be retrieved from
the Internet.
Our revenues from the communications market represented approximately 10% of
our revenues for the year ended September 30, 2000.
COMPETITIVE STRENGTHS
We believe several factors give us a competitive advantage in our markets,
including our:
- Geographically diverse operations -- which enable us to effectively
service large customers across operating regions, including regional and
national telecommunications companies and homebuilders, national retailers
and other commercial businesses, as well as to lessen the impact of
regional economic cycles;
- Diverse business lines -- which provide greater stability in sales
revenue;
- Strong customer relationships -- which provide us repeat business and the
opportunity for cross selling our other services to existing customers;
- Size and critical mass -- which give us purchasing and other economies of
scale, as well as greater ability to compete for larger jobs that require
greater technical expertise, personnel availability and bonding capacity;
- Expertise in specialized markets -- which provides us with access to high
growth markets, including data cabling, wireless telecommunication,
highway lighting and traffic control, video, security and fire systems;
- Substantial number of licensed electricians -- which enables us to deliver
quality service with greater reliability than many of our competitors,
which is particularly important given a current industry shortage of
qualified electricians;
- Design technology and expertise -- which give us the ability to
participate in higher margin design-and-build projects;
- Strong capitalization -- which gives us access to the capital markets; and
- Experienced management -- which owns in excess of 15% of our outstanding
common stock and includes executive management with extensive electrical,
communication and public company experience, as well as regional and local
management which have established reputations in their local markets.
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BUSINESS STRATEGY
We have built a national specialty contracting services platform through the
acquisition and integration of multiple electrical contracting and
communications solutions businesses. These businesses are complementary in that
we believe customers will choose to do business with the "best in class"
provider of both electrical and communications solutions. Our strategy is to
utilize our national presence and strong balance sheet to further expand these
core businesses. We believe that our corporate scale as well as opportunities in
leveraged ventures and opportunities from our horizontal scope provide
significant value creation.
Complementary Core Businesses. We offer a broad range of electrical and
communications solutions, including installation and design, for both new and
renovation projects in the commercial, industrial and residential markets. We
also offer long-term and per call maintenance services, which generally provide
recurring revenues that are relatively independent of levels of construction
activity.
In some markets we offer design-and-build expertise and specialized
services, which typically require specific skills and equipment, in order to
provide value added services to the customer and to earn higher margins than
those generated by general electrical contracting and maintenance services. We
also act as a subcontractor, and in some cases a general contractor, for a
variety of national, regional and local builders in the installation of
electrical and other systems.
Commercial and Industrial. New commercial and industrial work begins with
either a design request or engineer's plans from the owner or general
contractor. Initial meetings with the parties allow the contractor to prepare
preliminary and then more detailed design specifications, engineering drawings
and cost estimates. Once a project is awarded, it is conducted in scheduled
phases, and progress billings are rendered to the owner for payment, less a
retainage of 5% to 10% of the construction cost of the project. Actual fieldwork
is coordinated during these phases, including:
- ordering of equipment and materials;
- fabrication or assembly of certain components;
- delivery of materials and components to the job site; and
- scheduling of work crews and inspection and quality control.
We generally provide the materials to be installed as a part of these
contracts, which vary significantly in size from a few hundred dollars to
several million dollars and vary in duration from less than a day to more than a
year.
Residential. New residential installations begin with a builder providing
potential subcontractors the architectural or electrical drawings for the
residences within the tract being developed. We typically submit a bid or
contract proposal for the work. Our personnel analyze the plans and drawings and
estimate the equipment, materials and parts and the direct and supervisory labor
required to complete the project. We deliver a written bid or negotiate an
arrangement for the job. The installation work is coordinated by our field
supervisors along with the builder's personnel. Payments for the project are
generally obtained within 30 days, at which time any mechanics' and
materialmen's liens securing these payments are released. Interim payments are
often obtained to cover labor and materials costs on larger projects.
Service and Maintenance. Service and maintenance is supplied on a long-term
and per call basis. Long-term service and maintenance is provided through
contracts that require the customer to pay an annual or semiannual fee for
periodic diagnostic services at a specific discount from standard prices for
repair and replacement services. Per call service and maintenance is initiated
when a customer requests emergency repair service. We then call the client to
schedule periodic maintenance work. Service technicians are scheduled for the
call or routed to the customer's residence or business by the dispatcher.
Service personnel work out of our service vehicles, which carry an inventory of
equipment, tools, parts and supplies needed to complete the typical variety of
jobs. The technician assigned to a service call:
- travels to the residence or business;
- interviews the customer;
- diagnoses the problem;
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- prepares and discusses a price quotation; and
- performs the work and often collects payment from the customer.
Most work is warrantied for thirty days.
Communications Solutions. Communications work can be either regional
infrastructure, which involves running lines cross country, or site-specific
installation of cabling in a new or existing structure. Infrastructure work is
similar in nature to power line work. Installation of cabling in a new or
existing structure is usually done for general contractors, computer network
consultants or end-users. The work is similar to the installation of electrical
wiring in commercial or residential structures. However, because the materials
and some of the methods used in the installation of data cabling differ from
those used in the installation of electrical wiring, the work is typically
performed by technicians who specialize in data cabling. Our communications
projects include all phases of the design and installation of voice, data and
communications systems. These projects may range from the networking of small,
single-office PC-based systems to wiring communications networks for multi-site
institutions such as large universities. As part of this business, we provide
extensive design and consulting services in order to configure a system that
will meet our customers' needs. Large communications projects often include
traditional electrical contracting elements and create an opportunity for us to
better serve the overall needs of the customer and to capture a larger
percentage of that project's contractor expenditures. Large installation
projects also provide the opportunity for recurring service and, in some cases,
monitoring revenues. Our operations in the information technology market are
currently focused on site-specific installations.
Our power line work begins with a request for bids from either an electric
utility or a general contractor. We analyze the plans provided and determine the
amount of the bid. Once the project is awarded, it is conducted in scheduled
phases, and progress billings are rendered for payment. This work is capital
intensive, requiring the use of various pieces of heavy equipment. Additionally,
the electricians that perform power line work must be highly skilled in order to
work with the high voltage power lines. In addition to running the lines, we
often construct the towers that carry the lines as well as electrical
substations.
Major Customers. We have a diverse customer base. During the year ended
September 30, 2000, we had one customer, MCI Worldcom Network Services, Inc.,
which represented 11% of our revenues. Excluding that customer, we had no single
customer accounting for more than 3% of our revenues for the year ended
September 30, 2000. As a result of emphasis on quality and worker reliability,
our management and a dedicated sales and work force have been responsible for
developing and maintaining successful relationships with key customers.
Customers generally include:
- general contractors;
- developers;
- building owners;
- consulting engineers;
- architects;
- facility owners and managers of large retail establishments, office
buildings, apartments and condominiums, theaters and restaurants;
- consultants;
- hotels and casinos;
- manufacturing and processing facilities;
- arenas and convention centers;
- refineries and petrochemical and power plants;
- hospitals;
- school districts;
- utilities;
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- military and other government agencies; and
- airports and car lots.
Some of our better-known customers include:
- Home Depot;
- Dell Computer;
- Lucent Technologies;
- Lowe's;
- American Airlines;
- Wal-Mart;
- Dow Chemical;
- Intel;
- Federal Express;
- Motorola;
- Amazon.com; and
- Texaco.
We intend to continue our emphasis on developing and maintaining
relationships with our customers by providing superior, high-quality service.
Scale. Our scale provides us with advantages not available to smaller
companies. Our size allows us to attract the best talent to create solutions for
our customers. Our geographic diversity allows us to provide solutions to
customers across the country. Because of our size, we are focusing on profit
enhancement by leveraging our purchasing power to achieve cost savings and
providing technologically superior information systems efficiently and cost
effectively to our operating locations. We are also able to invest in a
company-wide quality initiative to improve the quality of our services and
motivate our workforce to perform beyond expectation.
Attract and Retain Quality Employees. Our ability to attract and retain
qualified electricians is a critical competitive factor in an industry like ours
where there are local shortages of skilled workers. We plan to continue to
attract and train skilled employees by:
- extending active recruiting and training programs;
- offering stock-based compensation for key employees; and
- offering expanded career paths and more stable income through a larger
public company.
Employee Screening, Training and Development. We are committed to providing
the highest level of customer service through the development of a highly
trained workforce. Employees are encouraged to complete a progressive training
program to advance their technical competencies and to ensure that they
understand and follow the applicable codes, our safety practices and other
internal policies. We support and fund continuing education for our employees,
as well as apprenticeship training for our technicians under the Bureau of
Apprenticeship and Training of the Department of Labor and similar state
agencies. Employees who train as apprentices for four years may seek to become
journeymen electricians and, after additional years of experience, master
electricians. We pay progressive increases in compensation to employees who
acquire this additional training, and more highly trained employees serve as
foremen, estimators and project managers. Our master electricians are licensed
in one or more cities or other jurisdictions in order to obtain the permits
required in our business, and some employees have also obtained specialized
licenses in areas including security systems and fire alarm installation. In
some areas, licensing boards have set continuing education requirements for
maintenance of licenses. Because of the lengthy and difficult training and
licensing process for electricians, we believe that the number, skills and
licenses of our employees constitute a competitive strength in the industry.
We actively recruit and screen applicants for our technical positions and
have established programs in some locations to recruit apprentice technicians
directly from high schools and vocational technical schools. Prior to
employment, we make an assessment of the technical competence level of all
potential new employees, confirm background references, conduct random drug
testing and check criminal and driving records.
National Accounts. We currently have a number of clients that operate on a
regional or national basis, including: developers, contractors, homebuilders and
owners of nationwide chains. We are able to leverage our national footprint and
offer these customers service in many, if not all, required geographies. Because
we understand the demands and needs of our customers based on prior,
substantially similar projects, we are able to configure and install systems to
their specifications on a more timely and cost-efficient basis than other
locally
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operated electrical contractors by utilizing best practices that result in
higher gross profit margins. In addition, we have the available resources to
provide service for large-scale projects. In order to capitalize on this
opportunity, we have established a separate marketing team that is responsible
for obtaining and developing national contracts. We believe our existing local
and regional relationships and the expanded sales force will enable us to
capture additional revenues from national accounts.
We believe that significant demand exists from these companies to utilize
the services of a single electrical and communications solutions provider from
whom they can obtain consistent service that meets their quality requirements.
This demand is at least partially driven by the recent consolidation among a
number of our principal customers. National Accounts is targeting additional
communications projects and is actively pursuing relationships with the regional
bell operating companies, competitive local exchange carriers and building local
exchange carriers.
Purchasing. As a result of economies of scale derived through its
acquisitions, we have been able to purchase equipment, parts and supplies at
discounts comparable to historical levels. In addition, as a result of our size,
we are also able to lower our costs of the following:
- the purchase or lease of vehicles;
- bonding, casualty and liability insurance;
- retirement benefits administration;
- office and computer equipment; and
- marketing and advertising.
Substantially all the equipment and component parts we sell or install are
purchased from manufacturers and other outside suppliers. We are not materially
dependent on any single outside supplier source.
Blocking and Tackling. We are committed to performing those controls and
procedures that provide consistent, accurate and predictable results of
operations. Some of the controls and procedures which we have in place are:
- an automated reporting package which includes internal checks and cross
references to ensure completeness and accuracy of the monthly financial
results. This "formalized" reporting package also requires discussion of
individual results;
- we perform a "home and away" series of quarterly reviews which involve our
senior management team and the individual company presidents. Every other
quarter, company presidents conduct these meetings at or near their "home"
locations and on remaining quarters attend an "away" meeting at the
Company's home office in Houston. The content of such meetings includes
discussing previous operating results, forecasts for the future, issues,
opportunities and concerns;
- we have formalized the planning process which involves analyzing industry
trends at a county level for each company. This planning process also
formalizes the capital allocation process; and
- we are defining and rolling out the best practices in estimating, bidding
and job control and management to ensure consistency across reporting
units.
Information Systems. We are currently beginning an Enterprise Resource
Planning ("ERP") software package rollout for implementation across all
operating companies. ERP applications are paramount to a growing business with a
diverse geographic platform. Additionally, we have selected a financial
reporting and forecasting application to complement the ERP application and
provide increased structure and analytical tools to the reporting process. We
plan an estimated $10 million rollout over a 18-24 month period that will begin
during the first quarter of fiscal 2001. Implementing a new ERP system with a
financial reporting application will allow us to obtain real time operating
performance and perform detailed analysis.
Implementation of Best Practices. We continue to expand the services we
offer in our local markets by using the specialized technical and marketing
strengths of each of our companies. Through a series of national and regional
forums attended by management and other employees, we regularly identify and
share best practices that can be successfully implemented throughout our
operations. We have identified opportunities to enhance various aspects of our
operational, administrative, safety, hiring and training practices.
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Quality. We are focusing all aspects of the business on quality including
providing quality services and products to our customers and ensuring quality
processes internally. We have partnered with a consulting firm to evaluate and
define our processes and make recommendations for process improvement. The
quality program kick off occurred in November 2000 at our annual company-wide
conference and will be rolled out across our company.
Ventures. We intend to leverage our complementary core businesses of
electrical and communication solutions which are primarily "margin on labor"
businesses into early life cycle industries where our national footprint and
skill can create value. We are evaluating investment opportunities in
e-commerce, distributed generation, and communications.
Significant opportunities exist in the distributed generation (on-site power
generation) market. We believe growth of distributed generation will be impacted
by several key factors: (i) the pace of utility deregulation, (ii) distributed
generation technology improvements, (iii) customer need for reliable power and
(iv) price volatility in power and gas markets. IES can benefit by investing in
early life cycle technology, leveraging its existing design and build
capabilities to create a national installer relationship and provide long-term
ongoing maintenance. We have committed to invest up to $5.0 million to EnerTech
Capital Partners II L.P. ("EnerTech"). EnerTech is a private equity firm
specializing in investment opportunities emerging from the deregulation and
resulting convergence of the energy, utility and telecommunications industries.
At September 30, 2000, the our investment was $0.5 million.
A venture with a communications company provides significant growth
opportunities. Those opportunities include (i) gaining access through
relationships, (ii) performing physical contracting work and (iii) providing
ongoing service. We have invested $1.0 million in MetStream Communications, Inc.
("MetStream"), a newly formed integrated communications service provider
targeting high-density residential communities with next-generation, broadband
services throughout the Pacific Northwest. MetStream plans to bypass incumbent
providers of cable, voice and data services in order to bring broadband services
to the multi-dwelling, multi-tenant and hospitality industries. MetStream's
business plan will include service packages that are bundled and provided to
consumers at competitive prices and in one simple, integrated monthly bill.
MetStream's initial round of capital raising completed in August, 2000 totaled
$4.0 million.
We intend to establish a relationship with an e-commerce portal to procure
goods and services. We believe this relationship will provide: (i) efficiencies
in the delivery of supplies and the ability to track purchases, (ii) the ability
to reap rewards through potential equity ownership in the portal and (iii)
potential future earnings streams through ongoing ventures.
Scope. We intend to leverage economies of scope to serve a larger share of
customer needs by cross selling services to satisfy electrical contracting and
communications solutions needs. We also intend to utilize our field labor
between electrical contacting and communications solutions. We expect this will
drive faster growth and reduce sales and marketing costs.
Focused Growth. Our growth strategy going forward is to expand our
complementary core businesses through selected acquisitions, primarily focused
on communications solutions and service. We believe that such acquisitions will
complement and expand our existing business platforms. Although our growth
strategy is focused primarily on communications solutions and service companies,
we will consider strategic commercial, industrial and residential acquisitions
to expand products, services and geographic coverage. We will focus on companies
with an experienced management, an entrepreneurial attitude and a willingness to
learn and share improved business practices through open communications.
Acquisition candidates must also be financially stable, have a strong presence
in the market in which they operate and have the customer base necessary to
integrate with or complement our existing business.
Integration of Acquisitions. Successful integration of the companies we
have acquired is an important focus for us. The work necessary to integrate the
operations of an acquired company is begun prior to the closing of the
transaction. In the process of financial, operational and legal due diligence,
we often identify a number of areas in which efficiencies can be realized in the
integration process. We are assisted in this process by employing outside
accountants who specialize in the construction industry to conduct extensive
financial due diligence on the books and financial records of the target
company. These accountants are directed to draw our attention to areas of
potential improvement they may encounter. At the closing, the acquired company
is added to our insurance and bonding policies, which typically results in an
immediate cost savings. Our financial reporting package is put into place
shortly after closing so that the results of operations of the acquired company
can be reported to IES in a timely standardized format and easily incorporated
into our consolidated
10
reports. Upon joining IES the management of acquired companies is introduced to
our policies and financial goals and attends regularly scheduled national and
regional best practices forums as well as regional management meetings on an
ongoing basis. In this manner, we attempt to share efficiencies throughout our
operations while maintaining the entrepreneurial atmosphere of the acquired
business.
COMPETITION
The electrical contracting and communications solutions industries are
highly fragmented and competitive. Most of our competitors are small,
owner-operated companies that typically operate in a limited geographic area.
There are few public companies focused on providing electrical and
communications solutions services. In the future, competition may be encountered
from new market entrants. Competitive factors in the electrical contracting
industry include:
- the availability of qualified and licensed electricians or qualified
technicians;
- safety record;
- cost structure;
- relationships with customers;
- geographic diversity;
- ability to reduce project costs;
- access to technology;
- experience in specialized markets; and
- ability to obtain bonding.
See "Risk Factors."
REGULATIONS
Our operations are subject to various federal, state and local laws and
regulations, including:
- licensing requirements applicable to electricians;
- building and electrical codes;
- regulations relating to consumer protection, including those governing
residential service agreements; and
- regulations relating to worker safety and protection of the environment.
We believe we have all required licenses to conduct our operations and are
in substantial compliance with applicable regulatory requirements. Our failure
to comply with applicable regulations could result in substantial fines or
revocation of our operating licenses.
Many state and local regulations governing electricians require permits and
licenses to be held by individuals. In some cases, a required permit or license
held by a single individual may be sufficient to authorize specified activities
for all our electricians who work in the state or county that issued the permit
or license. It is our policy to ensure that, where possible, any permits or
licenses that may be material to our operations in a particular geographic
region are held by at least two IES employees within that region.
RISK MANAGEMENT AND INSURANCE
The primary risks in our operations include health, bodily injury, property
damage and injured worker's compensation. We maintain automobile and general
liability insurance for third party health, bodily injury and property damage
and workers' compensation coverage, which we consider appropriate to insure
against these risks, subject to large deductibles.
11
EMPLOYEES
At September 30, 2000, we had approximately 15,500 employees. We are not a
party to any collective bargaining agreements with our employees. We believe
that our relationship with our employees is satisfactory.
12
RISK FACTORS
DOWNTURNS IN CONSTRUCTION COULD ADVERSELY AFFECT OUR BUSINESS BECAUSE MORE THAN
HALF OF OUR BUSINESS IS DEPENDENT ON LEVELS OF NEW CONSTRUCTION ACTIVITY.
Presently, more than half of our business is the installation of electrical
systems in newly constructed and renovated buildings, plants and residences.
Additionally, a majority of our business is concentrated in the southeastern and
southwestern portion of the United States. Downturns in levels of construction
or housing starts could have a material adverse effect on our business,
financial condition and results of operations. Our ability to maintain or
increase revenues from new installation services will depend on the number of
new construction starts and renovations. Our revenue growth from year to year is
likely to reflect the cyclical nature of the construction industry. The number
of new building starts will be affected by local economic conditions, changes in
interest rates and other related factors. The housing industry is similarly
affected by changes in general and local economic conditions, including the
following:
- employment and income levels;
- interest rates and other factors affecting the availability and cost of
financing;
- tax implications for homebuyers;
- consumer confidence; and
- housing demand.
THE ESTIMATES WE USE IN PLACING BIDS COULD BE MATERIALLY INCORRECT. THE USE OF
INCORRECT ESTIMATES COULD RESULT IN LOSSES ON A FIXED PRICE CONTRACT. THESE
LOSSES COULD BE MATERIAL TO OUR BUSINESS.
We currently generate, and expect to continue to generate, more than half of
our revenues under fixed price contracts. Variations from estimated contract
costs along with other risks inherent in performing fixed price contracts may
result in actual revenue and gross profits for a project differing from those we
originally estimated and could result in losses on projects. Depending upon the
size of a particular project, variations from estimated contract costs can have
a significant impact on our operating results for any fiscal quarter or year. We
must estimate the costs of completing a particular project to bid for these
fixed price contracts. The cost of labor and materials, however, may vary from
the costs we originally estimated.
A SIGNIFICANT AMOUNT OF OUR HISTORIC GROWTH HAS OCCURRED THROUGH THE ACQUISITION
OF EXISTING BUSINESSES; HOWEVER, FUTURE ACQUISITIONS WILL BE MADE ON A SELECTIVE
BASIS AND MAY BE DIFFICULT TO INTEGRATE, DISRUPT OUR BUSINESS AND ADVERSELY
AFFECT OUR OPERATING RESULTS.
Historically, a significant amount of our growth has come through
acquisitions. We have significantly diminished our acquisition activity but will
consider selective, strategic acquisitions going forward that complement our
expand our existing business. Each acquisition, however, involves a number of
risks. These risks include:
- the diversion of our management's attention from our existing businesses
to integrating the operations and personnel of the acquired business;
- possible adverse effects on our operating results during the integration
process; and
- our possible inability to achieve the intended objectives of the
combination.
We may seek to finance an acquisition through borrowings under our credit
facility or through the issuance of new debt or equity securities. If we should
proceed with a relatively large cash acquisition, we could deplete a substantial
portion of our financial resources to the possible detriment of our other
operations. Any future acquisitions could also dilute the equity interests of
our stockholders, require us to write off assets for accounting purposes or
create other undesirable accounting issues, such as significant expenses for
amortization of goodwill or other intangible assets.
13
THERE IS CURRENTLY A SHORTAGE OF QUALIFIED ELECTRICIANS. SINCE THE MAJORITY OF
OUR WORK IS PERFORMED BY ELECTRICIANS, THIS SHORTAGE MAY NEGATIVELY IMPACT OUR
BUSINESS, INCLUDING OUR ABILITY TO GROW.
There is currently a shortage of qualified electricians in the United
States. In order to conduct our business, it is necessary to employ
electricians. Over the last few years, as the U.S. economy has continued to grow
and the unemployment rate has decreased to all time lows, it has become more
difficult for us to attract, hire and retain competent electricians. Our ability
to increase productivity and profitability has been limited by our ability to
employ, train and retain skilled electricians who meet our requirements. There
can be no assurance that, among other things:
- we will be able to maintain the skilled labor force necessary to operate
efficiently;
- our labor expenses will not increase as a result of a shortage in the
skilled labor supply; and
- we will not be able to grow as a result of labor shortages.
DUE TO SEASONALITY AND DIFFERING REGIONAL ECONOMIC CONDITIONS, OUR RESULTS MAY
FLUCTUATE FROM PERIOD TO PERIOD.
Our business can be subject to seasonal variations in operations and demand
that affect the construction business, particularly in residential construction.
Our quarterly results may also be affected by the regional economic conditions.
Accordingly, our performance in any particular quarter may not be indicative of
the results, which can be expected for any other quarter or for the entire year.
IN THE FUTURE, WE MAY NEED TO INCUR ADDITIONAL DEBT IN ORDER TO FUND WORKING
CAPITAL OR FOR OTHER PURPOSES. OUR CURRENT CREDIT FACILITY EXPIRES ON JULY 30,
2001 AND WE CANNOT BE CERTAIN OF THE TERMS OF ANY RENEWAL OR REFINANCING OF SUCH
FACILITY.
Our ability to fund working capital may require us to incur additional debt
in the future. We cannot be certain that we will be able to obtain additional
financing on favorable terms or at all. If we need additional capital and cannot
raise it on acceptable terms, our business will be materially adversely
affected.
THE HIGHLY COMPETITIVE NATURE OF OUR INDUSTRY COULD AFFECT OUR PROFITABILITY BY
REDUCING OUR PROFIT MARGINS.
The electrical contracting industry is served by small, owner-operated
private companies, public companies and several large regional companies. We
could also face competition in the future from other competitors entering these
markets. Some of our competitors offer a greater range of services, including
mechanical construction, plumbing and heating, ventilation and air conditioning
services. Competition in our markets depends on a number of factors, including
price. Some of our competitors may have lower overhead cost structures and may,
therefore, be able to provide their services at lower rates.
OUR OPERATIONS ARE SUBJECT TO NUMEROUS PHYSICAL HAZARDS ASSOCIATED WITH THE
CONSTRUCTION OF ELECTRICAL SYSTEMS. IF AN ACCIDENT OCCURS, IT COULD RESULT IN AN
ADVERSE EFFECT ON OUR BUSINESS.
Hazards related to our industry include, but are not limited to,
electrocutions, fires, mechanical failures or transportation accidents. These
hazards can cause personal injury and loss of life, severe damage to or
destruction of property and equipment and may result in suspension of
operations. Our insurance does not cover all types or amounts of liabilities. No
assurance can be given either that (1) our insurance will be adequate to cover
all losses or liabilities we may incur in our operations or (2) we will be able
to maintain insurance of the types or at levels that are adequate or at
reasonable rates.
WE HAVE A SUBSTANTIAL AMOUNT OF DEBT. OUR CURRENT DEBT LEVEL COULD LIMIT OUR
ABILITY TO FUND FUTURE WORKING CAPITAL NEEDS AND INCREASE OUR EXPOSURE DURING
ADVERSE ECONOMIC CONDITIONS.
Our indebtedness could have important consequences. For example, it could:
- increase our vulnerability to adverse operational performance and economic
and industry conditions;
- limit our ability to fund future working capital, capital expenditures and
other general corporate requirements;
- limit our flexibility in planning for, or reacting to, changes in our
business and the industry in which we operate;
14
- place us at a disadvantage compared to a competitor that has less debt;
and
- limit, with the financial and other restrictive covenants in our
indebtedness, among other things, our ability to borrow additional funds.
Additionally, failing to comply with those covenants could result in an
event of default, which, if not cured or waived, could have a material
adverse effect on us.
TO SERVICE OUR INDEBTEDNESS, WE WILL REQUIRE A SIGNIFICANT AMOUNT OF CASH. OUR
ABILITY TO GENERATE CASH DEPENDS ON MANY FACTORS.
Our ability to make payments on and to refinance our indebtedness and to
fund planned capital expenditures will depend on our ability to generate cash in
the future. This is subject to our operational performance, as well as general
economic, financial, competitive, legislative, regulatory and other factors that
are beyond our control.
We cannot assure you that our business will generate sufficient cash flow
from operations, that currently anticipated cost savings and operating
improvements will be realized on schedule or that future borrowings will be
available to us under our credit facility in an amount sufficient to enable us
to pay our indebtedness, or to fund our other liquidity needs. We may need to
refinance all or a portion of our indebtedness, on or before maturity. We cannot
assure you that we will be able to refinance any of our indebtedness on
commercially reasonable terms or at all.
THE LOSS OF A GROUP OF KEY PERSONNEL, EITHER AT THE CORPORATE OR OPERATING
LEVEL, COULD ADVERSELY AFFECT OUR BUSINESS.
The loss of key personnel or the inability to hire and retain qualified
employees could have an adverse effect on our business, financial condition and
results of operations. Our operations depend on the continued efforts of our
current and future executive officers, senior management and management
personnel at the companies we have acquired. A criteria we use in evaluating
acquisition candidates is the quality of their management. We cannot guarantee
that any member of management at the corporate or subsidiary level will continue
in their capacity for any particular period of time. If we lose a group of key
personnel, our operations could be adversely affected. We do not maintain key
man life insurance.
THE ESTIMATED LIFE OF GOODWILL MAY CHANGE. THIS COULD REDUCE OUR FUTURE REPORTED
EARNINGS.
When we acquire a business, we record an asset called "goodwill" equal to
the excess amount we pay for the business, including liabilities assumed, over
the fair value of the tangible assets of the business we acquire. As of
September 30, 2000, "goodwill" represents 49% of assets and 98% of stockholders'
equity. GAAP requires us to amortize this and all other intangible assets over
the period benefited. We have determined that period to be no less than 40
years. On an ongoing basis we evaluate the useful life of all our assets. If we
were to assign a shorter life to a material portion of the goodwill, earnings
reported in periods immediately following acquisitions would be reduced.
Earnings in later years could be significantly affected if management determined
then that the remaining balance of goodwill was impaired.
If it turns out that the period should have been shorter, earnings reported
in periods right after the acquisition would be overstated. Then in later years,
we will be burdened by a continuing charge against earnings, without the benefit
to income we thought we would get when we agreed on the purchase price. Earnings
in later years might also be significantly worse if we determine then that the
remaining balance of goodwill is overstated.
15
ITEM 2. PROPERTIES
We operate a fleet of owned and leased service trucks, vans and support
vehicles. We believe these vehicles generally are adequate for our current
operations.
At September 30, 2000, we maintained branch offices, warehouses, sales
facilities and administrative offices at 150 locations. Substantially all of our
facilities are leased. We lease our home office located in Houston, Texas.
Our properties are generally adequate for our present needs, and we believe
that suitable additional or replacement space will be available as required.
ITEM 3. LEGAL PROCEEDINGS
Our subsidiaries are involved in various legal proceedings that have arisen
in the ordinary course of business. While it is not possible to predict the
outcome of these proceedings with certainty, in our opinion, these proceedings
are either adequately covered by insurance or, if not so covered should not
ultimately result in any liability which would have a material adverse effect on
our financial position, liquidity or results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 4A. EXECUTIVE OFFICERS
H. David Ramm has been the Chief Executive Officer and President of the
Company since March 2000. From 1997 to 2000, Mr. Ramm was employed by Enron
Corp., most recently as President of Enron Wind Corp., a world leader in the
renewable energy market with a focus on clean, environmentally benign power
generation. Prior to 1997, Mr. Ramm held various senior management positions
with United Technologies Corporation, including Senior Vice President of Pratt &
Whitney Space Propulsion, Chairman and Chief Executive Officer of International
Fuel Cells Corporation, and Sales and Marketing Vice President of Otis Elevator.
Mr. Ramm serves the board of directors for CountryWatch.com, Millenium Cell,
Inc., a Nasdaq corporation, and Fabrication Technologies Corp.
Ben L. Mueller has been Chief Operating Officer and a Director of the
Company since 1998. Prior to that time, Mr. Mueller was the Executive Vice
President of Houston-Stafford Electric, Inc. ("Houston-Stafford"), one of the
Company's subsidiaries, since 1993 and served as Vice President of
Houston-Stafford since 1975. Mr. Mueller is a past member of the board of the
IEC, Houston Chapter, and has served on the Electrical Board for the city of
Sugar Land, Texas.
William W. Reynolds has been the Chief Financial Officer and Executive Vice
President of the Company since June 2000. Mr. Reynolds joined IES after having
most recently served as Vice President and Treasurer of Peoples Energy
Corporation in Chicago, Illinois from 1998 to 2000. Prior to his appointment
with Peoples Energy Corporation, Mr. Reynolds was Vice President and Project
Finance Corporate Officer for MCN Energy Group, Inc. in Detroit, Michigan from
1997 to 1998. Prior to 1997, Mr. Reynolds spent seventeen years with BP Amoco
Corporation.
John F. Wombwell has been Executive Vice President, General Counsel and
Secretary of IES since November 1999. From January 1998 to November 1999, Mr.
Wombwell was Senior Vice President, General Counsel and Secretary of IES. Prior
to that time, Mr. Wombwell was a partner at Andrews & Kurth L.L.P., where he
practiced law in the area of corporate and securities matters.
Herbert R. Allen has been Senior Vice President -- Eastern Operations since
January 2000 and served as a Regional Operating Officer of the Company from June
1998 to January 2000. Prior to September 2000, Mr. Allen served as the President
of H.R. Allen, Inc., one of the Company's subsidiaries.
Bob Weik has been Senior Vice President -- West Area since January 2000 and
has served as a Regional Operating Officer of the Company since May 1998 and as
President of BW Consolidated, Inc. and related entities ("Bexas-Calhoun"), one
of the Company's subsidiaries, since its inception in 1997.
James Thurman has been Senior Vice President -- Business Development of the
Company since January 2000 and served as Vice President of National Accounts
from January 1999 till January 2000. Prior to January
16
1999, Mr. Thurman was President of Thurman & O'Connell Corporation, one of the
Company's subsidiaries, since 1988. Mr. Thurman is a member of the Executive
Board of the IEC, presently serving as First Vice President for 1999 through
2000 and is President elect for 2001.
Robert Stalvey has served as Vice President -- Special Projects since July,
1999 and a director of the Company since 1998. Prior to that time he served as
Vice President of Ace Electric, Inc. ("Ace"), one of the Company's subsidiaries,
since 1976.
Neil J. DePascal, Jr. has been the Chief Accounting Officer of the Company
since July 1999. From August 1997 to January 1999, he served as Executive Vice
President and Chief Financial Officer of Collectibles USA, Inc. From October
1992 to August 1997, he served as Treasurer of Owen Healthcare, Inc., a Houston
based provider of hospital pharmacy management services. Mr. DePascal is a
Certified Public Accountant.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
The Company's common stock trades on the NYSE under the symbol "IEE." The
following table presents the quarterly high and low sales prices for the Common
Stock on the NYSE since October 1, 1998.
[Download Table]
HIGH LOW
---- ---
FISCAL YEAR ENDED SEPTEMBER 30, 1999
First Quarter............................................... 22 5/8 12 3/8
Second Quarter.............................................. 23 5/16 13
Third Quarter............................................... 18 7/8 13 7/8
Fourth Quarter.............................................. 18 7/8 12 3/8
FISCAL YEAR ENDED SEPTEMBER 30, 2000
First Quarter............................................... 15 3/4 8 3/4
Second Quarter.............................................. 9 3/4 4 1/2
Third Quarter............................................... 5 9/16 4 3/8
Fourth Quarter.............................................. 8 4 3/4
As of December 14, 2000 there were approximately 861 holders of record of
the Company's common stock.
We do not anticipate paying cash dividends on our common stock in the
foreseeable future. We expect that we will retain all available earnings
generated by our operations for the development and growth of our business. Any
future determination as to the payment of dividends will be made at the
discretion of our Board of Directors and will depend upon the Company's
operating results, financial condition, capital requirements, general business
conditions and such other factors as the Board of Directors deems relevant. Our
debt instruments restrict us from paying cash dividends on the common stock. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources."
17
ITEM 6. SELECTED FINANCIAL DATA
On January 30, 1998, we completed our initial public offering of common
stock. In accordance with the SEC's Staff Accounting Bulletin No. 97, IES
results of operations for periods prior to January 30, 1998 reflect the
historical accounts of the accounting acquirer restated for the effect of the
acquisition accounted for as a pooling of interests. The results of operations
for businesses acquired subsequent to January 29, 1998 are included in the
results of operations beginning on their respective dates of acquisition. The
accounting acquirer's results of operations through January 30, 1998 include a
non-cash, non-recurring compensation charge of approximately $17.0 million
required by the SEC in connection with a note receivable and rights held by the
accounting acquirer which were exchanged for cash and shares of our common
stock. The following selected consolidated historical financial information for
IES should be read in conjunction with the audited historical consolidated
financial statements of Integrated Electrical Services, Inc. and subsidiaries
and the notes thereto included in Item 8, "Financial Statements and
Supplementary Data." The selected historical financial information for the nine
months ended September 30, 1997 has been derived from the unaudited consolidated
financial statements of IES, which have been prepared on the same basis as the
audited financial statements and, in the Company's opinion reflect all
adjustments necessary for a fair presentation of such data. The results of
operations for the interim period presented should not be regarded as indicative
of the results that may be expected for a full year.
[Enlarge/Download Table]
NINE MONTHS
YEAR ENDED ENDED YEAR ENDED SEPTEMBER 30,
DECEMBER 31, SEPTEMBER 30, ---------------------------------------------
1996 1997 1997 1998 1999 2000
------------ ------------- -------- -------- ---------- ----------
(UNAUDITED)
STATEMENT OF OPERATIONS DATA:
Revenues..................... $101,431 $92,379 $117,111 $386,721 $1,035,888 $1,672,288
Cost of services (including
depreciation).............. 85,081 76,306 95,937 306,052 816,715 1,372,537
-------- ------- -------- -------- ---------- ----------
Gross profit................. 16,350 16,073 21,174 80,669 219,173 299,751
Selling, general and
administrative expenses.... 10,228 10,222 14,261 47,390 113,871 221,519
Non-cash, non-recurring
compensation charge........ -- -- -- 17,036 -- --
Goodwill amortization........ -- -- -- 3,212 9,305 13,211
-------- ------- -------- -------- ---------- ----------
Income from operations....... 6,122 5,851 6,913 13,031 95,997 65,021
Interest and other income
(expense), net............. 14 292 385 (393) (12,542) (22,222)
-------- ------- -------- -------- ---------- ----------
Income before income taxes... 6,136 6,143 7,298 12,638 83,455 42,799
Provision for income taxes... 2,471 2,408 2,923 12,690 35,348 21,643
-------- ------- -------- -------- ---------- ----------
Net income (loss)............ $ 3,665 $ 3,735 $ 4,375 $ (52) $ 48,107 $ 21,156
======== ======= ======== ======== ========== ==========
Ratio of earnings to fixed
charges.................... 28.5 25.5 26.8 6.1 6.6 2.7
======== ======= ======== ======== ========== ==========
[Enlarge/Download Table]
AS OF AS OF SEPTEMBER 30,
DECEMBER 31, ------------------------------------------
1996 1997 1998 1999 2000
------------ ------- -------- -------- ----------
BALANCE SHEET DATA:
Cash and cash equivalents................. $ 4,301 $ 4,154 $ 14,583 $ 2,931 $ 770
Working capital........................... 7,068 7,770 75,020 175,572 91,643
Total assets.............................. 23,712 35,794 502,468 858,492 1,019,990
Long term debt............................ 1,406 1,275 90,354 228,100 151,162
Total stockholders' equity................ 8,700 12,636 302,704 467,166 507,749
18
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATION
The discussion and analysis presented below should be read in conjunction
with the consolidated financial statements and related notes appearing elsewhere
in the Form 10-K. See "Information Regarding Forward-Looking Statements".
GENERAL
The Company's electrical contracting business is operated in three segments:
commercial and industrial, residential and service and maintenance.
Additionally, the Company operates a communication solutions business. See Note
9 of "Notes to Consolidated Financial Statements" for a description of these
reportable segments and a discussion of the Company's change in operating
segments.
RESULTS OF OPERATIONS
The following table presents selected historical results of operations of
IES and subsidiaries, with dollar amounts in thousands. These historical
statements of operations for periods prior to January 30, 1998 represent the
results of operations of the accounting acquirer restated for the effect of the
acquisition accounted for as a pooling-of-interests. The results of operations
for businesses acquired subsequent to January 29, 1998 are included in the
results of operations beginning on their respective dates of acquisition.
[Enlarge/Download Table]
YEAR ENDED SEPTEMBER 30,
----------------------------------------------------
1998 1999 2000
-------------- ---------------- ----------------
Revenues...................................... $386,721 100% $1,035,888 100% $1,672,288 100%
Cost of services.............................. 306,052 79 816,715 79 1,372,537 82
-------- --- ---------- --- ---------- ---
Gross profit................................ 80,669 21 219,173 21 299,751 18
Selling, general and administrative
expenses.................................... 47,390 12 113,871 11 221,519 13
Non-cash, non-recurring compensation charge... 17,036 5 -- -- -- --
Goodwill amortization......................... 3,212 1 9,305 1 13,211 1
-------- --- ---------- --- ---------- ---
Income from operations........................ 13,031 3 95,997 9 65,021 4
Interest and other income (expense), net...... (393) -- (12,542) (1) (22,222) (2)
-------- --- ---------- --- ---------- ---
Income before income taxes.................... 12,638 3 83,455 8 42,799 2
Provision for income taxes.................... 12,690 3 35,348 3 21,643 1
-------- --- ---------- --- ---------- ---
Net income (loss)............................. $ (52) --% $ 48,107 5% $ 21,156 1%
======== === ========== === ========== ===
REVENUES
[Enlarge/Download Table]
PERCENT OF TOTAL
GROWTH REVENUES
------------ --------------------
YEARS ENDED SEPTEMBER 30,
------------------------------------
1999 2000 1998 1999 2000
---- ---- ---- ---- ----
Commercial and Industrial................................... 187% 57% 58% 69% 67%
Residential................................................. 86% 43% 30% 17% 15%
Service..................................................... 73% 91% 11% 7% 8%
Communications Solutions.................................... N/A 119% 1% 7% 10%
--- --- ---- ---- ----
Total Company............................................... 168% 61% 100% 100% 100%
=== === ==== ==== ====
Revenues increased $636.4 million, or 61%, from $1,035 million for the year
ended September 30, 1999 to $1,672.3 million for the year ended September 30,
2000. Total same store revenues increased approximately $229.9 million, or 23%,
from $988.6 million for the fiscal year ended September 30, 1999, to $1,218.5
million for the fiscal year ended September 30, 2000. The revenue growth within
each operating segment was the result of acquisitions and increased construction
and communications activity in the markets we serve.
Revenues increased $649.2 million, or 168%, from $386.7 million for the year
ended September 30, 1998 to $1,035.9 million for the year ended September 30,
1999. Total same store revenues increased approximately $47.8 million, or 13%,
from $361.0 million for the fiscal year ended September 30, 1998, to $408.9
million for
19
the fiscal year ended September 30, 1999. The revenue growth within each
operating segment was the result of acquisitions and increased construction and
communications activity in the markets we serve.
GROSS MARGIN
[Download Table]
PERCENTAGE OF SEGMENT
GROSS MARGINS AS A
PERCENTAGE OF TOTAL
REVENUES
----------------------
YEARS ENDED SEPTEMBER
30
----------------------
1998 1999 2000
---- ---- ----
Commercial and Industrial................................... 19% 19% 16%
Residential................................................. 22% 23% 22%
Service and maintenance..................................... 27% 34% 22%
Communications Solutions.................................... 29% 29% 24%
--- --- ---
Total Company...................................... 21% 21% 18%
=== === ===
Gross profit increased $80.6 million, or 37%, from $219.2 million for the
year ended September 30, 1999 to $299.8 million for the year ended September 30,
2000. Overall gross margin as a percentage of revenue decreased approximately 3%
from 21% for the year ended September 30, 1999 to 18% for the year ended
September 30, 2000. The overall decrease in gross profit as a percentage of
revenue is primarily the result of losses recorded on certain commercial
projects, a shift in the mix of work toward lower margin bid work versus
negotiated contract work, the completion of certain contracts at lower than
planned gross margins and the recording of additional claims reserves for our
self-insured healthcare plan resulting from a higher level of employee
participation.
Gross profit increased $138.5 million, or 172%, from $80.7 million for the
year ended September 30, 1998 to $219.2 million for the year ended September 30,
1999. This increase in gross profit was principally due additional companies
acquired during the fiscal year and an overall increase in construction activity
in the markets we serve. As a percentage of revenue, overall gross profit
remained constant at 21%.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses increased $107.6 million, or
95%, from $113.9 million for the year ended September 30, 1999 to $221.5 million
for the year ended September 30, 2000. Selling, general and administrative
expenses as a percentage of revenue increased from 11% in 1999 to 13% in 2000.
The increase in selling, general and administrative expenses related to acquired
companies was approximately $45.5 million. Other increased selling, general and
administrative costs primarily resulted from the need for additional
infrastructure growth to support operational initiatives, including various
incentive awards, claims reserves related to the Company's self-insured health
insurance plan, the non-cash compensation charge associated with the restricted
stock awards, and the write-off, net of recoveries, of costs associated with the
Company's decision to curtail the development of its information system.
Selling, general and administrative expenses increased $66.5 million, or
140%, from $47.4 million for the year ended September 30, 1998 to $113.9 million
for the year ended September 30, 1999. Selling, general and administrative
expenses as a percentage of revenues decreased from 12% in 1998 to 11% in 1999.
The increase in selling, general and administrative expenses is primarily
related to increased expenses from acquisitions. During the four months ended
January 1998 a $5.6 million bonus was paid to the previous owners of the
accounting acquirer, compared to no bonus during the year ended September 30,
1999. Corporate costs associated with being a public company totaled
approximately $3.3 million during the year ended September 30, 1998, compared to
approximately $11.3 million during the year ended September 30, 1999. This
increase is related to building infrastructure necessary to manage our
operations. Excluding the accounting acquirer bonuses and higher corporate
costs, selling, general and administrative expenses as a percentage of revenues
remained constant at 10%.
INCOME FROM OPERATIONS
Income from operations decreased $31.0 million, or 32%, from $96.0 million
for the year ended September 30, 1999 to $65.0 million for the year ended
September 30, 2000. This decrease was primarily the
20
result of higher selling, general and administrative costs discussed above. As a
percentage of revenues, income from operations decreased from 9% for the year
ended September 30, 1999 to 4% for the year ended September 30, 2000.
Income from operations increased $83.0 million, or 638%, from $13.0 million
for the year ended September 30, 1998 to $96.0 million for the year ended
September 30, 1999. This increase in income from operations was primarily
attributable to our acquisitions. These increases were partially offset by the
higher corporate costs discussed above, net of the $17.0 million non-cash,
non-recurring compensation charge incurred in connection with our IPO (see Note
11 of the notes to consolidated financial statements). As a percentage of
revenues, income from operations (excluding the accounting acquirer owner
bonuses, higher corporate costs and the non-cash, non-recurring compensation
charge noted above) remained constant at 10%.
INTEREST AND OTHER EXPENSE
Interest and other income (expense) increased from net expense of $12.5
million in 1999 to $22.0 million in 2000, primarily as a result of increased
interest expense on borrowings to fund the company's acquisitions and a full
twelve months of interest expense on the $150.0 million 9 3/8% Senior
Subordinated Notes ("Senior Subordinated Notes") due February 1, 2009.
Interest and other income (expense) changed from net expense of $0.4 million
in 1998 to $12.5 million in 1999, primarily as a result of interest expense on
borrowings from our Senior Subordinated Notes and Credit Facility to fund our
1999 acquisitions.
PROVISION FOR INCOME TAXES
Our effective tax rate increased from the year ended September 30, 1999 to
September 30, 2000 primarily as a result of disproportionately lower pretax
income than in 1999 together with higher non-deductible goodwill amortization
and the non-deductible portion of the compensation expense associated with the
restricted stock awards in 2000.
The increase in our tax provision from $12.7 million in 1998 to $35.3
million in 1999 is primarily attributable to the growth in income from
operations discussed above. The change in net income (loss) is primarily
attributable to the factors discussed above.
LIQUIDITY AND CAPITAL RESOURCES
As of September 30, 2000, we had cash and cash equivalents of $0.8 million,
working capital of $91.6 million, borrowings of $93.0 million under our
three-year revolving credit facility (the "Credit Facility"), $1.5 million of
letters of credit outstanding, and available capacity under our Credit Facility
of $80.5 million.
During the year ended September 30, 2000, we generated $43.2 million of net
cash from operating activities. This net cash from operating activities is
comprised of net income of $21.2 million, increased by $38.0 million of non-cash
charges related to depreciation and amortization expense and a non-cash
compensation charge and decreased by changes in working capital. Working capital
changes consisted of a $81.1 million increase in receivables as a result of
revenue growth and the timing of collections offset by a $72.8 million increase
in payables also associated with revenue growth and further increased by a $15.1
million increase in billings in excess of costs and estimated earnings on
uncompleted contracts offset by a $11.5 million increase in costs and estimated
earnings on uncompleted contracts in excess of billings related to the timing of
billings, with the balance of the change due to other working capital changes.
Net cash used in investing activities was $60.5 million, including $33.2 million
used for the purchase of businesses, net of cash acquired, and $28.4 million of
capital expenditures. Net cash provided by financing activities was $15.2
million, resulting primarily from borrowings, net of repayments under our credit
facility and reduced by paydowns on debt acquired in connection with the
purchase of businesses discussed above.
In January 1998, we entered into our credit facility, which provided for
borrowings of up to $65.0 million, to be used for working capital, capital
expenditures, other corporate purposes and acquisitions. In July 1998, the
amounts available for borrowings under our credit facility were increased to
$175.0 million.
21
The amounts borrowed under the credit facility bear interest at an annual
rate equal to either:
- LIBOR plus 1.0% to 2.375%, as determined by the ratio of our total funded
debt to EBITDA; or
- the higher of
- the bank's prime rate, and
- the federal funds rate plus 0.5%, plus up to an additional 0.5% as
determined by the ratio of our total funded debt to EBITDA.
Commitment fees of 0.25% to 0.375%, as determined by the ratio of total
funded debt to EBITDA, are due on any unused borrowing capacity under the credit
facility. Our subsidiaries have guaranteed the repayment of all amounts due
under the facility, and the facility is secured by the capital stock of the
guarantors and the accounts receivable of IES and the guarantors. The credit
facility:
- requires the consent of the lenders for acquisitions exceeding a set level
of cash consideration;
- prohibits the payment of cash dividends on our common stock;
- restricts our ability to incur other indebtedness; and
- requires us to comply with material financial covenants.
Availability of the credit facility is subject to customary drawing
conditions.
The Credit Facility matures on July 30, 2001. The Company is currently in
negotiations with several banks to refinance the Credit Facility. The Company
believes that it will be successful in refinancing its current Credit Facility.
On January 25, 1999, we completed our offering of $150.0 million Series B
senior subordinated notes ("Senior Subordinated Notes"). The notes bear interest
at 9 3/8% and will mature on February 1, 2009. We pay interest on the notes on
February 1 and August 1 of each year, commencing August 1, 1999. The notes are
unsecured senior subordinated obligations and are subordinated to all our
existing and future senior indebtedness. The notes are guaranteed on a senior
subordinated basis by all of our subsidiaries. Under the terms of the notes, we
are required to comply with various affirmative and negative covenants including
(1) restrictions on additional indebtedness, and (2) restrictions on liens,
guarantees and dividends.
We anticipate that our cash flow from operations and proceeds from the
Credit Facility will provide sufficient cash to enable us to meet our working
capital needs, debt service requirements and planned capital expenditures for
property and equipment through fiscal 2001.
Subsequent to our IPO, and through December 2000, we have acquired 70
additional electrical contracting and communications solutions businesses for
approximately $232.7 million in cash, net of cash acquired and 15.8 million
shares of common stock. The cash component of the consideration paid for these
companies was funded with proceeds from our IPO, existing cash, borrowings under
our credit facility and proceeds from the offering of our Senior Subordinated
Notes.
We intend to continue to pursue selected acquisition opportunities. We may
be in various stages of negotiation, due diligence and documentation of
potential acquisitions at any time. The timing, size or success of any
acquisition effort and the associated potential capital commitments cannot be
predicted. We expect to fund future acquisitions primarily with working capital,
cash flow from operations and borrowings, including any unborrowed portion of
the credit facility, as well as issuances of additional equity or debt. To the
extent we fund a significant portion of the consideration for future
acquisitions with cash, we may have to obtain sources of financing through the
public or private sale of debt or equity securities. There can be no assurance
that we will be able to secure this financing if and when it is needed or on
terms we consider acceptable. If we are unable to secure acceptable financing,
our acquisition program could be negatively affected. We expect capital
expenditures for equipment and expansion of facilities to be funded from cash
flow from operations and supplemented as necessary by borrowings under our
credit facility.
All of our operating income and cash flow is generated by our wholly owned
subsidiaries, which are the subsidiary guarantors of our outstanding Senior
Subordinated Notes. The separate financial statements of the subsidiary
guarantors are not included herein because (i) the subsidiary guarantors are all
of the direct and indirect subsidiaries of the Company; (ii) the subsidiary
guarantors have fully and unconditionally, jointly and
22
severally guaranteed the Senior Subordinated Notes; (iii) the aggregate assets,
liabilities, earnings, and equity of the subsidiary guarantors is substantially
equivalent to the assets, liabilities, earnings and equity of the Company on a
consolidated basis; and (iv) the presentation of separate financial statements
and other disclosures concerning the subsidiary guarantors is not deemed
material.
SEASONALITY AND CYCLICAL FLUCTUATIONS
Our results of operations from residential construction are seasonal,
depending on weather trends, with typically higher revenues generated during
spring and summer and lower revenues during fall and winter. The commercial and
industrial aspect of our business is less subject to seasonal trends, as this
work generally is performed inside structures protected from the weather. Our
service and maintenance business is generally not affected by seasonality. In
addition, the construction industry has historically been highly cyclical. Our
volume of business may be adversely affected by declines in construction
projects resulting from adverse regional or national economic conditions.
Quarterly results may also be materially affected by the timing of new
construction projects and acquisitions and the timing and magnitude of
acquisition assimilation costs. Accordingly, operating results for any fiscal
period are not necessarily indicative of results that may be achieved for any
subsequent fiscal period.
INFLATION
Due to the relatively low levels of inflation experienced in fiscal 1998,
1999 and 2000, inflation did not have a significant effect on our results in
those fiscal years, or on any of the acquired businesses during similar periods.
RECENT ACCOUNTING PRONOUNCEMENTS
In December 1999, the Securities and Exchange Commission staff issued Staff
Accounting Bulletin No. 101 (SAB 101). The staff has deferred the implementation
date of SAB 101 until no later than the fourth quarter of fiscal years beginning
after December 15, 1999. SAB 101 reflects the basic principles of revenue
recognition in existing accounting principles generally accepted in the United
States. SAB 101 does not supersede any existing authoritative literature.
Management has reviewed the staff's views presented in SAB 101 and does not
believe the adoption of SAB 101 will have a material impact on the financial
position or results of operations of the Company as we recognize revenue from
construction contracts on the percentage-of-completion method in accordance with
the American Institute of Certified Public Accountants Statement of Position
81-1, "Accounting for Performance of Construction -- Type and Certain
Production -- Type Contracts".
SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities,
as amended, is required to be adopted for fiscal years beginning after June 15,
2000. We adopted SFAS No. 133, as amended, on October 1, 2000. Adoption of this
statement did not have a material impact on the financial position or results of
operations of the Company, as we have not engaged or entered into any
arrangements usually associated with derivative instruments.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Management is actively involved in monitoring exposure to market risk and
continues to develop and utilize appropriate risk management techniques. We are
not exposed to any significant market risks, including commodity price risk,
foreign currency exchange risk or interest rate risks resulting from the use of
derivative financial instruments. Further, management does not use derivative
financial instruments for trading or to speculate on changes in interest rates
or commodity prices.
As a result, our exposure to changes in interest rates results from our
short-term and long-term debt with both fixed and floating interest rates. The
following table presents principal or notional amounts (stated in
23
thousands) and related interest rates by year of maturity for our debt
obligations and their indicated fair market value at September 30, 2000:
[Enlarge/Download Table]
2001 2002 2003 2004 2005 THEREAFTER TOTAL
------- ------ ------ ------ ------ ---------- --------
Liabilities -- Debt:
Variable Rate (Credit
Facility)................... $93,000 $ -- $ -- $ -- $ -- $ -- $ 93,000
Average Interest Rate......... 8.0% -- -- -- -- -- 8.0%
Fixed Rate (Senior
Subordinated Notes)......... $ -- $ -- $ -- $ -- $ -- $150,000 $150,000
Interest Rate................. 9.375% 9.375% 9.375% 9.375% 9.375% 9.375% 9.375%
Fair Value of Debt:
Variable Rate................. $ 93,000
Fixed Rate.................... $132,375
24
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
[Download Table]
PAGE
----
Integrated Electrical Services, Inc. and Subsidiaries
Report of Independent Public Accountants.................. 26
Consolidated Balance Sheets............................... 27
Consolidated Statements of Operations..................... 28
Consolidated Statements of Stockholders' Equity........... 29
Consolidated Statements of Cash Flows..................... 30
Notes to Consolidated Financial Statements................ 31
25
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Integrated Electrical Services, Inc.:
We have audited the accompanying consolidated balance sheets of Integrated
Electrical Services, Inc. (a Delaware corporation), and subsidiaries as of
September 30, 1999 and 2000, and the related consolidated statements of
operations, stockholders' equity and cash flows for each of the three years in
the period ended September 30, 2000. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements 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 consolidated financial position of Integrated
Electrical Services, Inc., and subsidiaries as of September 30, 1999 and 2000,
and the consolidated results of their operations and their cash flows for each
of the three years in the period ended September 30, 2000, in conformity with
accounting principles generally accepted in the United States.
ARTHUR ANDERSEN LLP
Houston, Texas
November 8, 2000
26
INTEGRATED ELECTRICAL SERVICES, INC., AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE INFORMATION)
(NOTE 1)
[Download Table]
SEPTEMBER 30,
---------------------
1999 2000
-------- ----------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents................................. $ 2,931 $ 770
Accounts receivable:
Trade, net of allowance of $5,709 and $7,121,
respectively........................................... 222,824 300,038
Retainage............................................... 47,682 67,851
Related party........................................... 220 256
Costs and estimated earnings in excess of billings on
uncompleted contracts................................... 40,592 51,119
Inventories, net.......................................... 12,793 16,861
Prepaid expenses and other current assets................. 7,640 8,857
-------- ----------
Total current assets............................... 334,682 445,752
-------- ----------
PROPERTY AND EQUIPMENT, net................................. 47,368 61,367
GOODWILL, net............................................... 467,385 496,212
OTHER NONCURRENT ASSETS..................................... 9,057 16,659
-------- ----------
Total assets....................................... $858,492 $1,019,990
======== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Short-term debt and current maturities of long-term
debt.................................................... $ 1,444 $ 93,903
Accounts payable and accrued expenses..................... 116,188 202,047
Income taxes payable...................................... 3,971 1,166
Billings in excess of costs and estimated earnings on
uncompleted contracts................................... 37,507 56,993
-------- ----------
Total current liabilities.......................... 159,110 354,109
-------- ----------
LONG-TERM BANK DEBT......................................... 76,980 --
OTHER LONG-TERM DEBT, net of current maturities............. 1,120 1,162
SENIOR SUBORDINATED NOTES, net of unamortized discount of
$1,151 and $1,073, respectively........................... 148,849 148,927
OTHER NON-CURRENT LIABILITIES............................... 5,267 8,043
-------- ----------
Total liabilities.................................. 391,326 512,241
-------- ----------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Preferred stock, $.01 par value, 10,000,000 authorized,
none issued and outstanding............................. -- --
Common stock, $.01 par value, 100,000,000 shares
authorized, 35,985,838 and 38,099,079 shares issued and
outstanding, respectively............................... 360 381
Restricted voting common stock, $.01 par value, 2,655,709
shares authorized, 2,655,709 shares issued and
outstanding at September 30, 1999 and 2000.............. 27 27
Additional paid-in capital................................ 407,926 427,332
Retained earnings......................................... 58,853 80,009
-------- ----------
Total stockholders' equity......................... 467,166 507,749
-------- ----------
Total liabilities and stockholders' equity......... $858,492 $1,019,990
======== ==========
The accompanying notes are an integral part of these consolidated financial
statements.
27
INTEGRATED ELECTRICAL SERVICES, INC., AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE INFORMATION)
(NOTE 1)
[Enlarge/Download Table]
YEAR ENDED SEPTEMBER 30,
---------------------------------------
1998 1999 2000
----------- ----------- -----------
REVENUES.................................................... $ 386,721 $ 1,035,888 $ 1,672,288
COST OF SERVICES (including depreciation)................... 306,052 816,715 1,372,537
----------- ----------- -----------
Gross profit.............................................. 80,669 219,173 299,751
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES................ 47,390 113,871 221,519
NON-CASH, NON-RECURRING COMPENSATION CHARGE (Note 11)....... 17,036 -- --
GOODWILL AMORTIZATION....................................... 3,212 9,305 13,211
----------- ----------- -----------
Income from operations.................................... 13,031 95,997 65,021
----------- ----------- -----------
OTHER INCOME (EXPENSE):
Interest expense.......................................... (728) (13,145) (23,230)
Other, net................................................ 335 603 1,008
----------- ----------- -----------
Other income (expense), net............................. (393) (12,542) (22,222)
----------- ----------- -----------
INCOME BEFORE INCOME TAXES.................................. 12,638 83,455 42,799
PROVISION FOR INCOME TAXES.................................. 12,690 35,348 21,643
----------- ----------- -----------
NET INCOME (LOSS)........................................... $ (52) $ 48,107 $ 21,156
=========== =========== ===========
EARNINGS (LOSS) PER SHARE:
Basic..................................................... $ -- $ 1.41 $ 0.53
=========== =========== ===========
Diluted................................................... $ -- $ 1.39 $ 0.52
=========== =========== ===========
SHARES USED IN THE COMPUTATION OF EARNINGS (LOSS) PER SHARE:
Basic..................................................... 19,753,060 34,200,532 40,207,940
=========== =========== ===========
Diluted................................................... 19,753,060 34,613,644 40,410,400
=========== =========== ===========
The accompanying notes are an integral part of these consolidated financial
statements.
28
INTEGRATED ELECTRICAL SERVICES, INC., AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE INFORMATION)
(NOTE 1)
[Enlarge/Download Table]
RESTRICTED
COMMON STOCK COMMON STOCK ADDITIONAL TOTAL
------------------- ------------------ PAID-IN RETAINED STOCKHOLDERS'
SHARES AMOUNT SHARES AMOUNT CAPITAL EARNINGS EQUITY
---------- ------ --------- ------ ---------- -------- -------------
BALANCE, September 30, 1997..... 4,492,039 $ 45 -- $-- $ 887 $11,704 $ 12,636
Non-cash non-recurring
compensation charge......... -- -- -- -- 17,036 -- 17,036
Initial public offering of
stock....................... 8,050,000 80 -- -- 91,433 -- 91,513
Issuance of stock for
acquisitions................ 15,563,324 156 2,655,709 27 199,920 -- 200,103
Distribution to accounting
acquirer.................... -- -- -- -- (17,626) (906) (18,532)
Net loss...................... -- -- -- -- -- (52) (52)
---------- ---- --------- --- -------- ------- --------
BALANCE, September 30, 1998..... 28,105,363 281 2,655,709 27 291,650 10,746 302,704
Issuance of stock for
acquisitions................ 7,755,586 78 -- -- 115,074 -- 115,152
Exercise of stock options..... 124,889 1 -- -- 1,202 -- 1,203
Net income.................... -- -- -- -- -- 48,107 48,107
---------- ---- --------- --- -------- ------- --------
BALANCE, September 30, 1999..... 35,985,838 360 2,655,709 27 407,926 58,853 467,166
Issuance of stock for
acquisitions................ 1,737,522 17 -- -- 17,045 -- 17,062
Issuance of stock (Note 10)... 375,499 4 -- -- 2,358 -- 2,362
Exercise of stock options..... 220 -- -- -- 3 -- 3
Net income.................... -- -- -- -- -- 21,156 21,156
---------- ---- --------- --- -------- ------- --------
BALANCE, September 30, 2000..... 38,099,079 $381 2,655,709 $27 $427,332 $80,009 $507,749
========== ==== ========= === ======== ======= ========
The accompanying notes are an integral part of these consolidated financial
statements.
29
INTEGRATED ELECTRICAL SERVICES, INC., AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(NOTE 1)
[Enlarge/Download Table]
YEAR ENDED SEPTEMBER 30,
--------------------------------
1998 1999 2000
--------- --------- --------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)......................................... $ (52) $ 48,107 $ 21,156
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Non-cash non-recurring compensation charge.............. 17,036 -- --
Non-cash compensation charge............................ -- -- 5,378
Depreciation and amortization........................... 5,557 16,947 32,656
Allowance for doubtful accounts......................... 261 871 1,768
Gain on sale of property and equipment.................. (177) (198) (145)
Changes in operating assets and liabilities:
(Increase) decrease in:
Accounts receivable................................... (20,261) (54,456) (82,917)
Inventories........................................... 631 (472) (2,900)
Costs and estimated earnings in excess of billings on
uncompleted contracts.............................. (2,013) (12,656) (11,489)
Prepaid expenses and other current assets............. 1,603 (2,333) (1,096)
Increase (decrease) in:
Accounts payable and accrued expenses................. (1,063) 6,585 72,763
Billings in excess of costs and estimated earnings on
uncompleted contracts.............................. 4,838 (1,575) 15,131
Other current liabilities............................. (66) (8,829) (2,880)
Other, net............................................ 3,558 1,001 (4,211)
--------- --------- --------
Net cash provided by (used in) operating activities... 9,852 (7,008) 43,214
--------- --------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of property and equipment.............. 702 753 2,742
Additions of property and equipment....................... (4,352) (12,888) (28,381)
Purchase of businesses, net of cash acquired.............. (128,735) (106,476) (33,225)
Other investments......................................... -- -- (1,670)
Collections of notes receivable........................... 475 -- --
--------- --------- --------
Net cash used in investing activities................... (131,910) (118,611) (60,534)
--------- --------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings of debt........................................ 108,026 270,388 63,434
Payments of debt.......................................... (47,778) (152,070) (48,278)
Distributions to stockholders............................. (17,758) -- --
Payments for debt issuance costs.......................... (1,516) (5,554) --
Proceeds from exercise of stock options................... -- 1,203 3
Proceeds from initial public offering..................... 91,513 -- --
--------- --------- --------
Net cash provided by financing activities............... 132,487 113,967 15,159
--------- --------- --------
NET INCREASE (DECREASE) IN CASH............................. 10,429 (11,652) (2,161)
CASH AND CASH EQUIVALENTS, beginning of period.............. 4,154 14,583 2,931
--------- --------- --------
CASH AND CASH EQUIVALENTS, end of period.................... $ 14,583 $ 2,931 $ 770
========= ========= ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for:
Interest.............................................. $ 755 $ 11,432 $ 23,151
Income taxes.......................................... 10,779 38,214 24,832
Non-cash property distribution.......................... 774 -- --
The accompanying notes are an integral part of these consolidated financial
statements.
30
INTEGRATED ELECTRICAL SERVICES, INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE INFORMATION)
1. BUSINESS AND ORGANIZATION AND BASIS OF PRESENTATION:
Integrated Electrical Services, Inc. (the "Company" or "IES"), a Delaware
corporation, was founded in June 1997 to create a leading national provider of
electrical services, focusing primarily on the commercial and industrial,
residential, communications solutions and service and maintenance markets.
On January 30, 1998, the Company completed its initial public offering
("IPO"), issuing to the public 7,000,000 shares of its common stock at a price
of $13.00 per share, resulting in net proceeds to the Company of $78.8 million
after deducting underwriting commissions and discounts. On February 5, 1998, the
Company sold an additional 1,050,000 shares of common stock pursuant to the
overallotment option granted to the underwriters. The Company realized net
proceeds from this sale of $12.7 million.
The financial statements of the Company for periods prior to January 30,
1998, reflect the historical accounts of the accounting acquirer restated for
the effect of the acquisition accounted for as a pooling-of-interests. The
results of operations for businesses acquired subsequent to January 29, 1998,
are included in the Company's results of operations beginning on their
respective dates of acquisition. The accounting acquirer's results of operations
through January 30, 1998, include a non-cash, non-recurring compensation charge
of approximately $17.0 million required by the Securities and Exchange
Commission in connection with a note receivable and rights held by an officer of
the accounting acquirer which was exchanged for cash and shares of IES common
stock (see Note 11).
In the course of its operations, the Company is subject to certain risk
factors, including but not limited to: exposure to downturns in commercial
construction or housing starts, risks related to its acquisition strategy,
management of growth, availability of qualified employees, competition,
seasonality, risks associated with contracts, significant fluctuations in
quarterly results, recoverability of goodwill, dependence on key personnel and
risks associated with the availability of capital and with debt service.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of
IES, its wholly owned subsidiaries, and certain investments. All significant
intercompany accounts and transactions have been eliminated in consolidation.
Certain reclassifications have been made to the prior year consolidated
financial statements to conform with the presentation used in 2000.
Cash and Cash Equivalents
The Company considers all highly liquid investments purchased with an
original maturity of three months or less to be cash equivalents.
Inventories
Inventories consist of parts and supplies held for use in the ordinary
course of business and are valued by the Company at the lower of cost or market
generally using the first-in, first-out (FIFO) method.
Marketable Securities and Other Investments
The Company accounts for its marketable equity securities in accordance with
Statement of Financial Accounting Standards ("SFAS") No. 115, "Accounting for
Certain Investments in Debt and Equity Securities." Management determines the
appropriate classification of marketable securities at the time of purchase and
reevaluates such designation at each balance sheet date. The Company's
marketable securities are categorized as "available for sale" and are carried at
fair value.
At September 30, 2000, the Company's investments in marketable securities
had a fair value of $1.7 million, which approximated cost. Such investments are
included in other assets on the balance sheet.
31
INTEGRATED ELECTRICAL SERVICES, INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Unrealized holding gains and losses, net of taxes, will be reflected in
accumulated other comprehensive income (loss) included in stockholders' equity
until realized. For the purpose of computing realized gains and losses, cost is
identified on a specific identification basis.
Property and Equipment
Additions of property and equipment are stated at cost, and depreciation is
computed using the straight-line method over the estimated useful lives of the
assets. Leasehold improvements are capitalized and amortized over the lesser of
the life of the lease or the estimated useful life of the asset. Depreciation
expense was approximately $2,148,000, $6,728,000 and $17,970,000 for the years
ended September 30, 1998, 1999 and 2000, respectively.
In accordance with its ongoing review of capitalized software, during 2000,
the Company curtailed the development of a complex and proprietary information
system. This comprehensive information system had been under development for
approximately one year. After a period of field-testing, the Company determined
that it was necessary to significantly alter the technological architecture of
the system in order to reduce ongoing support, maintenance and communications
costs. Accordingly, the Company recorded a pretax charge of approximately $6.8
million, of which $5.7 million was included in depreciation expense for the
year, to write-off the carrying value of the software costs, development costs
and certain hardware and network infrastructure costs.
Expenditures for repairs and maintenance are charged to expense when
incurred. Expenditures for major renewals and betterments, which extend the
useful lives of existing equipment, are capitalized and depreciated. Upon
retirement or disposition of property and equipment, the cost and related
accumulated depreciation are removed from the accounts and any resulting gain or
loss is recognized in the statement of operations.
Goodwill
Goodwill represents the excess of the aggregate of purchase price paid by
the Company in the acquisition of businesses accounted for as purchases over the
estimated fair market value of the net assets acquired. Goodwill is amortized on
a straight-line basis over 40 years. As of September 30, 1999 and 2000,
accumulated amortization was approximately $12,550,000 and $25,761,000,
respectively.
The Company periodically evaluates the recoverability of intangibles
resulting from business acquisitions and measures the amount of impairment, if
any, by assessing current and future levels of income and cash flows as well as
other factors, such as business trends and prospects and market and economic
conditions. If an evaluation is required, the estimated future undiscounted cash
flows associated with the asset will be compared to the asset's carrying amount
to determine if such an impairment exists.
Debt Issuance Costs
Debt issuance costs related to the Company's credit facility and the Senior
Subordinated Notes are included in other noncurrent assets and are amortized to
interest expense over the scheduled maturity of the debt. As of September 30,
1999 and 2000, accumulated amortization of debt issuance costs were
approximately $1,061,000 and $2,458,000, respectively.
Revenue Recognition
The Company recognizes revenue when services are performed except when work
is being performed under a construction contract. Such contracts generally
provide that the customers accept completion of progress to date and compensate
the Company for services rendered measured in terms of hours expended or some
other measure of progress. Revenues from construction contracts are recognized
on the percentage-of-completion method in accordance with the American Institute
of Certified Public Accountants Statement of Position (SOP) 81-1 "Accounting for
Performance of Construction-Type and Certain Production-Type Contracts."
Percentage of completion for construction contracts is measured principally by
the percentage of costs incurred and accrued to date for each contract to the
estimated total costs for each contract at completion. The Company generally
considers contracts to be substantially complete upon departure from the
32
INTEGRATED ELECTRICAL SERVICES, INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
work site and acceptance by the customer. Contract costs include all direct
material and labor costs and those indirect costs related to contract
performance, such as indirect labor, supplies, tools, repairs and depreciation
costs. Changes in job performance, job conditions, estimated contract costs and
profitability and final contract settlements may result in revisions to costs
and income. Provisions for total estimated losses on uncompleted contracts are
made in the period in which such losses are determined and the effects of these
revisions are recognized in the period in which the revisions are determined.
The balances billed but not paid by customers pursuant to retainage
provisions in construction contracts will be due upon completion of the
contracts and acceptance by the customer. Based on the Company's experience with
similar contracts in recent years, the retention balance at each balance sheet
date will be collected within the subsequent fiscal year.
The current asset, "Costs and estimated earnings in excess of billings on
uncompleted contracts," represents revenues recognized in excess of amounts
billed which management believes will be billed and collected within the
subsequent year. The current liability, "Billings in excess of costs and
estimated earnings on uncompleted contracts," represents billings in excess of
revenues recognized.
Warranty Costs
For certain contracts, the Company warrants labor for the first year after
installation of new electrical systems. The Company generally warrants labor for
30 days after servicing of existing electrical systems. A reserve for warranty
costs is recorded based upon the historical level of warranty claims and
management's estimate of future costs.
Accounts Receivable and Provision for Doubtful Accounts
The Company provides an allowance for doubtful accounts for unknown
collection issues in addition to reserves for specific accounts receivable where
collection is considered doubtful.
Income Taxes
The Company follows the asset and liability method of accounting for income
taxes in accordance with Statement of Financial Accounting Standards No. 109,
"Accounting for Income Taxes." Under this method, deferred income tax assets and
liabilities are recorded for the future income tax consequences of temporary
differences between the financial reporting and income tax bases of assets and
liabilities, and are measured using enacted tax rates and laws.
The Company files a consolidated federal income tax return, which includes
the operations of all acquired businesses for periods subsequent to their
respective acquisition dates. The acquired businesses file "short period"
federal income tax returns for the period from their last fiscal year through
their respective acquisition dates.
Use of Estimates
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires the use of estimates
and assumptions by management in determining the reported amounts of assets and
liabilities, disclosures of contingent 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. Estimates
are used in the Company's revenue recognition of construction in progress,
allowance for doubtful accounts and self insured claims liability.
Self-Insurance
The Company retains the risk for worker's compensation, employer's
liability, auto liability, general liability and employee group health claims,
resulting from uninsured deductibles per accident or occurrence
33
INTEGRATED ELECTRICAL SERVICES, INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
which are subject to annual aggregate limits. Losses up to the deductible
amounts are accrued based upon the Company's known claims incurred and an
estimate of claims incurred but not reported. The accruals are based upon known
facts and historical trends and management believes such accruals to be
adequate.
Realization of Long-Lived Assets
In accordance with SFAS No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of," the Company
evaluates the recoverability of property and equipment or other assets, if facts
and circumstances indicate that any of those assets might be impaired. If an
evaluation is required, the estimated future undiscounted cash flows associated
with the asset are compared to the asset's carrying amount to determine if an
impairment of such property has occurred. The effect of any impairment would be
to expense the difference between the fair value of such property and its
carrying value.
Risk Concentration
Financial instruments, which potentially subject the Company to
concentrations of credit risk, consist principally of cash deposits and trade
accounts receivable. The Company grants credit, generally without collateral, to
its customers, which are generally contractors and homebuilders throughout the
United States. Consequently, the Company is subject to potential credit risk
related to changes in business and economic factors throughout the United States
within the construction and home-building market. However, the Company generally
is entitled to payment for work performed and has certain lien rights in that
work. Further, management believes that its contract acceptance, billing and
collection policies are adequate to manage potential credit risk. The Company
routinely maintains cash balances in financial institutions in excess of
federally insured limits.
During the year ended September 30, 2000, we had one customer which
represented 11% of our revenues. Excluding that customer, we had no single
customer accounting for more than 3% of our revenues for the year ended
September 30, 2000.
Fair Value Of Financial Instruments
The Company's financial instruments consist of cash and cash equivalents,
accounts receivable, receivables from related parties, retainage receivables,
accounts payable, a line of credit, notes and bonds payable and long-term debt.
The Company's Senior Subordinated Notes have a carrying value at September 30,
1999 and 2000 of $150.0 million. The fair value of the Company's Senior
Subordinated Notes at September 30, 1999 and 2000 was $147.0 million and $132.4
million, respectively. This decrease is primarily related to increases in
interest rates after the issuance of the Senior Subordinated Notes. Other than
the Senior Subordinated Notes, the Company believes that the carrying value of
financial instruments on the accompanying consolidated balance sheets
approximates their fair value.
Subsidiary Guaranties
All of the Company's operating income and cash flows are generated by its
wholly owned subsidiaries, which are the subsidiary guarantors of the Company's
outstanding 9 3/8% Senior Subordinated Notes due 2009. The separate financial
statements of the subsidiary guarantors are not included herein because (i) the
subsidiary guarantors are all of the direct and indirect subsidiaries of the
Company; (ii) the subsidiary guarantors have fully and unconditionally, jointly
and severally guaranteed the Senior Subordinated Notes; (iii) the aggregate
assets, liabilities, earnings, and equity of the subsidiary guarantors are
substantially equivalent to the assets, liabilities, earnings and equity of the
Company on a consolidated basis; and (iv) the presentation of separate financial
statements and other disclosures concerning the subsidiary guarantors is not
deemed material.
34
INTEGRATED ELECTRICAL SERVICES, INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Earnings per Share
The following table reconciles the components of the basic and diluted
earnings per share for the three years ended September 30, 1998, 1999 and 2000
(in thousands, except share information):
[Enlarge/Download Table]
YEAR ENDED SEPTEMBER 30,
---------------------------------------
1998 1999 2000
----------- ----------- -----------
Numerator:
Net income (loss)................................. $ (52) $ 48,107 $ 21,156
=========== =========== ===========
Denominator:
Weighted average common shares outstanding --
basic........................................... 19,753,060 34,200,532 40,207,940
Effect of dilutive stock options.................. -- 413,112 202,460
----------- ----------- -----------
Weighted average common and common equivalent
shares outstanding -- diluted................... 19,753,060 34,613,644 40,410,400
=========== =========== ===========
Earnings (loss) per share:
Basic............................................. $ -- $ 1.41 $ 0.53
Diluted........................................... $ -- $ 1.39 $ 0.52
Common stock equivalents are excluded in the calculation of weighted average
shares outstanding when a company reports a net loss for a period. The number of
potentially antidilutive shares excluded from the calculation of fully diluted
earnings per share was 0.4 million for the year ended September 30, 1998 due to
the net loss for the period. For the years ended September 30, 1999 and 2000,
exercisable stock options of 1.0 million and 4.4 million, respectfully, were
excluded from the computation of diluted earnings per share because the options'
exercise prices were greater than the average market price of the Company's
common stock.
New Accounting Pronouncements
In December 1999, the Securities and Exchange Commission staff issued Staff
Accounting Bulletin No. 101 (SAB 101). The staff has deferred the implementation
date of SAB 101 until no later than the fourth quarter of fiscal years beginning
after December 15, 1999. SAB 101 reflects the basic principles of revenue
recognition in existing accounting principles generally accepted in the United
States. SAB 101 does not supersede any existing authoritative literature.
Management has reviewed the staff's views presented in SAB 101 and does not
believe the adoption of SAB 101 will have a material impact on the financial
position or results of operations of the Company as we recognize revenue from
construction contracts on the percentage-of-completion method in accordance with
the American Institute of Certified Public Accountants Statement of Position
81-1, "Accounting for Performance of Construction -- Type and Certain
Production -- Type Contracts".
SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities,
as amended, is required to be adopted for fiscal years beginning after June 15,
2000. We adopted SFAS No. 133, as amended, on October 1, 2000. Adoption of this
statement did not have a material impact on the financial position or results of
operations of the Company, as we have not engaged or entered into any
arrangements usually associated with derivative instruments.
3. BUSINESS COMBINATIONS:
Pooling of Interests
On June 1, 1998, IES completed the acquisition of all the capital stock of
H.R. Allen, Inc. ("Allen"), in a business combination accounted for as a
"pooling-of-interests" transaction in accordance with the requirements of
Accounting Principles Board ("APB") Opinion No. 16, "Business Combinations."
Allen, headquartered in Charleston, South Carolina, provides electrical
contracting and maintenance services. IES issued 1.1 million shares of common
stock in exchange for all of the capital stock of Allen. There were no
transactions between IES or Allen during periods prior to the business
combination.
35
INTEGRATED ELECTRICAL SERVICES, INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The unaudited revenues and net income of Allen for the pre-acquisition
period in 1998 were $20.5 million and $1.3 million, respectively.
Purchases
Subsequent to the IPO, and through September 30, 2000, IES has acquired 69
businesses in transactions accounted for as purchases. The total consideration
paid in these transactions was approximately $232.7 million in cash and 14.7
million shares of common stock. The accompanying September 30, 2000,
consolidated balance sheet includes allocations of the respective purchase
prices to the assets acquired and liabilities assumed based on preliminary
estimates of fair value which are subject to final adjustment during the first
year of ownership.
In connection with the acquisitions discussed above, goodwill was determined
as follows for each of the years ending September 30, 1999 and 2000 (in
thousands):
[Download Table]
1999 2000
-------- --------
Fair value of assets acquired, net of cash acquired......... $115,645 $ 23,726
Liabilities assumed......................................... (77,641) (15,477)
-------- --------
Net assets acquired, net of cash.......................... 38,004 8,249
-------- --------
Cash paid, net of cash acquired............................. 106,476 33,225
Issuance of common stock.................................... 115,152 17,062
-------- --------
Total consideration paid.................................. 221,628 50,287
-------- --------
Goodwill.................................................... $183,624 $ 42,038
======== ========
Pro Forma Presentation
The unaudited pro forma data presented below reflect the results of
operations of IES and the businesses acquired during fiscal 1999 and 2000
assuming the transactions were completed on October 1, 1998 (in thousands):
[Enlarge/Download Table]
YEAR ENDED SEPTEMBER 30,
-------------------------
1999 2000
----------- -----------
(UNAUDITED)
Revenues.................................................... $1,376,763 $1,687,650
========== ==========
Net income.................................................. $ 65,164 $ 22,440
========== ==========
Basic earnings per share.................................... $ 1.91 $ 0.57
========== ==========
Diluted earnings per share.................................. $ 1.88 $ 0.56
========== ==========
The unaudited pro forma data summarized above also reflects pro forma
adjustments primarily related to: reductions in general and administrative
expenses for contractually agreed reductions in owners' compensation, estimated
goodwill amortization for the excess of consideration paid over the net assets
acquired assuming a 40-year amortization period, interest expense on borrowings
incurred to fund acquisitions, elimination of interest income, and additional
income tax expense based on the Company's effective income tax rate. The
unaudited pro forma financial data does not purport to represent what the
Company's combined results of operations would actually have been if such
transactions had in fact occurred on October 1, 1998, and are not necessarily
representative of the Company's results of operations for any future period.
36
INTEGRATED ELECTRICAL SERVICES, INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
4. PROPERTY AND EQUIPMENT:
Property and equipment consists of the following (in thousands):
[Enlarge/Download Table]
ESTIMATED
USEFUL SEPTEMBER 30,
LIVES IN -------------------
YEARS 1999 2000
--------- -------- --------
Land........................................................ N/A $ 2,586 $ 2,820
Buildings................................................... 5-32 2,353 5,677
Transportation equipment.................................... 3-5 23,212 30,119
Machinery and equipment..................................... 3-10 21,807 33,442
Leasehold improvements...................................... 5-32 5,843 8,231
Furniture and fixtures...................................... 5-7 5,330 7,390
-------- --------
61,131 87,679
Less -- Accumulated depreciation and amortization........... (13,763) (26,312)
-------- --------
Property and equipment, net............................... $ 47,368 $ 61,367
======== ========
5. DETAIL OF CERTAIN BALANCE SHEET ACCOUNTS:
Activity in the Company's allowance for doubtful accounts receivable
consists of the following (in thousands):
[Download Table]
SEPTEMBER 30,
----------------
1999 2000
------ -------
Balance at beginning of period.............................. $4,160 $ 5,709
Additions from acquisitions................................. 1,169 948
Additions to costs and expenses............................. 871 1,768
Deductions for uncollectible receivables written off, net of
recoveries................................................ (491) (1,304)
------ -------
Balance at end of period.................................... $5,709 $ 7,121
====== =======
Accounts payable and accrued liabilities consist of the following (in
thousands):
[Download Table]
SEPTEMBER 30,
-------------------
1999 2000
-------- --------
Accounts payable, trade..................................... $ 68,665 $105,814
Accrued compensation and benefits........................... 24,546 57,561
Other accrued liabilities................................... 22,977 38,672
-------- --------
$116,188 $202,047
======== ========
37
INTEGRATED ELECTRICAL SERVICES, INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Contracts in progress are as follows (in thousands):
[Enlarge/Download Table]
SEPTEMBER 30,
-----------------------
1999 2000
--------- -----------
Costs incurred on contracts in progress..................... $ 689,132 $ 1,163,463
Estimated earnings.......................................... 149,548 220,411
--------- -----------
838,680 1,383,874
Less -- Billings to date.................................... (835,595) (1,389,748)
--------- -----------
$ 3,085 $ (5,874)
========= ===========
Costs and estimated earnings in excess of billings on
uncompleted contracts..................................... $ 40,592 $ 51,119
Less -- Billings in excess of costs and estimated earnings
on uncompleted contracts.................................. (37,507) (56,993)
--------- -----------
$ 3,085 $ (5,874)
========= ===========
6. DEBT:
Debt consists of the following (in thousands):
[Download Table]
SEPTEMBER 30,
-------------------
1999 2000
-------- --------
Secured credit facility with a bank group, due July 30,
2001, at a weighted average interest rate of 8.00%........ $ 76,980 $ 93,000
Senior Subordinated Notes, due February 1, 2009, bearing
interest at 9 3/8% with an effective interest rate of
9 1/2%.................................................... 150,000 150,000
Other....................................................... 2,564 2,065
-------- --------
229,544 245,065
Less -- short-term debt and current maturities of long-term
debt...................................................... (1,444) (93,903)
Less -- unamortized discount on Senior Subordinated Notes... (1,151) (1,073)
-------- --------
Total long-term debt............................... $226,949 $150,089
======== ========
Future payments due on debt at September 30, 2000 are as follows (in
thousands):
[Download Table]
2001........................................................ $ 93,903
2002........................................................ 739
2003........................................................ 262
2004........................................................ 122
2005........................................................ 39
Thereafter.................................................. 150,000
--------
Total.............................................. $245,065
========
Credit Facility
In January 1998, the Company obtained a three-year revolving credit facility
of up to $65.0 million (the "Credit Facility") from a commercial bank to be used
for working capital, capital expenditures, other corporate purposes and
acquisitions. In July 1998, the Company increased the credit facility to $175.0
million. The Credit Facility matures July 30, 2001. Amounts borrowed under the
Credit Facility bear interest at an annual rate equal to either (a) the London
interbank offered rate (LIBOR) plus 1.0 percent to 2.0 percent, as determined by
the ratio of the Company's total funded debt to EBITDA (as defined in the credit
facility) or (b) the higher of (i) the bank's prime rate and (ii) the Federal
funds rate plus 0.5 percent plus up to an additional 0.5 percent, as determined
by the ratio of the Company's total funded debt to EBITDA. Commitment fees of
0.25 percent to 0.375 percent, as determined by the ratio of the Company's total
funded debt to
38
INTEGRATED ELECTRICAL SERVICES, INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
EBITDA, will be due on any unused borrowing capacity under the Credit Facility.
The Company's existing and future subsidiaries guarantee the repayment of all
amounts due under the facility, and the facility is secured by the capital stock
of those subsidiaries and the accounts receivable of the Company and those
subsidiaries. The Credit Facility requires the consent of the lenders for
acquisitions exceeding a certain level of cash consideration, prohibits the
payment of cash dividends on the common stock, restricts the ability of the
Company to incur other indebtedness and requires the Company to comply with
various affirmative and negative covenants including certain financial
covenants. Among other restrictions, the financial covenants include minimum net
worth requirements, maintenance of a total consolidated funded debt to EBITDA
ratio and a minimum fixed charge coverage ratio. The Company was in compliance
with the financial covenants at September 30, 2000. As of September 30, 2000,
the Company's Credit Facility had outstanding indebtedness of $93.0 million,
letters of credit of $1.5 million, $2.1 million of other borrowings and
available borrowing capacity of $80.5 million. The weighted average interest
rate for the year ending September 30, 2000 was 8.00% for the Credit Facility.
The Company's Credit Facility matures on July 30, 2001, and is classified as
currently payable. The Company is in negotiations with several banks to
refinance the Credit Facility. The Company believes that it will be successful
in refinancing its current credit facility prior to its maturity.
Senior Subordinated Notes
On January 25, 1999, the Company completed its offering of $150.0 million
Senior Subordinated Notes. The Senior Subordinated Notes bear interest at 9 3/8%
and mature on February 1, 2009. The Company will pay interest on the Senior
Subordinated Notes on February 1 and August 1 of each year, commencing August 1,
1999. The Senior Subordinated Notes are unsecured obligations and are
subordinated to all existing and future senior indebtedness. The Senior
Subordinated Notes are guaranteed on a senior subordinated basis by all of the
Company's subsidiaries. Under the terms of the Senior Subordinated Notes, the
Company is required to comply with various affirmative and negative covenants
including: (i) restrictions on additional indebtedness, and (ii) restrictions on
liens, guarantees and dividends.
The net proceeds to the Company from the offering of the Senior Subordinated
Notes were approximately $143.0 million after deducting the debt issue discount,
underwriting commissions and offering expenses. The Company capitalized $5.5
million of expenses related to the debt offering. These debt issuance costs are
being amortized to interest expense over the scheduled maturity of the debt.
7. LEASES:
The Company leases various facilities under noncancelable operating leases.
For a discussion of leases with certain related parties see Note 11.
Future minimum lease payments under these noncancelable operating leases
with terms in excess of one year are as follows (in thousands):
[Download Table]
YEAR ENDED SEPTEMBER 30,
2001..................................................... $ 8,079
2002..................................................... 7,509
2003..................................................... 6,325
2004..................................................... 4,620
2005..................................................... 2,360
Thereafter............................................... 1,162
-------
Total.......................................... $30,055
=======
Rental expense for the years ended September 30, 1998, 1999 and 2000 was
approximately $2,033,000, $4,849,000 and $7,543,000, respectively.
39
INTEGRATED ELECTRICAL SERVICES, INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
8. INCOME TAXES:
Federal and state income tax provisions are as follows (in thousands):
[Enlarge/Download Table]
YEAR ENDED SEPTEMBER 30,
---------------------------
1998 1999 2000
------- ------- -------
Federal:
Current................................................... $11,952 $33,317 $19,345
Deferred.................................................. (712) (2,558) (157)
State:
Current................................................... 1,616 4,819 2,475
Deferred.................................................. (166) (230) (20)
------- ------- -------
$12,690 $35,348 $21,643
======= ======= =======
Actual income tax expense differs from income tax expense computed by
applying the U.S. federal statutory corporate rate of 35 percent to income
before provision for income taxes as follows (in thousands):
[Enlarge/Download Table]
YEAR ENDED SEPTEMBER 30,
---------------------------
1998 1999 2000
------- ------- -------
Provision at the statutory rate............................. $ 4,423 $29,209 $14,980
Increase resulting from:
Non-cash, non-recurring compensation charge............... 5,963 -- --
Non-cash restricted stock compensation charge............. -- -- 611
Non-deductible goodwill................................... 1,103 2,838 4,070
State income taxes, net of benefit for federal
deduction............................................... 942 2,983 1,596
Non-deductible expenses................................... 259 318 386
------- ------- -------
$12,690 $35,348 $21,643
======= ======= =======
Deferred income tax provisions result from temporary differences in the
recognition of income and expenses for financial reporting purposes and for
income tax purposes. The income tax effects of these temporary differences,
representing deferred income tax assets and liabilities, result principally from
the following (in thousands):
[Download Table]
YEAR ENDED
SEPTEMBER 30,
-------------------
1999 2000
-------- --------
Deferred income tax assets:
Allowance for doubtful accounts........................... $ 2,028 $ 2,492
Reserves and accrued expenses............................. 7,944 9,507
Other..................................................... 1,707 2,626
-------- --------
Total deferred income tax assets................... 11,679 14,625
-------- --------
Deferred income tax liabilities:
Property, equipment and goodwill.......................... (4,783) (8,559)
Deferred contract revenue and other....................... (6,625) (5,618)
-------- --------
Total deferred income tax liabilities.............. (11,408) (14,177)
-------- --------
Net deferred income tax assets..................... $ 271 $ 448
======== ========
The Company does not believe that a valuation allowance against the deferred
income tax assets is necessary as it believes the assets will be fully realized.
40
INTEGRATED ELECTRICAL SERVICES, INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The net deferred income tax assets and liabilities are comprised of the
following (in thousands):
[Download Table]
SEPTEMBER 30,
-----------------
1999 2000
------- -------
Current deferred income taxes:
Assets.................................................... $10,186 $13,567
Liabilities............................................... (5,198) (5,664)
------- -------
4,988 7,903
------- -------
Long-term deferred income taxes:
Assets.................................................... $ 1,493 $ 1,059
Liabilities............................................... (6,210) (8,514)
------- -------
(4,717) (7,455)
------- -------
Net deferred income tax assets.............................. $ 271 $ 448
======= =======
9. OPERATING SEGMENTS
The Company follows SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information." Certain information is disclosed, per SFAS
No. 131, based on the way management organizes financial information for making
operating decisions and assessing performance.
The Company's reportable segments are strategic business units that offer
products and services to four distinct customer groups. They are managed
separately because each business requires different operating and marketing
strategies.
Prior to October 1, 2000, the Company was organized in a single segment.
During fiscal 2000, the Company aligned its operations among two complementary
core businesses: electrical contracting and communications solutions. Within the
electrical contracting business, the Company has three reportable segments:
commercial/industrial, residential and service and maintenance markets. The
commercial/industrial segment provides installations, renovations and upgrades
and replacement services in office buildings, high-rise apartments and
condominiums, theaters, restaurants, hotels, hospitals and critical-care
facilities, school districts, manufacturing and processing facilities, military
installations, airports, refineries and petrochemical and power plants. The
residential segment consists of installations, replacements and renovation
services in single family and low-rise multifamily housing units. The service
and maintenance segment provides maintenance and replacement services from
service calls and routine maintenance contracts. The communications solutions
business provides installation, service and maintenance, design, engineering and
support services to infrastructure services customers.
The accounting policies of these reportable segments are the same as those
described in the summary of significant accounting policies. The Company
evaluates performance based on income from operations of the respective business
units prior to unallocated home office expenses. No significant transactions
have occurred between the Company's business segments. Management intends to
continue to focus on its internal allocation methods for allocating results to
business segments.
41
INTEGRATED ELECTRICAL SERVICES, INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Segment information for the years ended September 30, 1998, 1999 and 2000
are as follows (in thousands):
[Enlarge/Download Table]
FISCAL YEAR ENDED SEPTEMBER 30, 1998
-----------------------------------------------------------------------------------------
ELECTRICAL CONTRACTING
--------------------------------------------------
COMMERCIAL/ SERVICE AND COMMUNICATIONS
INDUSTRIAL RESIDENTIAL MAINTENANCE SUBTOTAL SOLUTIONS OTHER TOTAL
----------- ----------- ----------- -------- -------------- -------- --------
Revenues.................... $238,002 $111,163 $34,683 $383,848 $2,873 $ -- $386,721
Cost of services............ 191,715 86,830 25,473 304,018 2,034 -- 306,052
-------- -------- ------- -------- ------ -------- --------
Gross profit................ 46,287 24,333 9,210 79,830 839 -- 80,669
Selling, general and
administrative............ 29,025 10,438 4,230 43,693 399 20,334 64,426
Goodwill amortization....... 2,213 667 323 3,203 9 -- 3,212
-------- -------- ------- -------- ------ -------- --------
Operating Income............ $ 15,049 $ 13,228 $ 4,657 $ 32,934 $ 431 $(20,334) $ 13,031
======== ======== ======= ======== ====== ======== ========
Other Data:
Depreciation expense...... $ 1,486 $ 311 $ 216 $ 2,013 $ 46 $ 89 $ 2,148
Capital expenditures...... 2,880 556 420 3,856 66 430 4,352
Total assets................ 321,995 64,186 29,736 415,917 14,671 71,880 502,468
[Enlarge/Download Table]
FISCAL YEAR ENDED SEPTEMBER 30, 1999
-------------------------------------------------------------------------------------------
ELECTRICAL CONTRACTING
--------------------------------------------------
COMMERCIAL/ SERVICE AND COMMUNICATIONS
INDUSTRIAL RESIDENTIAL MAINTENANCE SUBTOTAL SOLUTIONS OTHER TOTAL
----------- ----------- ----------- -------- -------------- -------- ----------
Revenues.................... $716,340 $175,978 $69,370 $961,688 $74,200 $ -- $1,035,888
Cost of services............ 583,440 134,938 45,967 764,345 52,370 -- 816,715
-------- -------- ------- -------- ------- -------- ----------
Gross profit................ 132,900 41,040 23,403 197,343 21,830 -- 219,173
Selling, general and
administrative............ 68,335 16,524 6,617 91,476 10,388 12,007 113,871
Goodwill amortization....... 6,993 1,056 677 8,726 579 -- 9,305
-------- -------- ------- -------- ------- -------- ----------
Operating Income............ $ 57,572 $ 23,460 $16,109 $ 97,141 $10,863 $(12,007) $ 95,997
======== ======== ======= ======== ======= ======== ==========
Other Data:
Depreciation expense...... $ 4,419 $ 493 $ 428 $ 5,340 $ 1,187 $ 201 $ 6,728
Capital expenditures...... 7,089 880 687 8,656 2,456 1,776 12,888
Total assets................ 518,157 101,610 33,725 653,492 51,718 153,282 858,492
[Enlarge/Download Table]
FISCAL YEAR ENDED SEPTEMBER 30, 2000
---------------------------------------------------------------------------------------------
ELECTRICAL CONTRACTING
-------------------------
COMMERCIAL/ SERVICE AND COMMUNICATIONS
INDUSTRIAL RESIDENTIAL MAINTENANCE SUBTOTAL SOLUTIONS OTHER TOTAL
----------- ----------- ----------- ---------- -------------- -------- ----------
Revenues.................... $1,126,792 $250,877 $132,167 $1,509,836 $162,452 $ -- $1,672,288
Cost of services............ 950,131 195,913 102,849 1,248,893 123,644 -- 1,372,537
---------- -------- -------- ---------- -------- -------- ----------
Gross profit................ 176,661 54,964 29,318 260,943 38,808 -- 299,751
Selling, general and
administrative............ 107,859 23,557 12,651 144,067 22,743 54,709 221,519
Goodwill amortization....... 9,343 1,505 1,096 11,944 1,267 -- 13,211
---------- -------- -------- ---------- -------- -------- ----------
Operating Income............ $ 59,459 $ 29,902 $ 15,571 $ 104,932 $ 14,798 $(54,709) $ 65,021
========== ======== ======== ========== ======== ======== ==========
Other Data:
Depreciation expense...... $ 7,613 $ 702 $ 893 $ 9,208 $ 2,599 $ 6,163 $ 17,970
Capital expenditures...... 13,337 1,254 1,564 16,155 5,377 6,849 28,381
Total assets................ 663,810 144,856 61,102 869,768 113,229 36,993 1,019,990
42
INTEGRATED ELECTRICAL SERVICES, INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
During the year ended September 30, 2000, we had one customer in the
commercial/industrial segment which represented 11% of our revenues or $185.3
million. Excluding that customer, we had no single customer accounting for more
than 3% of our revenues for the year ended September 30, 2000.
The Company's 1998 and 1999 information has been restated for consistency
with the current year presentation. The Company does not have significant
operations or long-lived assets in countries outside of the United States.
10. STOCKHOLDERS' EQUITY:
Restricted Voting Common Stock
The shares of restricted voting common stock have rights similar to shares
of common stock except that such shares are entitled to elect one member of the
board of directors and to not otherwise vote with respect to the election of
directors and are entitled to one-half of one vote for each share held on all
other matters. Each share of restricted common stock will convert into common
stock upon disposition by the holder of such shares.
1997 Stock Plan
In September 1997, the Company's board of directors and stockholders
approved the Company's 1997 Stock Plan (the "Plan"), which provides for the
granting or awarding of incentive or nonqualified stock options, stock
appreciation rights, restricted or phantom stock and other incentive awards to
directors, officers, key employees and consultants of the Company. The number of
shares authorized and reserved for issuance under the Plan is 15 percent of the
aggregate number of shares of common stock outstanding. The terms of the option
awards will be established by the compensation committee of the Company's board
of directors. Options generally expire 10 years from the date of grant, one year
following termination of employment due to death or disability, or three months
following termination of employment by means other than death or disability.
Directors' Stock Plan
In September 1997, the Company's board of directors and stockholders
approved the 1997 Directors' Stock Plan (the "Directors' Plan"), which provides
for the granting or awarding of stock options to nonemployee directors. In May
2000, the Company's board of directors amended the Directors' Plan. The number
of shares authorized and reserved for issuance under the Directors' Plan is
250,000 shares. Each nonemployee director shall receive an annual retainer to be
paid quarterly; one half in cash and one half in shares of the Company. Each
nonemployee director is granted options to purchase an additional 3,000 shares
at the time of an initial election of such director. In addition, each director
will be automatically granted options to purchase 3,000 shares annually at each
September 30 on which such director remains a director. All options have an
exercise price based on the fair market value at the date of grant and vesting
terms similar to options granted under the Directors' Plan discussed above.
The Directors' Plan allows nonemployee directors to receive additional
option grants in amounts and at terms as deemed appropriate by the Company's
board of directors.
Employee Stock Purchase Plan
In February 2000, the Company's stockholders approved the Company's Employee
Stock Purchase Plan (the "ESPP"), which provides for the sale of common stock to
participants as defined at a price equal to the lower of 85% of the Company's
closing stock price at the beginning or end of the option period, as defined.
The number of shares of common stock authorized and reserved for issuance under
the ESPP is 1.0 million shares. The purpose of the ESPP is to provide an
incentive for employees of the Company to acquire a proprietary interest in the
Company through the purchase of shares of the Company's common stock. The ESPP
is intended to qualify as an "Employee Stock Purchase Plan" under Section 423 of
the Internal Revenue Code of 1986, as amended (the "Code"). The provisions of
the ESPP are construed in a manner to be consistent with the requirements of
that section of the Code. As of September 30, 2000, there were no shares
purchased under the ESPP.
43
INTEGRATED ELECTRICAL SERVICES, INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
1999 Incentive Compensation Plan
In November 1999, the Board of Directors adopted the 1999 Incentive
Compensation Plan (the "1999 Plan"). The 1999 Plan, as amended, authorizes the
Compensation Committee of the Board of Directors or the Board of Directors to
grant eligible participants of the Company awards in the form of options, stock
appreciation rights, restricted stock or other stock based awards. The Company
has up to 5.5 million shares of common stock authorized for issuance under the
1999 Plan.
In December 1999 and March 2000, the Company granted restricted stock awards
of 609,306 and 400,000, respectively under its stock plans to certain of its
employees. The December 1999 awards vested in equal installments on May 31, 2000
and August 31, 2000, provided the recipient was still employed by the Company.
The March 2000 award vests in equal installments on March 20th of each year
through 2004, provided the recipient is still employed by the Company. The
market value of the underlying stock on the date of grant for the December 1999
and March 2000 awards was $5.2 million and $2.3 million, respectively, which is
being recognized as compensation expense over the related vesting periods.
During the year ended September 30, 2000, the Company amortized $5.4 million to
expense in connection with these awards. Through September 30, 2000, 578,269
shares of these common stock awards vested and 31,037 shares of common stock
were forfeited. To fund employee tax liabilities, 202,770 of these awards were
cancelled and 375,499 of these shares were issued and are currently outstanding.
At September 30, 2000, there were 400,000 shares of unvested common stock awards
outstanding.
The following table summarizes activity under the Company's stock option and
incentive compensation plans:
[Enlarge/Download Table]
WEIGHTED AVERAGE
SHARES EXERCISE PRICE
---------- ----------------
Outstanding, September 30, 1997............................. -- --
Options Granted........................................... 3,464,014 $13.99
Forfeited................................................. (225,063) 13.14
---------- ------
Outstanding, September 30, 1998............................. 3,238,951 $13.48
---------- ------
Options Granted........................................... 1,248,125 16.93
Exercised................................................. (316,312) 9.55
Forfeited................................................. (420,307) 15.20
---------- ------
Outstanding, September 30, 1999............................. 3,750,457 $14.81
---------- ------
Options Granted........................................... 1,987,482 10.18
Restricted Stock Granted.................................. 1,009,306 0.00
Exercised................................................. (579,839) 0.00
Forfeited and Cancelled................................... (721,111) 13.92
---------- ------
Outstanding, September 30, 2000............................. 5,446,295 $12.02
========== ======
Exercisable, September 30, 1998............................. 85,000 $ 9.33
========== ======
Exercisable, September 30, 1999............................. 759,656 $14.17
========== ======
Exercisable, September 30, 2000............................. 1,536,995 $13.74
========== ======
Unexercised options expire at various dates from September 4, 2007 through
September 30, 2010.
The Company follows Accounting Principles Board ("APB") Opinion No. 25 in
accounting for stock options issued to employees. Under APB Opinion No. 25,
compensation expense is not recorded for stock options issued to employees if
the exercise price of the option is equal to the market price of the stock on
the date of grant. SFAS No. 123, "Accounting for Stock-Based Compensation,"
requires that if a company does not record compensation expense for stock
options issued to employees pursuant to APB Opinion No. 25, the company must
also disclose the effects on its results of operations as if the Company has
adopted SFAS 123. The following compares the Company's reported income and
earnings per share to pro forma estimates of these
44
INTEGRATED ELECTRICAL SERVICES, INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
amounts assuming that the Company had expensed the estimated fair value of
options provided to its employees over the applicable vesting period.
[Enlarge/Download Table]
1998 1999 2000
------- ------- -------
Net income (loss)
As reported............................................... $ (52) $48,107 $21,156
Pro forma for SFAS No. 123................................ $(2,173) $42,720 $12,510
Basic earnings (loss) per share
As reported............................................... $ -- $ 1.41 $ 0.53
Pro forma for SFAS No. 123................................ $ (0.11) $ 1.25 $ 0.31
Diluted earnings (loss) per share
As reported............................................... $ -- $ 1.39 $ 0.52
Pro forma for SFAS No. 123................................ $ (0.11) $ 1.23 $ 0.31
The effects of applying SFAS No. 123 in the pro forma disclosure may not be
indicative of future amounts as additional awards in future years are
anticipated and because the Black-Scholes option-pricing model involves
subjective assumptions which may be materially different than actual amounts.
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option-pricing model with the following subjective
assumptions:
[Enlarge/Download Table]
1998 1999 2000
------- ------- -------
Expected dividend yield..................................... 0.00% 0.00% 0.00%
Expected stock price volatility............................. 53.20% 52.23% 94.42%
Weighted average risk free interest rate.................... 5.55% 5.24% 6.35%
Expected life of options.................................... 6 years 6 years 6 years
The tables below summarizes options outstanding and exercisable at September
30, 2000:
[Enlarge/Download Table]
WEIGHTED-AVERAGE
RANGE OF OUTSTANDING AS OF REMAINING WEIGHTED-AVERAGE EXERCISABLE AS OF WEIGHTED-AVERAGE
EXERCISE PRICES SEPTEMBER 30, 2000 CONTRACTUAL LIFE EXERCISE PRICE SEPTEMBER 30, 2000 EXERCISE PRICE
--------------- ------------------ ---------------- ---------------- ------------------ ----------------
$ 0.0000-$ 4.6240.. 400,000 9.5 $ 0.0000 -- $ 0.0000
$ 4.6250-$ 7.8000.. 969,195 9.2 $ 5.5455 206,000 $ 6.5652
$ 7.8100-$10.5000.. 49,667 9.2 $ 9.7947 -- $ 0.0000
$10.5100-$15.5000.. 3,038,150 7.5 $13.6949 930,400 $13.2613
$15.5100-$22.1250.. 989,283 7.6 $18.1885 400,595 $18.5497
--------- --- -------- --------- --------
5,446,295 8.0 $12.0195 1,536,995 $13.7422
========= === ======== ========= ========
Options exercisable at September 30, 1998, 1999 and 2000 had weighted
average fair values per option of $7.98, $9.45 and $8.10, respectively.
11. RELATED-PARTY TRANSACTIONS:
The Company has transactions in the normal course of business with certain
affiliated companies. Amounts due from related parties at September 30, 1999 and
2000 were $220,000 and $256,000, respectively. In connection with certain of the
acquisitions, subsidiaries of the Company have entered into a number of related
party lease arrangements for facilities. These lease agreements are for periods
generally ranging from three to five years and were priced based on prevailing
market rates at the time the arrangements were negotiated. Lease payments for
the years ended September 30, 1998, 1999 and 2000 were $1,648,000, $2,850,000
and $4,180,000, respectively. Future commitments with respect to these leases
are included in the schedule of minimum lease payments in note 7.
In August 1996, the Company negotiated the purchase of the common stock from
an officer. The selling price of the shares totaled $800,000. The Company signed
an installment promissory note that provided for the
45
INTEGRATED ELECTRICAL SERVICES, INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
payout of $800,000 over seven years at 8 percent interest, secured by the
purchased stock. At the closing of the IPO, the officer exchanged the promissory
note for cash and shares of IES common stock. In connection therewith, the
Company recorded a non-cash, non-recurring compensation charge of approximately
$17.0 million, as required by the SEC.
12. EMPLOYEE BENEFIT PLANS:
In November 1998, the Company established the Integrated Electrical
Services, Inc. 401(k) Retirement Savings Plan (the "401(k) Plan"). All IES
employees are eligible to participate subsequent to completing six months of
service and attaining age twenty-one. Participants become vested in Company
matching contributions following three years of service.
Certain subsidiaries of the Company do not participate in the 401(k) Plan,
but instead provide various defined contribution savings plans for their
employees (the "Plans"). The Plans cover substantially all full-time employees
of such subsidiaries. Participants vest at varying rates ranging from full
vesting upon participation to those that provide for vesting to begin after
three years of service and are fully vested after eight years. Certain plans
provide for a deferral option that allows employees to elect to contribute a
portion of their pay into the plan and provide for a discretionary profit
sharing contribution by the individual subsidiary. Generally the subsidiaries
match a portion of the amount deferred by participating employees. Contributions
for the profit sharing portion of the Plans are generally at the discretion of
the individual subsidiary. The aggregate contributions to the Plans were
$1,127,000, $1,460,000 and $2,106,000 for the years ended September 30, 1998,
1999 and 2000, respectively.
13. COMMITMENTS AND CONTINGENCIES:
Subsidiaries of the Company are involved in various legal proceedings that
have arisen in the ordinary course of business. While it is not possible to
predict the outcome of such proceedings with certainty, in the opinion of the
Company, all such proceedings are either adequately covered by insurance or, if
not so covered should not ultimately result in any liability which would have a
material adverse effect on the financial position, liquidity or results of
operations of the Company. The Company expenses routine legal costs related to
such proceedings as incurred.
The Company has committed to invest up to $5.0 million in EnerTech Capital
Partners II L.P. ("EnerTech"). EnerTech is a private equity firm specializing in
investment opportunities emerging from the deregulation and resulting
convergence of the energy, utility and telecommunications industries. At
September 30, 2000, the Company's investment in EnerTech was $0.5 million.
14. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED):
Quarterly financial information for the years ended September 30, 1999 and
2000 are summarized as follows (in thousands, except per share data):
[Enlarge/Download Table]
FISCAL YEAR ENDED SEPTEMBER 30, 1999
-----------------------------------------
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
-------- -------- -------- --------
Revenues......................................... $197,712 $215,692 $279,742 $342,742
Gross profit..................................... $ 40,967 $ 45,503 $ 61,878 $ 70,825
Net income....................................... $ 9,092 $ 9,740 $ 13,645 $ 15,630
Earnings per share:
Basic.......................................... $ 0.29 $ 0.30 $ 0.39 $ 0.41
Diluted........................................ $ 0.29 $ 0.30 $ 0.39 $ 0.41
46
INTEGRATED ELECTRICAL SERVICES, INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
[Enlarge/Download Table]
FISCAL YEAR ENDED SEPTEMBER 30, 2000
-----------------------------------------
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
-------- -------- -------- --------
Revenues......................................... $335,191 $370,327 $452,149 $514,621
Gross profit..................................... $ 59,620 $ 62,860 $ 78,048 $ 99,223
Net income (loss)................................ $ 2,603 $ (2,475) $ 10,084 $ 10,944
Earnings (loss) per share:
Basic.......................................... $ 0.07 $ (0.06) $ 0.25 $ 0.27
Diluted........................................ $ 0.07 $ (0.06) $ 0.25 $ 0.27
The sum of the individual quarterly earnings per share amounts may not agree
with year-to-date earnings per share as each period's computation is based on
the weighted average number of shares outstanding during the period.
15. EVENTS SUBSEQUENT TO DATE OF AUDITORS' REPORT (UNAUDITED):
In December 2000, the Company invested $4.6 million in Energy Photovoltaics,
Inc. ("EPV"). EPV is engaged in the developing, manufacturing and marketing
photovoltaic components, products and systems. The Company will account for EPV
using the equity method of accounting.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
47
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this item is incorporated by reference from the
sections entitled "Management" and "Section 16(a) Beneficial Ownership Reporting
Compliance" in the Company's definitive Proxy Statement for its 2000 Annual
Meeting of Stockholders (the "Proxy Statement") to be filed with the Securities
and Exchange Commission no later than January 28, 2001.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item is incorporated by reference from the
section entitled "Executive Compensation" in the Proxy Statement. Nothing in
this report shall be construed to incorporate by reference the Board
Compensation Committee Report on Executive Compensation, the Performance Graph
or the Report of the Audit Committee, which are contained in the Proxy
Statement, but expressly not incorporated herein.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item is incorporated by reference from the
section entitled "Security Ownership of Certain Beneficial Owners and
Management" in the Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item is incorporated by reference from the
section entitled "Certain Relationships and Other Transactions" in the Proxy
Statement.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) Financial Statements and Supplementary Data, Financial Statement
Schedules and Exhibits.
See Index to Financial Statements under Item 8 of this report.
(b) Exhibits.
[Download Table]
3.1 -- Amended and Restated Certificate of Incorporation as
amended. (Incorporated by reference to 3.1 to the
Registration Statement on Form S-1 (File No. 333-38715)
of the Company)
3.2 -- Bylaws, as amended (Incorporated by reference to 3.2 to
the Company's Annual Report on Form 10-K for the year
ended September 30, 1999)
4.1 -- Specimen Common Stock Certificate. (Incorporated by
reference to 4.1 to the Registration Statement on Form
S-1 (File No. 333-38715) of the Company)
4.2 -- Indenture, dated January 28, 1999, by and among
Integrated Electrical Services, Inc. and the subsidiaries
named therein and State Street Bank and Trust Company
covering up to $150,000,000 9 3/8% Senior Subordinated
Notes due 2009. (Incorporated by reference to Exhibit 4.2
to Post-Effective Amendment No. 3 to the Registration
Statement on Form S-4 (File No. 333-50031) of the
Company)
4.4 -- Form of Integrated Electrical Services, Inc. 9 3/8%
Senior Subordinated Note due 2009 (Included in Exhibit A
to Exhibit 4.1)
10.1 -- Form of Employment Agreement (Incorporated by reference
to 10.1 to the Registration Statement on Form S-1 (File
No. 333-38715) of the Company)
10.2 -- Form of Officer and Director Indemnification Agreement.
(Incorporated by reference to 10.2 to the Registration
Statement on Form S-1 (File No. 333-38715) of the
Company)
48
[Download Table]
10.3 -- Integrated Electrical Services, Inc. 1997 Stock Plan, as
amended. (Incorporated by reference to Exhibit 10.1 of
the Company's Quarterly Report on Form 10-Q for the
quarter ended June 30, 1999)
*10.4 -- Integrated Electrical Services, Inc. 1997 Directors Stock
Plan.
10.5 -- Credit Agreement dated July 30, 1998, among the Company,
the Financial Institutions named therein and NationsBank
of Texas, N.A., including Guaranty, Pledge Agreement,
Security Agreement, form of promissory note, and form of
swing line note. (Incorporated by reference to Exhibit
10.5 to Post-Effective Amendment No. 1 to the
Registration Statement on Form S-1 (File No. 333-50031)
of the Company)
10.6 -- Amendment No. 1 dated September 30, 1998, to the Credit
Agreement dated July 30, 1998, among the Company, the
Financial Institutions named therein and NationsBank of
Texas, N.A. (Incorporated by reference to Exhibit 10.6 to
the Company's Annual Report on Form 10-K/A for the year
ended September 30, 1998)
10.7 -- Amendment No. 2 dated January 18, 1999, to the Credit
Agreement dated July 30, 1998, among the Company, the
Financial Institutions named therein and NationsBank of
Texas, N.A. (Incorporated by reference to Exhibit 10.7 to
Post-Effective Amendment No. 2 to the Registration
Statement on Form S-1 (Reg. No. 333-50031) of the
Company)
*10.8 -- Amendment No. 3 dated August 19, 1999, to the Credit
Agreement dated July 30, 1998, among the Company, the
Financial Institutions named therein and NationsBank of
Texas, N.A.
10.9 -- Amendment No. 4 dated March 31, 2000, to the Credit
Agreement dated July 30, 1998, among the Company, the
Financial Institutions named therein and NationsBank of
Texas, N.A. (Incorporated by reference to Exhibit 10.1 of
the Company's Quarterly Report on Form 10-Q for the
quarter ended March 31, 2000)
10.10 -- Employment Agreement between the Company and H. David
Ramm dated March 20, 2000 (Incorporated by reference to
Exhibit 10.2 of the Company's Quarterly Report on Form
10-Q for the quarter ended March 31, 2000)
*10.11 -- Integrated Electrical Services, Inc. 1999 Incentive
Compensation Plan.
*12 -- Ratio of Earnings to Fixed Charges
*21.1 -- List of Subsidiaries.
*23.1 -- Consent of Arthur Andersen LLP.
*27 -- Financial Data Schedule
---------------
* Filed herewith.
49
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 on December 18, 2000.
INTEGRATED ELECTRICAL SERVICES, INC.
By: /s/ H. DAVID RAMM
-----------------------------------
H. David Ramm
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 indicated on December 18, 2000.
[Enlarge/Download Table]
SIGNATURE TITLE
--------- -----
/s/ H. DAVID RAMM Chief Executive Officer and Director
------------------------------------------------
H. David Ramm
/s/ DONALD PAUL HODEL Director
------------------------------------------------
Donald Paul Hodel
/s/ ROBERT KELLY Director
------------------------------------------------
Robert Kelly
/s/ BEN L. MUELLER Chief Operating Officer and Director
------------------------------------------------
Ben L. Mueller
/s/ RICHARD MUTH Director
------------------------------------------------
Richard Muth
/s/ ALAN R. SIELBECK Director
------------------------------------------------
Alan R. Sielbeck
/s/ C. BYRON SNYDER Chairman of the Board of Directors
------------------------------------------------
C. Byron Snyder
/s/ ROBERT STALVEY Director
------------------------------------------------
Robert Stalvey
/s/ RICHARD L. TUCKER Director
------------------------------------------------
Richard L. Tucker
/s/ BOB WEIK Director
------------------------------------------------
Bob Weik
/s/ JIM P. WISE Director
------------------------------------------------
Jim P. Wise
/s/ WILLIAM W. REYNOLDS Chief Financial Officer
------------------------------------------------
William W. Reynolds
/s/ NEIL J. DEPASCAL, JR. Vice President and Chief Accounting Officer
------------------------------------------------
Neil J. DePascal, Jr.
50
EXHIBIT INDEX
[Download Table]
EXHIBIT
NO. DESCRIPTION
------- -----------
3.1 -- Amended and Restated Certificate of Incorporation as
amended. (Incorporated by reference to 3.1 to the
Registration Statement on Form S-1 (File No. 333-38715)
of the Company)
3.2 -- Bylaws, as amended (Incorporated by reference to 3.2 to
the Company's Annual Report on Form 10-K for the year
ended September 30, 1999)
4.1 -- Specimen Common Stock Certificate. (Incorporated by
reference to 4.1 to the Registration Statement on Form
S-1 (File No. 333-38715) of the Company)
4.2 -- Indenture, dated January 28, 1999, by and among
Integrated Electrical Services, Inc. and the subsidiaries
named therein and State Street Bank and Trust Company
covering up to $150,000,000 9 3/8% Senior Subordinated
Notes due 2009. (Incorporated by reference to Exhibit 4.2
to Post-Effective Amendment No. 3 to the Registration
Statement on Form S-4 (File No. 333-50031) of the
Company)
4.4 -- Form of Integrated Electrical Services, Inc. 9 3/8%
Senior Subordinated Note due 2009 (Included in Exhibit A
to Exhibit 4.1)
10.1 -- Form of Employment Agreement (Incorporated by reference
to 10.1 to the Registration Statement on Form S-1 (File
No. 333-38715) of the Company)
10.2 -- Form of Officer and Director Indemnification Agreement.
(Incorporated by reference to 10.2 to the Registration
Statement on Form S-1 (File No. 333-38715) of the
Company)
10.3 -- Integrated Electrical Services, Inc. 1997 Stock Plan, as
amended. (Incorporated by reference to Exhibit 10.1 of
the Company's Quarterly Report on Form 10-Q for the
quarter ended June 30, 1999)
*10.4 -- Integrated Electrical Services, Inc. 1997 Directors Stock
Plan.
10.5 -- Credit Agreement dated July 30, 1998, among the Company,
the Financial Institutions named therein and NationsBank
of Texas, N.A., including Guaranty, Pledge Agreement,
Security Agreement, form of promissory note, and form of
swing line note. (Incorporated by reference to Exhibit
10.5 to Post-Effective Amendment No. 1 to the
Registration Statement on Form S-1 (File No. 333-50031)
of the Company)
10.6 -- Amendment No. 1 dated September 30, 1998, to the Credit
Agreement dated July 30, 1998, among the Company, the
Financial Institutions named therein and NationsBank of
Texas, N.A. (Incorporated by reference to Exhibit 10.6 to
the Company's Annual Report on Form 10-K/A for the year
ended September 30, 1998)
10.7 -- Amendment No. 2 dated January 18, 1999, to the Credit
Agreement dated July 30, 1998, among the Company, the
Financial Institutions named therein and NationsBank of
Texas, N.A. (Incorporated by reference to Exhibit 10.7 to
Post-Effective Amendment No. 2 to the Registration
Statement on Form S-1 (Reg. No. 333-50031) of the
Company)
*10.8 -- Amendment No. 3 dated August 19, 1999, to the Credit
Agreement dated July 30, 1998, among the Company, the
Financial Institutions named therein and NationsBank of
Texas, N.A.
[Download Table]
EXHIBIT
NO. DESCRIPTION
------- -----------
10.9 -- Amendment No. 4 dated March 31, 2000, to the Credit
Agreement dated July 30, 1998, among the Company, the
Financial Institutions named therein and NationsBank of
Texas, N.A. (Incorporated by reference to Exhibit 10.1 of
the Company's Quarterly Report on Form 10-Q for the
quarter ended March 31, 2000)
10.10 -- Employment Agreement between the Company and H. David
Ramm dated March 20, 2000 (Incorporated by reference to
Exhibit 10.2 of the Company's Quarterly Report on Form
10-Q for the quarter ended March 31, 2000)
*10.11 -- Integrated Electrical Services, Inc. 1999 Incentive
Compensation Plan.
*12 -- Ratio of Earnings to Fixed Charges
*21.1 -- List of Subsidiaries.
*23.1 -- Consent of Arthur Andersen LLP.
*27 -- Financial Data Schedule
---------------
* Filed herewith.
Dates Referenced Herein and Documents Incorporated by Reference
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Filing Submission 0000950129-00-006032 – Alternative Formats (Word / Rich Text, HTML, Plain Text, et al.)
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