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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
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[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 1999
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)
DELAWARE 76-0542208
(State of other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
515 POST OAK BOULEVARD
SUITE 450
HOUSTON, TEXAS 77027
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (713) 860-1500
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Securities registered pursuant to Section 12(b) of the Act:
NAME OF EACH EXCHANGE ON
TITLE OF EACH CLASS 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 check mark 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, 1999, there were outstanding 39,466,819 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 $83.1 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 9, 2000.
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FORM 10-K
INTEGRATED ELECTRICAL SERVICES, INC.
TABLE OF CONTENTS
ITEM PAGE
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PART I
1 Business.................................................... 2
2 Properties.................................................. 15
3 Legal Proceedings........................................... 15
4 Submission of Matters to a Vote of Security Holders......... 15
4A Executive Officers.......................................... 16
PART II
Market for Registrant's Common Equity and Related
5 Stockholder Matters......................................... 17
6 Selected Financial Data..................................... 17
Management's Discussion and Analysis of Financial Condition
7 and Results of Operations................................... 18
Quantitative and Qualitative Disclosures About Market
7A Risk........................................................ 25
8 Financial Statements and Supplementary Data................. 25
Changes in and Disagreements with Accountants on Accounting
9 and Financial Disclosure.................................... 46
PART III
10 Directors and Executive Officers of the Registrant.......... 46
11 Executive Compensation...................................... 46
Security Ownership of Certain Beneficial Owners and
12 Management.................................................. 46
13 Certain Relationships and Related Transactions.............. 46
PART IV
Exhibits, Financial Statement Schedules, and Reports on Form
14 8-K......................................................... 46
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DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS
This Annual Report on Form 10-K includes "forward-looking statements" within
the meaning of Section 27A of the Securities Act of 1933, as amended (the
"Securities Act") and Section 21E of the Securities Exchange Act of 1934, as
amended (the "Exchange Act"). All statements other than statements of historical
fact included in this Form 10-K, including without limitation, statements under
"Business" and "Management's Discussion and Analysis of Financial Condition and
Results of Operations" regarding the planned capital expenditures, the Company's
financial position, business strategy and other plans and objectives for future
operations, are forward-looking statements. Those forward-looking statements are
subject to risks, uncertainties and assumptions about us, including among other
things: our anticipated growth strategies; our ability to operate our companies;
our expected internal growth; anticipated trends and conditions in our industry;
our ability to integrate acquired businesses; operating risks; our ability to
implement a Year 2000 readiness program; our future capital needs; and our
ability to compete (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 the second largest provider of electrical 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, with the
acquisition of 16 electrical businesses, in order to create a nationwide
provider of electrical services and to lead the consolidation of our industry.
We have expanded our focus to include the information technology and power line
markets, which we believe are complementary to electrical contracting. Since
February 1998 and through December 14, 1999, we have acquired 65 additional
electrical and cabling contracting businesses. On a pro forma basis for the year
ended September 30, 1999, we generated revenues and earnings before interest,
taxes, depreciation and amortization ("EBITDA") of $1.3 billion and $130.6
million, respectively.
According to the most recently available U.S. Census data, the electrical
contracting industry generated annual revenues in excess of $64 billion in 1997.
This data also indicates that the electrical contracting industry is highly
fragmented with more than 61,000 companies, most of which are small,
owner-operated businesses. We estimate that there are only five other U.S.
electrical contractors with revenues in excess of $200 million. Government
sources indicate that total construction industry revenues have grown at an
average compound rate of approximately 7% from 1995 through 1999. Over the same
period, our pro forma combined revenues increased at a compound annual rate of
approximately 11%. 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, higher margin projects.
We serve a broad range of markets, including:
- commercial;
- industrial;
- residential;
- information technology; and
- power line.
We have continued to concentrate on the information technology market and to
date have acquired nine companies which focus on the installation of wiring for
computer networks and fiber optic telecommunications systems, as well as
consulting and engineering services for the design and integration of voice,
data and video communication networks. Our revenues are generated from a mix of:
- new construction;
- renovation;
- maintenance; and
- specialized services.
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We focus on higher margin, larger projects that require special expertise,
including:
- design-and-build projects that utilize the capabilities of our in-house
engineers;
- service;
- maintenance; and
- renovation and upgrade work.
We believe our service, maintenance and renovation and upgrade revenues tend
to either be recurring, have lower sensitivity to economic cycles, or both.
INDUSTRY OVERVIEW
General. Virtually all construction and renovation in the United States
generates demand for electrical contracting services. We believe that electrical
work generally accounts for approximately:
- 8% to 12% of the total construction cost of commercial and industrial
projects;
- 5% to 10% of the total construction cost for residential projects; and
- substantially all of the construction costs of power line projects.
In recent years, electrical contractors have experienced a growing demand
for their services due to:
- more stringent electrical codes;
- increased use of electrical power;
- demand for increased data cabling capacity for high-speed computer
systems; and
- the construction of smart houses with integrated computer, temperature
control and safety systems.
THE MARKETS WE SERVE
Commercial Market. Our commercial work consists primarily of electrical
installations and renovations in:
- office buildings;
- high-rise apartments and condominiums;
- theaters;
- restaurants;
- hotels;
- hospitals; and
- school districts.
Our commercial customers include:
- general contractors;
- developers;
- building owners;
- engineers; 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 1999, our pro forma revenues from commercial work have
grown at a compound annual rate of approximately 7% per year and represented
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approximately 42% of our pro forma revenues for the year ended September 30,
1999. According to internal estimates, approximately 75% of our commercial
revenues are associated with new construction.
Industrial Market. Our industrial work consists primarily of electrical
installations and upgrade, renovation and replacement service and maintenance
work in:
- manufacturing and processing facilities;
- military installations;
- airports; and
- refineries and petrochemical and power plants.
According to internal estimates, approximately 65% of our industrial
revenues are associated with new construction. The balance of our industrial
revenues are derived from significant contracts for upgrade, renovation and
replacement service and maintenance work. Our industrial customers include:
- facility owners;
- general contractors;
- engineers;
- consultants; and
- architects.
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 1999, our pro forma revenues from
industrial work have grown at a compound annual rate of approximately 9% per
year and represented approximately 23% of our pro forma revenues for the year
ended September 30, 1999.
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. Demand for residential services is primarily
dependent on the number of single family and multi-family home starts.
Single-family home starts are most 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 and have operations across the United States. We
believe that there is significant additional opportunity for consolidation
within this highly fragmented market. In the current low interest rate
environment, our residential business has experienced significant growth. Our
pro forma revenues from residential electrical contracting have grown at a
compound annual rate of approximately 23% from fiscal 1995 through 1999 and
represented approximately 17% of our pro forma revenues for the year ended
September 30, 1999.
Information Technology Market. Since October 1998, we have completed the
acquisition of nine information technology businesses and sought to become a
national designer and installer of information technology systems. Our
information technology work consists primarily of:
- design, installation and maintenance of voice and data communication
cabling systems;
- design and installation of local and wide area networks;
- fiber optic wide area network transmission lines (outside plant
construction); and
- communications space planning and video/CCTV/CATV distribution design and
installation.
Our information technology businesses are currently located in Arizona,
California, Maryland, Massachusetts, North Carolina and Texas. Projects entail
the installation of both cross-country ("outside fiber") and local outside
("fiber to curb") fiber lines, as well as premise wiring systems ("fiber to
desk"). Projects range in
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scope from small office networks to networks for multi-site institutions.
Customers served include American Airlines, Bell Atlantic, General Telephone,
Alcon Laboratories, George Washington University, the Baltimore Ravens, the
Pittsburgh Steelers and HOK Sport. Often installation work is done in tandem
with traditional electrical contracting providers who will set up the power
delivery systems while our information technology experts design and install the
communications systems. We believe that demand for our information technology
services will be driven by:
- the pace of technological change;
- the overall growth in voice and data traffic; and
- 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 information technology market represented
approximately 8% of our pro forma revenues for the year ended September 30,
1999.
Power Line Market. Our work for the power line market consists primarily of
the installation, repair and maintenance of electric power transmission lines
and the construction and maintenance of electric substations. We generally serve
as the prime contractor and perform substantially all of the construction work
on these contracts. Our customers in this market are utilities and government
agencies. We believe demand for power line services is driven by:
- new infrastructure development;
- utilities' efforts to reduce costs through the outsourcing of power line
installation and maintenance services in anticipation of deregulation; and
- the need to modernize and increase the capacity of existing transmission
and distribution systems.
Our revenues from the power line market represented approximately 4% of our
pro forma revenues for the year ended September 30, 1999.
Service and Maintenance Market. The balance of our pro forma revenues is
derived from service calls and routine maintenance contracts. Our service and
maintenance revenues 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 19% from fiscal 1995
through 1999 and represented approximately 6% of our pro forma revenues for the
year ended September 30, 1999.
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 homebuilders, national retailers and other commercial businesses,
as well as to lessen the impact of regional economic cycles;
- Diverse business lines -- which we believe 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;
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- 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 65% of our outstanding
common stock and includes executive management with extensive electrical,
consolidation and public company experience, as well as regional and local
management which have established reputations in their local markets.
BUSINESS STRATEGY
Our goal is to expand our position as a leading national provider of
electrical and cabling contracting services by:
- continuing to realize operational efficiencies;
- expanding our business and markets through internal growth; and
- pursuing a targeted acquisition strategy.
OPERATING STRATEGY
We believe there are significant opportunities to continue to increase our
revenues and profitability. The key elements of our operating strategy are:
Increase the Number of National Accounts. We will continue to use our
geographic diversity to bid for additional business from customers that operate
on a regional or national basis, including:
- developers;
- contractors;
- homebuilders; and
- owners of national chains.
For example, we have completed one and are negotiating several other jobs
for companies with a national presence to provide installation and maintenance
services. Some of these projects could potentially extend over several years. We
believe that significant demand exists from these companies to utilize the
services of a single electrical contracting and maintenance service provider
from whom they can obtain consistent service which meets their quality
requirements. This demand is at least partially driven by the recent
consolidation among a number of our principal customers, including homebuilders,
developers and national contractors.
Because we are able to 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 electrical contractors. 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 will enable us to capture additional revenues from
national accounts.
Focus on Higher Margin, High Growth Opportunities. We intend to pursue
projects and business markets that are higher value-added in nature and provide
us with opportunities to expand our revenues, gross margins and operating
margins. Examples of higher margin opportunities within our markets include the
expansion of information technology, maintenance and specialized services, as
well as an increasing amount of our repeat business with national customers.
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.
We have adopted the best of these practices throughout our operations. An
example of this practice has been our ability to expand the number of our
companies using prefabricating techniques to more than 30. An additional area of
focus involves sharing information relating to specific projects or job
requirements
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throughout IES. As a result of these best practices we have already achieved
margin improvements in some areas.
Operate on Decentralized Basis. We believe that our decentralized operating
structure helps us retain the entrepreneurial spirit present in each of our
companies while maintaining disciplined operating and financial controls. We
have nine regional operating divisions to more efficiently share the
considerable local and regional market knowledge and customer relationships
possessed by each of our companies, as well as companies that we may acquire in
the future. This regional framework allows us to more effectively disseminate
ideas, gather financial information and target customers. By maintaining a local
focus, we are able to continue to:
- build relationships with general contractors and other customers;
- address design preferences and code requirements;
- respond quickly to customer demands; and
- adjust to local market conditions.
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 can be 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.
Achieve Additional Operating Efficiencies. We continue to focus on operating
efficiencies by combining overlapping operations and centralizing some
administrative functions. We have increased our profitability through efforts
like offsite prefabrication and standardized project management of similar jobs.
We are also taking advantage of our combined purchasing to gain volume discounts
on items like electrical materials, vehicles, bonding, employee benefits and
insurance.
ACQUISITION STRATEGY
Due to the highly fragmented nature of the electrical and cabling
contracting industry, we believe significant acquisition opportunities exist. We
focus on acquiring companies with an entrepreneurial attitude as well as a
willingness to learn and share improved business practices through open
communications. We believe that many electrical and cabling contracting
businesses that lack the capital necessary to expand operations will become
acquisition candidates. For these acquisition candidates, a sale of their
company to us will provide them with several benefits, including:
- the ability to improve margins through implementing best practices;
- expertise to expand in specialized markets;
- enhanced productivity through the reduction of administrative burdens;
- national name recognition;
- potential for substantial financial return through equity participation in
IES; and
- the opportunity for a continued role in management.
Other key elements of our acquisition strategy include:
Diversify Business Operations. We will continue to diversify our business
operations as we identify opportunities within related electrical and cabling
businesses with similar characteristics to our current business lines. Since our
inception, we have added power line and information technology operations to our
business portfolio. We added these areas to our business:
- due to the fragmented nature of those markets;
- because of our belief in their strong growth potential; and
- our desire to further diversify against sensitivity to economic downturns.
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Enter New Geographic Markets. We target acquisition candidates that are
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. We expect that increasing our geographic diversity will allow
us to better serve an increasingly national customer base. It should also
further reduce the impact of local and regional economic cycles, as well as
weather-related or seasonal variations in our business.
Expand Within Existing Markets. Once we enter a market, we seek to acquire
other well-established electrical contracting and maintenance businesses
operating within that region, including "add-on" acquisitions. Add-on
acquisitions afford the opportunity to improve our overall cost structure
through the integration of these acquisitions into existing operations as well
as to increase revenues through access to additional specialized markets.
Despite the integration opportunities afforded by these add-on acquisitions, we
typically maintain existing business names and identities to retain goodwill for
marketing purposes.
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 under the supervision
of our Vice President -- Integration/Transition. 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. For example, we
employ outside accountants who specialize in the construction industry to
conduct extensive financial due diligence on the financial records of the target
company. These accountants are directed to draw our attention to areas where
improvements can be made. 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
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.
COMPANY OPERATIONS
We offer a broad range of electrical and cabling contracting services,
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 necessary to
provide value added services to the customer and to earn higher margins. We also
act as a subcontractor 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 field
work 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.
Residential. New residential installations begin with a builder providing
potential subcontractors the architectural or electrical drawings for the
residences within the tract being developed. Our personnel analyze
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the plans and drawings and estimate the equipment, materials and parts and the
direct and supervisory labor required for the project. We then 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.
Information Technology. Information technology work can be either regional
infrastructure, which involves running lines cross country or through local
areas, 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 information technology 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 which will meet our customers' needs. Large
information technology 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.
Power Line. 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.
Maintenance Services. Our maintenance services are supplied on a long-term
and per call basis. Our long-term maintenance services are provided through
service 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. Our per call maintenance services are initiated
when a customer requests emergency repair service. 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;
- prepares and discusses a price quotation; and
- performs the work and often collects payment from the customer.
Major Customers. We have a diverse customer base, with no single customer
accounting for more than 5% of our pro forma combined revenues for the year
ended September 30, 1999. 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;
- consulting engineers;
- architects;
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- owners and managers of large retail establishments, office buildings,
apartments and condominiums, theaters and restaurants;
- hotels and casinos;
- manufacturing and processing facilities;
- arenas and convention centers;
- refineries and petrochemical and power plants;
- hospitals;
- school districts;
- utilities;
- 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.
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 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. 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 like 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.
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Purchasing. As a result of economies of scale derived through the overall
size of our company, we have been able to purchase equipment, parts and supplies
at discounts to historical levels. In addition, as a result of our size, we are
also able to lower our costs for:
- 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 source.
MANAGEMENT INFORMATION AND CONTROLS
We have centralized our consolidation accounting and some other financial
reporting activities at our operational headquarters in Houston, Texas, while
basic accounting activities are conducted at the operating level. While our
current information systems hardware and software are adequate to meet current
needs, we are in the process of upgrading all of our existing companies to a
reporting system which will enable us to more uniformly monitor the operations
and financial condition of our companies. We are undertaking this process with
incremental groups of our operating subsidiaries and expect it to take two to
three years to convert the systems of all of our existing companies.
COMPETITION
The electrical contracting industry is 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 cabling contracting 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.
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.
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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 bodily injury, property damage
and injured workers' compensation. We maintain automobile and general liability
insurance for third party bodily injury and property damage and workers'
compensation coverage which we consider appropriate to insure against these
risks, subject to deductibles.
EMPLOYEES
At September 30, 1999, we had approximately 13,000 employees. We are not a
party to any collective bargaining agreements with our employees. We believe
that our relationship with our employees is good.
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 home buyers;
- 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.
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 currently generate, and expect to
continue to generate, more than half of our revenues under fixed price
contracts. 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.
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OUR GROWTH COULD BE DIFFICULT TO MANAGE. AN ACTIVELY GROWING COMPANY LIKE OURS
REQUIRES THE CONSTANT ATTENTION OF ITS MANAGEMENT. IF TOO MUCH OF OUR
MANAGEMENT'S TIME IS SPENT ATTENDING TO THE GROWTH OF IES, OUR OPERATIONS COULD
SUFFER.
If we are unable to manage our growth, or if we are unable to attract and
retain additional qualified management, there could be a material adverse effect
on our financial condition and results of operations. As we continue to grow,
there can be no assurance that our management group will be able to oversee IES
and effectively implement our operating or growth strategies. We expect our
management will expend time and effort in evaluating, completing and integrating
acquisitions and opening new facilities. We cannot guarantee that our systems,
procedures and controls will be adequate to support our expanding operations,
including the timely receipt of financial information from acquired companies.
A key point of our business strategy is to grow by acquiring other
electrical and cabling contracting companies. We cannot guarantee that we will
be able to acquire additional businesses or integrate and manage them
successfully. We cannot assure you that the businesses we acquire will achieve
sales and profitability that justify our investment.
Acquisitions we make may involve additional issues, including:
- adverse effects on our financial results;
- diversion of our management's attention;
- dependence on retention, hiring and training of key personnel; and
- risks associated with unanticipated problems or legal liabilities.
In addition, if industry consolidation becomes more prevalent, the prices
for acquisition candidates may increase and the number of available candidates
may decrease. Our competitors may have greater financial resources to finance
acquisition and internal growth opportunities and may be willing to pay higher
prices than we are willing to pay for the same acquisition opportunities.
THERE IS CURRENTLY A SHORTAGE OF QUALIFIED ELECTRICIANS. SINCE THE MAJORITY OF
OUR WORK IS PERFORMED BY ELECTRICIANS, THIS SHORTAGE COULD LIMIT OUR ABILITY TO
GROW.
We believe 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; or
- we will not be able to grow as a result of labor shortages.
DUE TO SEASONALITY, DIFFERING REGIONAL ECONOMIC AND WEATHER CONDITIONS AND THE
TIMING OF ACQUISITIONS, 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 timing of acquisitions, the
timing and size of acquisition costs and regional economic and weather
conditions. For example, in the past local flooding conditions have prevented
our crews from being able to work, adversely affecting operating results.
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.
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
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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.
AS A RESULT OF OUR AGGRESSIVE ACQUISITION PROGRAM, WE HAVE GENERATED 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 substantial 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;
- place us at a disadvantage compared to a competitor that has less debt;
and
- limit, along 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.
IF OUR STOCK PRICE IS LOW AND OUR ABILITY TO OBTAIN CASH THROUGH THE DEBT OR
EQUITY MARKETS IS LIMITED, OUR ACQUISITION PROGRAM, WHICH IS A KEY PART OF OUR
BUSINESS STRATEGY, COULD BE HAMPERED.
We use our common stock as at least part of the consideration paid for
companies we acquire. If the common stock does not maintain a sufficient value
or company owners will not accept common stock as consideration for their
businesses, we may be required to use more of our cash to pursue our acquisition
program. If we do not have sufficient cash or borrowing capacity, our growth
through acquisitions could be limited unless we are able to obtain additional
cash from the sale of debt or common stock in the public market.
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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 and senior management and management
personnel at the companies we have acquired. A criterion 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 as a public company 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.
Our balance sheet as of September 30, 1999, has an amount called "goodwill"
that represents 54 % of assets and 100 % of stockholders' equity. Goodwill is
recorded when we pay more for a business than the fair value of the tangible and
separately measurable intangible net assets. 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.
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 would 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.
COMPUTER SYSTEMS WE RELY ON MAY FAIL TO RECOGNIZE YEAR 2000. A FAILURE COULD
RESULT IN DISRUPTIONS OF OUR OPERATIONS AND OUR ACCOUNTING SYSTEMS.
We are dependent on our computer software programs and operating systems in
operating our business. We also depend on the proper functioning of computer
systems of third parties, like vendors and clients. The failure of any of these
systems to appropriately interpret the upcoming calendar year 2000 could have a
material adverse effect on our financial condition, results of operations, cash
flow and business prospects.
Our inability to remedy our own Year 2000 problems or the failure of third
parties to remedy their year 2000 problems may cause business interruptions or
shutdown, financial loss, regulatory actions, reputational harm and/or legal
liability. We can not assure you that our Year 2000 program will be effective or
that our estimates about the timing and cost of completing our program will be
accurate.
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, 1999, we maintained branch offices, warehouses, sales
facilities and administrative offices at 137 locations. Substantially all of our
facilities are leased. We lease our corporate headquarters located in Houston,
Texas.
We believe that our properties are generally adequate for our present needs.
Furthermore, we believe that suitable additional or replacement space will be
available as required.
ITEM 3. LEGAL PROCEEDINGS
The Company and 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.
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ITEM 4A. EXECUTIVE OFFICERS
Jim P. Wise has been Chief Executive Officer of the Company since November
1998 and President from November 1998 to May 1999. He initially joined the
Company in September 1997 as Senior Vice President and Chief Financial Officer.
From September 1994 to September 1997, he was Vice President -- Finance and
Chief Financial Officer at Sterling Chemicals, Inc., a publicly held
manufacturer of commodity petrochemicals and pulp chemicals. From July 1994 to
September 1994, he was Senior Vice President and Chief Financial Officer of U.S.
Delivery Systems, Inc., a delivery service consolidator. From September 1991 to
July 1994 he was Chairman and Chief Executive Officer of Neostar Group, Inc., a
private investment banking and financial advisory firm. Mr. Wise was employed by
Transco Energy Company as Executive Vice President, Chief Financial Officer and
was a member of the Board of Directors from November 1982 until September 1991.
John F. Wombwell has been Executive Vice President -- Legal and
Administration, General Counsel and Secretary of IES since November 1999. Prior
to November 1999 and since January 1998, 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 for more than the previous five years.
Ben L. Mueller has been Senior Vice President and 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.
Stanley H. Florance has been Senior Vice President and Chief Financial
Officer of IES since April 1999. Prior to that time, Mr. Florance had served as
Senior Vice President, Finance and Chief Financial Officer of Owen Healthcare,
Inc. from 1989 to 1998. He joined that company in 1983 as Controller and
Treasurer. He is a member of the American Institute of Certified Public
Accountants, the Texas Society of Certified Public Accountants, the Financial
Executives Institute and the ESOP Association. Mr. Florance also serves on the
Board of Directors of The Living Bank International and on the Board of
Directors of the Phi Kappa Theta National Foundation.
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
Since January 27, 1998 the Company's Common Stock has traded 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 January 27, 1998.
HIGH LOW
-------- ----
FISCAL YEAR ENDED SEPTEMBER 30, 1998
Second Quarter (From January 27, 1998).................... 19 7/8 13
Third Quarter............................................. 23 3/4 17 1/8
Fourth Quarter............................................ 23 3/8 13
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
As of December 14, 1999 there were approximately 412 holders of record of
the 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 include certain restrictions on the payment of cash dividends
on the common stock.
ITEM 6. SELECTED FINANCIAL DATA
We acquired the 16 electrical businesses we refer to as our Founding
Companies concurrently with the consummation of our initial public offering of
common stock on January 30, 1998 (the "IPO"). Pursuant to the SEC's Staff
Accounting Bulletin No. 97, Houston-Stafford Electric, Inc. ("Houston-Stafford")
is considered for accounting purposes the entity which acquired the other
Founding Companies and IES (the "Accounting Acquirer"). As such, our
consolidated historical financial statements for periods prior to January 30,
1998, represent the financial position and results of operations of
Houston-Stafford as restated to include the financial position and results of
operations of one acquired company that was acquired in a pooling of interest
transaction in June 1998. The operations of the other Founding Companies, IES,
and the other subsequently acquired companies have been included in our
historical financial statements beginning on their respective dates of
acquisition. 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
Supplemental 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 our opinion, reflect all adjustments
consisting of normal recurring 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.
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NINE
YEAR ENDED MONTHS
DECEMBER 31, ENDED YEAR ENDED SEPTEMBER 30,
------------------ SEPTEMBER 30, --------------------------------
1995 1996 1997 1997 1998 1999
------- -------- ------------- -------- -------- ----------
(UNAUDITED)
STATEMENT OF OPERATIONS DATA:
Revenues............................. $73,345 $101,431 $92,379 $117,111 $386,721 $1,035,888
Cost of services (including
depreciation)...................... 63,709 85,081 76,306 95,937 306,052 816,715
------- -------- ------- -------- -------- ----------
Gross profit......................... 9,636 16,350 16,073 21,174 80,669 219,173
Selling, general and administrative
expenses........................... 7,905 10,228 10,222 14,261 47,390 113,871
Non-cash, non-recurring compensation
charge............................. -- -- -- -- 17,036 --
Goodwill amortization................ -- -- -- -- 3,212 9,305
------- -------- ------- -------- -------- ----------
Income from operations............... 1,731 6,122 5,851 6,913 13,031 95,997
Interest and other income (expense),
net................................ (182) 14 292 385 (393) (12,542)
------- -------- ------- -------- -------- ----------
Income before income taxes........... 1,549 6,136 6,143 7,298 12,638 83,455
Provision for income taxes........... 563 2,471 2,408 2,923 12,690 35,348
------- -------- ------- -------- -------- ----------
Net income (loss).................... $ 986 $ 3,665 $ 3,735 $ 4,375 $ (52) $ 48,107
======= ======== ======= ======== ======== ==========
AS OF DECEMBER 31, AS OF SEPTEMBER 30,
------------------- -----------------------------
1995 1996 1997 1998 1999
-------- -------- ------- -------- --------
BALANCE SHEET DATA:
Cash and cash equivalents........................ $ 1,772 $ 4,301 $ 4,154 $ 14,583 $ 2,931
Working capital.................................. 3,905 7,068 7,770 75,020 175,572
Total assets..................................... 14,882 23,712 35,794 502,468 858,492
Total debt....................................... 1,221 1,959 2,169 94,177 228,393
Total stockholders' equity....................... 5,842 8,700 12,636 302,704 467,166
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATION
INTRODUCTION
The following discussion should be read in conjunction with the financial
statements, related notes thereto, and "Selected Financial Data" appearing
elsewhere in this annual report.
We are the second largest provider of electrical contracting services in the
United States. We began operations on January 30, 1998 with the acquisition of
16 electrical businesses and through September 30, 1999, we have acquired 62
additional electrical and cabling contracting businesses. We refer to the
additional electrical and cabling contracting businesses acquired since January
30, 1998 as our Acquired Companies.
We serve a broad range of markets, including:
- commercial;
- industrial;
- residential;
- information technology; and
- power line markets.
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Our revenues are generated from a mix of:
- new construction;
- renovation;
- maintenance; and
- specialized services.
We also focus on higher margin, larger projects that require special
expertise, including:
- design-and-build projects that utilize the capabilities of our in-house
engineers;
- service;
- maintenance; and
- renovation and upgrade work.
We believe our service, maintenance and renovation and upgrade revenues tend
to either be recurring, have lower sensitivity to economic cycles, or both.
Our financial statements for the periods prior to January 30, 1998, reflect
the historical results of Houston-Stafford as the accounting acquirer as
restated to include the financial position and results of operations of one
Acquired Company that was acquired in a pooling of interests transaction in June
1998. The operations of the other Founding Companies, IES and the other Acquired
Companies have been included in our historical financial statements beginning on
their respective dates of acquisition.
Our revenues are derived primarily from electrical and cabling construction
and maintenance services provided to commercial, industrial, residential,
information technology and power line market. Revenues from fixed-price
construction and renovation contracts are generally accounted for on a
percentage-of-completion basis, using the cost-to-cost method. The cost-to-cost
method measures the percentage completion of a contract based on total costs
incurred to date compared to total estimated costs at completion. These
contracts generally provide that the customers accept completion of progress to
date and pay us for services rendered measured in terms of hours expended or
some other measure of progress. Some of our customers require us to post
performance and payment bonds upon the execution of the contract, depending upon
the nature of the work to be performed. Our fixed-price contracts often include
payment provisions that allow the customer to withhold up to ten percent from
each payment during the course of a job and forward all retained amounts to us
upon completion and approval of the work. Maintenance and other service revenues
are recognized as the services are performed.
Cost of services consists primarily of:
- salaries and benefits of employees;
- subcontracted services;
- materials;
- parts and supplies;
- depreciation;
- fuel and other vehicle expenses; and
- equipment rentals.
Our gross margin, which is gross profit expressed as a percentage of
revenues, depends on the relative proportion of costs related to labor and
materials. On jobs in which a higher percentage of the cost of services consists
of labor costs, we typically achieve higher gross margins than on jobs where
materials represent more of the cost of services. Materials costs can be
calculated with relatively greater accuracy than labor costs, and we
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seek to maintain higher margins on our labor-intensive projects to compensate
for the potential variability of labor costs for these projects. Selling,
general and administrative expenses consist primarily of:
- administrative salaries and benefits;
- marketing expenses;
- office rent and utilities; and
- similar administrative expenses.
We believe that we have realized savings from:
- consolidation of insurance and bonding programs;
- our ability to borrow at lower interest rates than the individual
companies;
- consolidation of operations in some locations; and
- greater volume discounts from suppliers of materials, parts, supplies and
services.
Offsetting these savings are costs related to our corporate management,
costs of being a public company, and costs of integrating acquired companies.
As a result of the acquisitions of the Acquired Companies and the Founding
Companies that were accounted for as purchases, the excess of the consideration
paid over the fair value of the net assets acquired was recorded as goodwill on
our balance sheet and is being amortized as a noncash charge to the statement of
operations over a 40-year period.
We do not utilize financial instruments for trading purposes and hold no
derivative financial instruments which could expose us to significant market
risk. Our exposure to market risk for changes in interest rates relates
primarily to our long-term obligations under our credit facility and our senior
subordinated notes, of which $77.0 million and $150.0 million was outstanding at
September 30, 1999, respectively. The credit facility matures on July 30, 2001,
and the senior subordinated notes mature on February 1, 2009.
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 represent the results of operations of (i)
Houston-Stafford (as restated to include the results of operations of one
Acquired Company that was acquired in a pooling-of-interests transaction) for
periods ending prior to January 30, 1998 and (ii) Houston-Stafford (as restated)
and the results of operations of the Founding Companies and other Acquired
Companies beginning on their respective dates of acquisition.
YEAR ENDED SEPTEMBER 30,
--------------------------------------------------
1997 1998 1999
-------------- -------------- ----------------
Revenues........................................... $117,111 100% $386,721 100% $1,035,888 100%
Cost of services................................... 95,937 82 306,052 79 816,715 79
-------- --- -------- --- ---------- ---
Gross profit..................................... 21,174 18 80,669 21 219,173 21
Selling, general and administrative expenses....... 14,261 12 47,390 12 113,871 11
Goodwill amortization.............................. -- -- 3,212 1 9,305 1
Non-cash, non-recurring compensation charge in
connection with the Founding Company
Acquisitions..................................... -- -- 17,036 5 -- --
-------- --- -------- --- ---------- ---
Income from operations............................. 6,913 6 13,031 3 95,997 9
Interest and other income (expense), net........... 385 -- (393) -- (12,542) (1)
-------- --- -------- --- ---------- ---
Income before income taxes......................... 7,298 6 12,638 3 83,455 8
Provision for income taxes......................... 2,923 2 12,690 3 35,348 3
-------- --- -------- --- ---------- ---
Net income (loss).................................. $ 4,375 4% $ (52) -- $ 48,107 5%
======== === ======== === ========== ===
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Year ended September 30, 1999 compared to the year ended September 30, 1998
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. The increase in revenues was principally due to the acquisition of
Acquired Companies.
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 to acquisitions. As
a percentage of revenues, gross profit remained constant at 21%.
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. The increase in selling, general and
administrative expenses is primarily related to inclusion of expenses of the
Acquired Companies. Selling, general and administrative expenses as a percentage
of revenues decreased from 12% in 1998 to 11% in 1999. During the four months
ended January 1998 a $5.6 million bonus was paid to the previous owners of
Houston-Stafford, which bonus was not paid 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.
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 the acquisition of the Acquired Companies and the elimination of
the $17.0 million non-cash, non-recurring compensation charge incurred in
connection with our IPO (see Note 1 of the Notes to Consolidated Financial
Statements). These increases were partially offset by the higher corporate costs
discussed above.
Interest and other income (expense), net changed from expense of $0.4
million in 1998 to $12.5 million in 1999, primarily as a result of interest
expense, payable on our 9 3/8% Senior Subordinated Notes due 2009 and our Credit
Facility. 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.
Year ended September 30, 1998 compared to the year ended September 30, 1997
Revenues increased $269.6 million, or 230%, from $117.1 million for the year
ended September 30, 1997 to $386.7 million for the year ended September 30,
1998. The increase in revenues was principally due to the acquisition of the
Founding Companies and the Acquired Companies.
Gross profit increased $59.5 million, or 281%, from $21.2 million for the
year ended September 30, 1997 to $80.7 million for the year ended September 30,
1998. The increase in gross profit was principally due to the acquisition of the
Founding Companies and the Acquired Companies. As a percentage of revenues,
gross profit increased from 18% in 1997 to 21% in 1998. This increase was
attributable primarily to Houston-Stafford's lower margin on certain material
purchases and higher than normal levels of overtime in the prior year.
Selling, general and administrative expenses increased $33.1 million, or
232%, from $14.3 million for the year ended September 30, 1997 to $47.4 million
for the year ended September 30, 1998. Selling, general and administrative
expenses as a percentage of revenues remained constant at approximately 12% in
1997 and 1998. Selling, general and administrative expenses were primarily
attributable to the acquisitions of the Founding Companies and the Acquired
Companies, a $5.6 million bonus paid to the owners of Houston-Stafford during
the four months ended in January 1998, compared to a $1.5 million bonus during
the four months ended in January 1997, and approximately $3.3 million of public
company related corporate costs incurred in 1998 which did not exist in 1997.
Excluding such bonuses and higher corporate costs, selling, general and
administrative expenses as a percentage of revenues decreased from 11% in 1997
to 10% in 1998.
Income from operations increased $6.1 million, or 88%, from $6.9 million for
the year ended September 30, 1997 to $13.0 million for the year ended September
30, 1998. This increase in operating income was primarily attributable to
acquisition of the Founding Companies and the Acquired Companies and the non-
recurring owner bonuses in 1997. These increases were partially offset by the
higher corporate costs discussed above and the $17.0 million non-cash,
non-recurring compensation charge incurred in connection with the Company's IPO
(see Note 1 of the Notes to Consolidated Financial Statements). As a percentage
of revenues, income from operations (excluding the owner bonuses, higher
corporate costs and the non-cash, non-recurring compensation charge noted above)
increased from 7% in 1997 to 10% in 1998.
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24
Interest and other income (expense), net changed from income of $0.4 million
in 1997 to $0.4 million expense in 1998, primarily as a result of interest
expense on borrowings to fund the Company's 1998 acquisitions. The increase in
the Company's tax provision from $2.9 million in 1997 to $12.7 million in 1998
is primarily attributed to the growth in income from operations discussed above.
The Company's effective tax rate increased from 40% in 1997 to 100% in 1998, due
to a $17.0 million non-cash, non-recurring compensation charge recognized during
1998 in connection with the IPO which is not deductible for tax purposes.
LIQUIDITY AND CAPITAL RESOURCES
As of September 30, 1999, we had cash and cash equivalents of $2.9 million,
working capital of $175.6 million, borrowings of $77.0 million under our
three-year revolving credit facility (the "Credit Facility"), $2.2 million of
letters of credit outstanding, and available capacity under our Credit Facility
of $95.8 million.
During the year ended September 30, 1999, we used $7.0 million of net cash
from operating activities, comprised of net income of $48.1 million, increased
by $16.9 million of non-cash charges related to depreciation and amortization
expense, decreased by a $53.6 million increase in receivables as a result of
revenue growth and the timing of collections and further decreased by a $12.7
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 $118.6 million, including $106.5 million used for the purchase of
businesses, net of cash acquired, and $12.9 million of capital expenditures. Net
cash flow provided by financing activities was $114.0 million, resulting
primarily from our offering of $150.0 million 9 3/8% senior subordinated notes
due 2009 (the "Senior Subordinated Notes"), net of borrowings under our credit
facility and reduced by paydowns on debt acquired in connection with the
purchase of businesses discussed above.
Our Credit Facility provides for borrowings of up to $175.0 million, to be
used for working capital, capital expenditures, other corporate purposes and
acquisitions. The amounts borrowed under the Credit Facility bear interest at an
annual rate equal to either:
- LIBOR plus 1.0% to 2.0%, 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.
At September 30, 1999, the weighted average interest rate was 6.65%.
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.
On January 25, 1999, we completed our offering of the $150.0 million Senior
Subordinated Notes. The notes bear interest at 9 3/8% and will mature on
February 1, 2009. Interest is payable on the notes semiannually on February 1
and August 1. We made the first of such payments on 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.
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25
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 2000.
During the fiscal year ended September 30, 1999, we acquired 41 additional
electrical contracting and cabling businesses for approximately $106.5 million
in cash and 7.8 million shares of common stock. The cash component of the
consideration paid for these companies was funded with existing cash, borrowings
under our Credit Facility and proceeds from the offering of our Senior
Subordinated Notes.
We intend to continue to pursue 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 increase the amount available for borrowing under our
credit facility or obtain other 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 such 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.
SEASONALITY AND QUARTERLY FLUCTUATIONS
Our results of operations from residential construction are seasonal,
depending on weather trends, with typically higher revenues generated during the
spring and summer and lower revenues during the 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;
however, it may be affected by severe weather conditions such as flooding. Our
service 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 1997,
1998 and 1999, inflation did not have a significant effect on our results in
those fiscal years, or on any of the Founding Companies or the Acquired
Companies during similar periods.
RECENT ACCOUNTING PRONOUNCEMENT
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities." In accordance with SFAS No. 137, "Accounting for
Derivative Instruments and Hedging Activities -- Deferral of the Effective Date
FASB Statement No. 133," SFAS No. 133 becomes effective for us for our year
ended September 30, 2001. SFAS No. 133 requires a company to recognize all
derivative instruments (including derivative instruments embedded in other
contracts) as assets or liabilities in its balance sheet and measure them at
fair value. The statement requires that changes in the derivatives' fair value
be recognized as current earnings unless specific hedge accounting criteria are
met. We are evaluating SFAS No. 133 and the impact on existing accounting
policies and financial reporting disclosures. However, we have not to date
engaged in activities or entered into arrangements normally associated with
derivative instruments.
YEAR 2000
Year 2000 Issue. Many software applications, hardware and equipment and
embedded chip systems identify dates using only the last two digits of the year.
These products may be unable to distinguish between dates in the year 2000 and
dates in the year 1900. That inability (referred to as the "Year 2000" issue),
if not addressed, could cause applications, equipment or systems to fail or
provide incorrect information after
23
26
December 31, 1999, or when using dates after December 31, 1999. This in turn
could have an adverse effect on us due to the direct dependence on our own
applications, equipment and systems and indirect dependence on those of other
entities with which we must interact.
Risk of Non-Compliance and Contingency Plans. The major applications which
pose the greatest Year 2000 risks for us if implementation of the Year 2000
compliance program is not successful are our financial systems applications,
including related third-party software. Potential problems if our Year 2000
compliance program is not successful could include disruptions of our revenue
invoicing and collection from our customers and purchasing and payments to our
vendors and the inability to perform our other financial and accounting
functions. We operate on a decentralized basis with each individual reporting
unit having independent information technology (IT) and non-IT systems. Our Year
2000 compliance program is focused on the systems which could materially affect
our business. We have completed substantially all of our remediation and testing
of our significant operating units to date and believe that the material systems
at our companies are or will be Year 2000 compliant. We currently have assessed
our remaining Year 2000 risk as low because:
- we are not dependent on any key customers or suppliers (none represent as
much as 5% of the companies sales or purchases, respectfully);
- we have many separate PC based systems which are not dependent on any one
system;
- many of our processes are performed using spreadsheets and/or other manual
processes which are not technologically dependent; and
- we perform construction and service maintenance on site for our customers,
the work performed is manual in nature and not dependent on automated
information technology systems to be completed.
As a result, we believe that our reasonably likely worst case Year 2000
scenario is a temporary inability for us to process the accounting transactions
representing our business activity using automated information systems at
certain of our operating units.
The goal of our Year 2000 project is to ensure that all of the critical
systems and processes under our direct control remain functional. However,
because certain systems and processes may be interrelated with systems outside
of our control, there can be no assurance that all implementations will be
successful. Accordingly, as part of our Year 2000 project, contingency and
business plans have been developed to respond to potential failures that may
occur. To the extent appropriate, such plans include emergency back up and
recovery procedures, remediation of existing systems with system upgrades or
installation of new systems and replacing electronic applications with manual
processes. Due to the uncertain nature of contingency planning, there can be no
assurances that such plans actually will be sufficient to reduce the risk of
material impacts on our operations due to Year 2000 issues. We have ongoing
information systems development and implementation projects, none of which have
experienced delays due to our Year 2000 compliance program.
Compliance Program. In order to address the Year 2000 issue, we established
a project team to assure that key automated accounting systems and related
processes will remain functional through year 2000. The team addressed the
project in the following stages: (i) awareness; (ii) assessment; (iii)
remediation; (iv) implementation and (v) testing of the necessary modifications.
The key automated systems consist of (a) project estimating, management and
financial systems applications, (b) supporting hardware and equipment and (c)
third-party developed software. The evaluation of our Year 2000 issue includes
the evaluation of the Year 2000 exposure of third parties material to our
operations. We have retained a Year 2000 consulting firm to manage, direct and
assist with the Year 2000 compliance program.
Company State of Readiness. We have completed substantially all phases of
our Year 2000 project that began with a corporate-wide awareness program which
will continue to be updated throughout the life of the project. We believe that
there is not a material risk related to our non-IT systems because we are
primarily a manual service provider and do not rely on these types of systems.
The assessment phase of the project involves for both IT and non-IT systems,
among other things, efforts to obtain representations and assurances from third
parties, including third party vendors, that their hardware and equipment,
embedded chip systems and software being used by or impacting us or any of our
business units are or will be modified to be Year 2000 compliant. To date, most
responses from such third parties have been conclusive. However, because we are
not dependent on any key customers or suppliers, we do not believe that a
disruption in service with any third party would have a material, adverse effect
on our business, results of operations or financial condition. The remediation
phase involves identifying the changes which are required to be implemented by
the systems to be Year 2000
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27
compliant. The testing and implementation phases involve verifying that changes
address the Year 2000 problems identified through testing the system as part of
implementing such changes. Substantially all phases, including testing and
certification, have been completed. However, a small number of subsidiaries will
complete their testing and certification by December 31, 1999.
Costs to Address Year 2000 Compliance Issues. The costs incurred in 1999
associated with the assessing and testing applications, hardware and equipment,
and third party developed software which were funded with existing operating
cash flows and were deducted from income as incurred. To date, we have expended
approximately $520,000 related to our Year 2000 compliance. These costs were
primarily related to the assessment, remediation and implementation phases of
the project. We do not expect the remaining costs of the Year 2000 project to
exceed $50,000.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed to market risk primarily related to potential adverse changes
in interest rates as discussed below. 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 other
significant market risks, including commodity price risk, foreign currency
exchange risk or interest rate risks from the use of derivative financial
instruments. Management does not use derivative financial instruments for
trading or to speculate on changes in interest rates or commodity prices.
Therefore, our exposure to changes in interest rates primarily results from
our short-term and long-term debt, with both fixed and floating interest rates.
Our debt with fixed interest rates primarily consists of the Senior Subordinated
Notes. Our debt with variable interest rates is primarily the Credit Facility.
The following table presents principal or notional amounts (stated in thousands)
and related interest rates by year of maturity for our debt obligations and
their indicated fair market value at September 30, 1999:
2000 2001 2002 2003 2004 THEREAFTER TOTAL
------ ------- ------ ------ ------ ---------- --------
Liabilities -- Long-Term Debt:
Variable Rate................. $ -- $76,980 $ -- $ -- $ -- $ -- $ 76,980
Average Interest Rate......... 6.65% 6.65% 6.65% 6.65% 6.65% 6.65% 6.65%
Fixed Rate.................... $ -- $ -- $ -- $ -- $ -- $150,000 $150,000
Average Interest Rate......... 9.375% 9.375% 9.375% 9.375% 9.375% 9.375% 9.375%
FAIR
TOTAL VALUE
-------- --------
Liabilities -- Long-Term Debt:
Variable Rate............................................. $ 76,980 $ 76,980
Fixed Rate................................................ $150,000 $147,000
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA
INDEX TO FINANCIAL STATEMENTS
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
28
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, 1998 and 1999, and the related consolidated statements of
operations, stockholders' equity and cash flows for each of the three years in
the period ended September 30, 1999. 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 generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Integrated Electrical Services,
Inc., and subsidiaries as of September 30, 1998 and 1999, and the results of
their operations and their cash flows for each of the three years in the period
ended September 30, 1999, in conformity with generally accepted accounting
principles.
ARTHUR ANDERSEN LLP
Houston, Texas
November 9, 1999
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29
INTEGRATED ELECTRICAL SERVICES, INC., AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE INFORMATION)
(SEE NOTE 1)
ASSETS
SEPTEMBER 30,
-------------------
1998 1999
-------- --------
CURRENT ASSETS:
Cash and cash equivalents................................. $ 14,583 $ 2,931
Accounts receivable:
Trade, net of allowance of $4,160 and $5,709,
respectively........................................... 120,153 222,824
Retainage............................................... 26,074 47,682
Related parties......................................... 100 220
Inventories, net.......................................... 6,440 12,793
Costs and estimated earnings in excess of billings on
uncompleted contracts................................... 12,502 40,592
Prepaid expenses and other current assets................. 3,198 7,640
-------- --------
Total current assets............................... 183,050 334,682
-------- --------
RECEIVABLES FROM RELATED PARTIES............................ 142 --
PROPERTY AND EQUIPMENT, net................................. 23,436 47,368
GOODWILL, net............................................... 293,066 467,385
OTHER NON-CURRENT ASSETS.................................... 2,774 9,057
-------- --------
Total assets....................................... $502,468 $858,492
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Short-term debt and current maturities of long-term
debt.................................................... $ 3,823 $ 1,444
Accounts payable and accrued expenses..................... 69,225 116,121
Income taxes payable...................................... 6,686 3,971
Billings in excess of costs and estimated earnings on
uncompleted contracts................................... 27,807 37,507
Other current liabilities................................. 489 67
-------- --------
Total current liabilities.......................... 108,030 159,110
-------- --------
LONG-TERM BANK DEBT......................................... 89,500 76,980
OTHER LONG-TERM DEBT, net of current maturities............. 854 1,120
SENIOR SUBORDINATED NOTES, net of $1,151 unamortized
discount.................................................. -- 148,849
OTHER NON-CURRENT LIABILITIES............................... 1,380 5,267
-------- --------
Total liabilities.................................. 199,764 391,326
-------- --------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Preferred stock, $.01 par value, 10,000,000 shares
authorized, none issued and outstanding................. -- --
Common stock, $.01 par value, 100,000,000 shares
authorized, 28,105,363 and 35,985,838 shares issued and
outstanding, at September 30, 1998 and 1999,
respectively............................................ 281 360
Restricted common stock, $.01 par value, 2,655,709 shares
authorized, 2,655,709 shares issued and outstanding..... 27 27
Additional paid-in capital................................ 291,650 407,926
Retained earnings......................................... 10,746 58,853
-------- --------
Total stockholders' equity......................... 302,704 467,166
-------- --------
Total liabilities and stockholders' equity......... $502,468 $858,492
======== ========
The accompanying notes are an integral part of these consolidated financial
statements.
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30
INTEGRATED ELECTRICAL SERVICES, INC., AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE INFORMATION)
(SEE NOTE 1)
YEAR ENDED SEPTEMBER 30,
--------------------------------------
1997 1998 1999
---------- ----------- -----------
REVENUES.................................................... $ 117,111 $ 386,721 $ 1,035,888
COST OF SERVICES (including depreciation)................... 95,937 306,052 816,715
---------- ----------- -----------
Gross profit.............................................. 21,174 80,669 219,173
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES................ 14,261 47,390 113,871
NON-CASH, NON-RECURRING COMPENSATION CHARGE IN CONNECTION
WITH THE FOUNDING COMPANY ACQUISITIONS (Note 1)........... -- 17,036 --
GOODWILL AMORTIZATION....................................... -- 3,212 9,305
---------- ----------- -----------
Income from operations.................................... 6,913 13,031 95,997
---------- ----------- -----------
OTHER INCOME (EXPENSE):
Interest expense, net..................................... (214) (728) (13,145)
Other, net................................................ 599 335 603
---------- ----------- -----------
Other income (expense), net........................ 385 (393) (12,542)
---------- ----------- -----------
INCOME BEFORE INCOME TAXES.................................. 7,298 12,638 83,455
PROVISION FOR INCOME TAXES.................................. 2,923 12,690 35,348
---------- ----------- -----------
NET INCOME (LOSS)........................................... $ 4,375 $ (52) $ 48,107
========== =========== ===========
EARNINGS (LOSS) PER SHARE:
Basic..................................................... $ 0.97 $ -- $ 1.41
========== =========== ===========
Diluted................................................... $ 0.97 $ -- $ 1.39
========== =========== ===========
SHARES USED IN THE COMPUTATION OF EARNINGS (LOSS) PER SHARE:
Basic..................................................... 4,492,039 19,753,060 34,200,532
========== =========== ===========
Diluted................................................... 4,492,039 19,753,060 34,613,644
========== =========== ===========
The accompanying notes are an integral part of these consolidated financial
statements.
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31
INTEGRATED ELECTRICAL SERVICES, INC., AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE INFORMATION)
(SEE NOTE 1)
RESTRICTED
COMMON STOCK COMMON STOCK ADDITIONAL TOTAL
------------------- ------------------ PAID-IN RETAINED STOCKHOLDERS'
SHARES AMOUNT SHARES AMOUNT CAPITAL EARNINGS EQUITY
---------- ------ --------- ------ ---------- -------- -------------
BALANCE, December 31, 1996............ 4,492,039 $ 45 -- $-- $ 887 $ 7,774 $ 8,706
Net income.......................... -- -- -- -- -- 3,735 3,735
Adjustment for change in fiscal year
of pooled company................. -- -- -- -- -- 195 195
---------- ---- --------- --- -------- ------- --------
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
========== ==== ========= === ======== ======= ========
The accompanying notes are an integral part of these consolidated financial
statements.
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32
INTEGRATED ELECTRICAL SERVICES, INC., AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(SEE NOTE 1)
YEAR ENDED SEPTEMBER 30,
--------------------------------
1997 1998 1999
-------- --------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)......................................... $ 4,375 $ (52) $ 48,107
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Non-cash non-recurring compensation charge.............. -- 17,036 --
Depreciation and amortization........................... 398 5,557 16,947
Gain on sale of property and equipment.................. (140) (177) (198)
Changes in operating assets and liabilities:
(Increase) decrease in:
Accounts receivable, net........................... (3,886) (20,000) (53,585)
Inventories........................................ (1,409) 631 (472)
Costs and estimated earnings in excess of billings
on uncompleted contracts......................... (841) (2,013) (12,656)
Prepaid expenses and other current assets.......... (286) 1,603 (2,333)
Increase (decrease) in:
Accounts payable and accrued expenses.............. 2,379 (1,063) 6,585
Billings in excess of costs and estimated earnings
on uncompleted contracts......................... (747) 4,838 (1,575)
Other current liabilities.......................... 272 (66) (8,829)
Other, net......................................... 210 3,558 1,001
-------- --------- ---------
Net cash provided by (used in) operating activities..... 325 9,852 (7,008)
-------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of property and equipment.............. 84 702 753
Additions of property and equipment....................... (997) (4,352) (12,888)
Purchase of businesses, net of cash acquired.............. (100) (128,735) (106,476)
Collections of notes receivable........................... 77 475 --
Other, net................................................ 21 -- --
-------- --------- ---------
Net cash used in investing activities................... (915) (131,910) (118,611)
-------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings of long-term debt.............................. 10,979 108,026 270,388
Payments of long-term debt................................ (11,545) (47,778) (152,070)
Distributions to stockholders............................. -- (17,758) --
Payments for debt issuance costs.......................... -- (1,516) (5,554)
Proceeds from exercise of stock options................... -- -- 1,203
Proceeds from initial public offering..................... -- 91,513 --
-------- --------- ---------
Net cash provided by (used in) financing activities..... (566) 132,487 113,967
-------- --------- ---------
NET INCREASE (DECREASE) IN CASH............................. (1,156) 10,429 (11,652)
CASH AND CASH EQUIVALENTS, beginning of period.............. 5,310 4,154 14,583
-------- --------- ---------
CASH AND CASH EQUIVALENTS, end of period.................... $ 4,154 $ 14,583 $ 2,931
======== ========= =========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for:
Interest................................................ $ 193 $ 755 $ 11,432
Income taxes............................................ 2,571 10,779 38,214
Non-cash property distribution............................ -- 774 --
The accompanying notes are an integral part of these consolidated financial
statements.
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INTEGRATED ELECTRICAL SERVICES, INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 and cabling contracting and maintenance services, focusing primarily
on the commercial, industrial, residential, power line and information
technology markets.
On January 30, 1998, concurrent with the closing of its initial public
offering (the "IPO" or "Offering") of common stock, IES acquired, in separate
transactions, for consideration including $53.4 million of cash and 12.3 million
shares of common stock, 16 companies and related entities engaged in all facets
of electrical contracting and maintenance services (collectively, the "Founding
Companies" or the "Founding Company Acquisitions"). Subsequent to its IPO, and
through September 30, 1999, the Company acquired 62 additional electrical
contracting and maintenance businesses for approximately $199.5 million of cash
and 14.1 million shares of common stock (the "Acquired Companies"). Of these 62
Acquired Companies, 61 were accounted for using the purchase method of
accounting and one was accounted for using the pooling-of-interests method of
accounting resulting in a restatement of the Company's financial statements for
all periods presented (see Note 3).
The financial statements of the Company for periods prior to January 30,
1998, reflect the historical accounts of Houston-Stafford as the accounting
acquirer as restated for the effect of an acquisition accounted for as a
pooling-of-interests transaction in June 1998. The Founding Companies and IES
are included in the Company's results of operations beginning February 1, 1998,
and the other Acquired Companies beginning on their respective dates of
acquisition. The $18.5 million of distributions to the accounting acquirer
includes $17.8 million of the $53.4 million of cash consideration described
above. Houston-Stafford'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 Houston-Stafford which were
exchanged for cash and shares of IES common stock in connection with the
Founding Company Acquisitions (see Note 11).
In the course of managing its operations, the Company is subject to certain
risk factors, including but not limited to: limited history of combined
operations history, 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 contract performance, recoverability of goodwill, dependence on key
management personnel and Year 2000 risks.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of
IES and its subsidiaries, all of which are wholly owned. 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 current year presentation.
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.
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
31
34
INTEGRATED ELECTRICAL SERVICES, INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
approximately $391,000, $2,148,000 and $6,728,000 for the years ended September
30, 1997, 1998 and 1999, respectively.
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, 1998 and 1999,
accumulated amortization was approximately $3,245,000 and $12,550,000,
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.
Debt Issue Costs
Debt issue costs related to the Company's credit facility (see Note 6) and
its 9 3/8% Senior Subordinated Notes due 2009 (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, 1998 and 1999,
accumulated amortization of debt issue costs were approximately $197,000 and
$1,061,000, 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 generally measured by the percentage of
costs incurred to date to total estimated costs for each contract. 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. Provisions for total estimated losses on
uncompleted contracts are made in the period in which such losses are
determined. Changes in job performance, job conditions, estimated contract costs
and profitability and final contract settlements may result in revisions to
costs and income and their effects 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 is generally 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. 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. An allowance for
warranty costs is recorded based upon the historical level of warranty claims
and management's estimate of future costs.
32
35
INTEGRATED ELECTRICAL SERVICES, INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Accounts Receivable and Allowance 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 no longer probable.
Income Taxes
The Company follows the asset and liability method of accounting for income
taxes in accordance with Statement of Financial Accounting Standards ("SFAS")
No. 109. Under this method, deferred income tax assets and liabilities are
recorded for future 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 generally
accepted accounting principles 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. See the "Revenue Recognition"
section of this footnote for a discussion of certain estimates reflected in the
Company's financial statements.
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 is necessary. The effect of any impairment would be
to expense the difference between the fair value of such property and its
carrying value.
Subsidiary Guaranties
All of the Company's operating income and cash flow is generated by its
wholly owned subsidiaries, which are the subsidiary guarantors of the Company's
outstanding Senior Subordinated Notes. The separate financial statements of the
subsidiary guarantors are not included herein because (i) the Company is a
holding company with no material assets or operations other than its ownership
of its subsidiaries; (ii) the subsidiary guarantors are all of the direct and
indirect subsidiaries of the Company; (iii) the subsidiary guarantors are wholly
owned subsidiaries of the Company and have fully and unconditionally, jointly
and severally guaranteed the Senior Subordinated Notes; (iv) the presentation of
separate financial statements and other disclosures concerning the subsidiary
guarantors is not deemed material. Under the terms of the Senior Subordinated
Notes, any loans between the subsidiary guarantors and the Company must be
subordinated to the Company's senior debt.
Earnings per Share
The Company applies SFAS No. 128, "Earning Per Share," which requires the
presentation of earnings per weighted average outstanding share ("basic") and
earnings per share including potentially dilutive securities such as outstanding
options ("diluted").
For financial statement purposes as required by the rules and regulations of
the Securities Act, Houston-Stafford was identified as the accounting acquirer
in the transaction with IES and its IPO. As such the shares of IES beneficially
owned by the shareholders of Houston-Stafford and the shares issued in the
pooling transaction
33
36
INTEGRATED ELECTRICAL SERVICES, INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
have been used in the calculation of basic and diluted earnings per share of the
Company, for all periods prior to the IPO.
The following table reconciles the numerators and denominators of the basic
and diluted earnings per share for the three years ended September 30, 1997,
1998 and 1999 (in thousands, except share information):
YEAR ENDED SEPTEMBER 30,
--------------------------------------
1997 1998 1999
---------- ----------- -----------
Numerator:
Net income (loss).................................. $ 4,375 $ (52) $ 48,107
Denominator:
Weighted average common shares outstanding --
basic............................................ 4,492,039 19,753,060 34,200,532
Effect of dilutive stock options................... -- -- 413,112
---------- ----------- -----------
Weighted average common shares outstanding --
diluted.......................................... 4,492,039 19,753,060 34,613,644
========== =========== ===========
Earnings (loss) per share:
Basic.............................................. $ 0.97 $ -- $ 1.41
Diluted............................................ $ 0.97 $ -- $ 1.39
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 year ended September 30, 1999, 1.0 million
exercisable stock options 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 the first quarter of 1999 the Company adopted SFAS No. 130 "Reporting
Comprehensive Income," which requires the display of comprehensive income and
its components in the financial statements. Comprehensive income represents all
changes in equity of an entity during the reporting period, except those
resulting from investments by stockholders and distributions to stockholders.
For the three years ended September 30, 1999, there are no material differences
between the Company's historical net income and comprehensive income.
The Company has adopted SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information," which establishes standards for the way
public enterprises are to report information about operating segments in annual
financial statements and requires the reporting of selected information about
operating segments in interim financial reports issued to shareholders.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." In accordance with SFAS No. 137,
"Accounting for Derivative Instruments and Hedging Activities -- Deferral of the
Effective Date FASB Statement No. 133," SFAS No. 133 becomes effective for the
Company for its year ended September 30, 2001. SFAS No. 133 requires a company
to recognize all derivative instruments (including certain derivative
instruments embedded in other contracts) as assets or liabilities in its balance
sheet and measure them at fair value. The statement requires that changes in the
derivatives fair value be recognized currently in earnings unless specific hedge
accounting criteria are met. The Company is evaluating SFAS No. 133 and the
impact on existing accounting policies and financial reporting disclosures.
However, the Company has not to date engaged in activities or entered into
arrangements normally associated with derivative instruments.
34
37
INTEGRATED ELECTRICAL SERVICES, INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
3. BUSINESS COMBINATIONS:
Purchases
Subsequent to the IPO, and through September 30, 1998, IES acquired 20 of
the Acquired Companies in transactions accounted for as purchases. The total
consideration paid in these transactions was approximately $93.0 million in
cash, and 5.2 million shares of Common Stock.
During 1999, the Company acquired 41 of the Acquired Companies in
transactions accounted for as purchases. The total consideration paid in
transactions was approximately $106.5 million in cash, and 7.8 million shares of
Common Stock. The accompanying September 30, 1999, 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 and the Founding Company
acquisitions, goodwill was determined as follows for 1998 and 1999 (in
thousands):
1998 1999
--------- --------
Fair value of assets acquired, net of cash acquired......... $ 143,204 $115,645
Liabilities assumed......................................... (110,677) (77,641)
--------- --------
Net assets acquired, net of cash.......................... 32,527 38,004
--------- --------
Cash paid, net of cash acquired............................. 128,735 106,476
Issuance of common stock.................................... 200,103 115,152
--------- --------
Total consideration paid.................................. 328,838 221,628
--------- --------
Goodwill.................................................... $ 296,311 $183,624
========= ========
Pro Forma Presentation
The unaudited pro forma data presented below reflect the results of
operations of the Company, the Founding Companies and the Acquired Companies
acquired during fiscal 1998 and 1999, and the IPO, assuming the transactions
were completed on October 1, 1997 (in thousands, except per share amounts):
YEAR ENDED
SEPTEMBER 30,
-----------------------
1998 1999
---------- ----------
(UNAUDITED)
Revenues.................................................... $1,158,094 $1,269,083
========== ==========
Net income.................................................. $ 53,542 $ 55,846
========== ==========
Basic earnings per share.................................... $ 1.39 $ 1.45
========== ==========
Diluted earnings per share.................................. $ 1.37 $ 1.43
========== ==========
The unaudited pro forma data summarized above also includes pro forma
adjustments primarily related to: reductions in general and administrative
expenses for contractually agreed reductions in owners' compensation, reversal
of the $17.0 million non-cash, non-recurring compensation charge (see Note 1),
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 current effective 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, 1997 and are not necessarily
representative of the Company's results of operations for any future period.
35
38
INTEGRATED ELECTRICAL SERVICES, INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Pooling
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 Opinion No. 16. Allen, headquartered in Charleston,
South Carolina, provides electrical contracting and maintenance services. IES
issued 1,140,000 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.
The following table summarizes the unaudited restated revenues, net income
and per share data of the Company after giving effect to the acquisition of
Allen (in thousands, except per share data):
YEAR ENDED
SEPTEMBER 30, 1997
---------------------
REVENUES NET INCOME
-------- ----------
Revenues and net income:
As previously reported.................................... $ 81,575 $3,316
Pooled Company............................................ 35,536 1,059
-------- ------
As restated............................................... $117,111 $4,375
======== ======
Earnings per share:
As previously reported.................................... $ .99
Pooled Company............................................ (.02)
------
As restated............................................... $ .97
======
The unaudited revenues and net income of Allen for the pre-combination
period in 1998 were $20.5 million and $1.3 million, respectively.
4. PROPERTY AND EQUIPMENT:
Property and equipment consists of the following (in thousands):
ESTIMATED SEPTEMBER 30,
USEFUL LIVES ------------------
IN YEARS 1998 1999
------------ ------- --------
Land....................................................... N/A $ 1,523 $ 2,586
Buildings.................................................. 5-32 585 2,353
Transportation equipment................................... 3-5 12,692 23,212
Machinery and equipment.................................... 3-10 9,926 21,807
Leasehold improvements..................................... 5-32 2,888 5,843
Furniture and fixtures..................................... 5-7 3,170 5,330
------- --------
30,784 61,131
Less -- Accumulated depreciation and amortization.......... (7,348) (13,763)
------- --------
Property and equipment, net....................... $23,436 $ 47,368
======= ========
36
39
INTEGRATED ELECTRICAL SERVICES, INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
5. DETAIL OF CERTAIN BALANCE SHEET ACCOUNTS:
Activity in the Company's allowance for doubtful accounts receivable
consists of the following (in thousands):
SEPTEMBER 30,
---------------
1998 1999
------ ------
Balance, beginning of period................................ $ 537 $4,160
Additions from the Acquired Companies (except Allen)...... 3,534 1,169
Provision for uncollectible amounts....................... 261 871
Uncollectible receivables written off, net of
recoveries.............................................. (172) (491)
------ ------
Balance at end of period.................................... $4,160 $5,709
====== ======
Accounts payable and accrued liabilities consist of the following (in
thousands):
SEPTEMBER 30,
------------------
1998 1999
------- --------
Accounts payable, trade..................................... $40,913 $ 68,665
Accrued compensation and benefits........................... 8,536 24,546
Other accrued liabilities................................... 19,776 22,910
------- --------
$69,225 $116,121
======= ========
Contracts in progress are as follows (in thousands):
SEPTEMBER 30,
--------------------
1998 1999
-------- ---------
Costs incurred on contracts in progress..................... $399,797 $ 689,132
Estimated earnings.......................................... 85,682 149,548
-------- ---------
485,479 838,680
Less -- Billings to date.................................... (500,784) (835,595)
-------- ---------
$(15,305) $ 3,085
======== =========
Costs and estimated earnings in excess of billings on
uncompleted contracts..................................... $ 12,502 $ 40,592
Less -- Billings in excess of costs and estimated earnings
on uncompleted contracts.................................. (27,807) (37,507)
-------- ---------
$(15,305) $ 3,085
======== =========
37
40
INTEGRATED ELECTRICAL SERVICES, INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
6. DEBT:
Debt consists of the following (in thousands):
SEPTEMBER 30,
------------------
1998 1999
------- --------
Secured credit facility with a bank group, due July 30,
2001, at a weighted average interest rate of 6.65%.......... $89,500 $ 76,980
Note payable to an officer, dated January 1998, payable on
demand, including interest at 7%.......................... 3,149 --
Senior Subordinated Notes, due February 1, 2009, bearing
interest at 9 3/8% with an effective interest rate of
9 1/2%.................................................... -- 150,000
Various capital lease obligations........................... 941 405
Other notes payable......................................... 587 2,159
------- --------
94,177 229,544
Less -- short-term debt and current maturities of long-term
debt...................................................... (3,823) (1,444)
Less -- unamortized discount on Senior Subordinated Notes... -- (1,151)
------- --------
Total long-term debt............................... $90,354 $226,949
======= ========
Principal payments due on long-term debt at September 30, are as follows (in
thousands):
2000........................................................ $ 1,444
2001........................................................ 77,787
2002........................................................ 181
2003........................................................ 41
2004........................................................ 30
Thereafter.................................................. 150,061
--------
Total.............................................. $229,544
========
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, acquisitions and other corporate
purposes. 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 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 and 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, 1999. As of
September 30, 1999, the Company had outstanding indebtedness of $77.0 million
under its Credit Facility, letters of credit outstanding under its Credit
Facility of $2.2 million, and available borrowing capacity under its Credit
Facility of $95.8 million.
38
41
INTEGRATED ELECTRICAL SERVICES, INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Senior Subordinated Notes
In January, 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 began paying interest semi-annually
beginning on August 1, 1999. The Senior Subordinated Notes are unsecured senior
obligations and are subordinated to all existing and future senior indebtedness.
The Senior Subordinated Notes are guaranteed on the same 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.
7. LEASES:
The Company leases various operating 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 exceeding one year are as follows (in thousands):
YEAR ENDED SEPTEMBER 30,
2000........................................................ $ 5,301
2001........................................................ 4,858
2002........................................................ 4,347
2003........................................................ 3,243
2004........................................................ 2,043
Thereafter.................................................. 3,187
-------
$22,979
=======
Rental expense for the years ended September 30, 1997, 1998 and 1999, was
approximately $206,000, $2,033,000 and $4,849,000, respectively.
8. INCOME TAXES:
Federal and state income tax provisions are as follows (in thousands):
YEAR ENDED SEPTEMBER 30,
--------------------------
1997 1998 1999
------ ------- -------
Federal:
Current................................................... $2,691 $11,952 $33,317
Deferred.................................................. (149) (712) (2,558)
State:
Current................................................... 400 1,616 4,819
Deferred.................................................. (19) (166) (230)
------ ------- -------
$2,923 $12,690 $35,348
====== ======= =======
39
42
INTEGRATED ELECTRICAL SERVICES, INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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):
YEAR ENDED SEPTEMBER 30,
--------------------------
1997 1998 1999
------ ------- -------
Provision at the statutory rate............................. $2,554 $ 4,423 $29,209
Increase resulting from:
Non-deductible expenses --
Non-cash, non-recurring compensation charge............. -- 5,963 --
Goodwill amortization................................... -- 1,103 2,838
State income taxes, net of benefit for federal
deduction............................................... 219 942 2,983
Other..................................................... 150 259 318
------ ------- -------
$2,923 $12,690 $35,348
====== ======= =======
Deferred income tax provisions result from temporary differences in the
recognition of income and expenses for financial reporting purposes and for tax
purposes. The tax effects of these temporary differences, representing deferred
income tax assets and liabilities, result principally from the following (in
thousands):
YEAR ENDED
SEPTEMBER 30,
------------------
1998 1999
------- --------
Deferred income tax assets:
Allowance for doubtful accounts........................... $ 1,029 $ 2,028
Inventory................................................. 240 179
Accrued expenses.......................................... 1,758 7,944
Other..................................................... 521 1,528
------- --------
Total deferred income tax assets................... 3,548 11,679
------- --------
Deferred income tax liabilities:
Property, equipment and goodwill.......................... (1,438) (4,783)
Deferred contract revenue and other....................... (3,089) (6,625)
------- --------
Total deferred income tax liabilities.............. (4,527) (11,408)
------- --------
Net deferred income tax assets (liabilities)....... $ (979) $ 271
======= ========
The net deferred income tax assets and liabilities are comprised of the
following (in thousands):
SEPTEMBER 30,
-----------------
1998 1999
------- -------
Current deferred income taxes:
Asset..................................................... $ 3,038 $10,186
Liability................................................. (2,712) (5,198)
------- -------
326 4,988
------- -------
Long-term deferred income taxes:
Asset..................................................... $ 509 $ 1,493
Liability................................................. (1,814) (6,210)
------- -------
(1,305) (4,717)
------- -------
Net deferred income tax assets (liabilities)....... $ (979) $ 271
======= =======
9. OPERATING SEGMENTS:
The Company operates in one reportable segment as a specialty contractor.
The Company provides electrical and cabling contracting and maintenance services
to the commercial, industrial, residential, service,
40
43
INTEGRATED ELECTRICAL SERVICES, INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
power line and information technology markets. Services to each of these markets
are provided by various of the Company's subsidiaries. The Company has not
disaggregated the services into more than one segment because the chief
operating decision maker analyzes the Company as an electrical contracting and
cabling business and operating statistics are prepared considering the Company
as one segment. The following table presents revenues derived from each of the
services noted above (in thousands):
YEAR ENDED SEPTEMBER 30,
--------------------------------
1997 1998 1999
-------- -------- ----------
Commercial................................................. $ 35,536 $193,361 $ 464,181
Industrial................................................. -- 61,875 252,159
Residential................................................ 81,575 96,680 175,978
Service.................................................... -- 34,805 69,370
Power Line................................................. -- -- 38,922
Information Technology..................................... -- -- 35,278
-------- -------- ----------
Total revenues.................................... $117,111 $386,721 $1,035,888
======== ======== ==========
The Company does not have operations or long-lived assets in countries
outside of the United States.
10. STOCKHOLDERS' EQUITY:
Restricted Common Stock
The shares of restricted 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 one share
of common stock upon disposition by the holder of such shares.
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 the greater of 3.5
million shares or 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. The Company has
filed a registration statement on Form S-8 under the Securities Act of 1933
registering the issuance of shares upon exercise of options granted under this
Plan. Options generally vest at the rate of either 20 or 33 percent per year,
commencing on the first anniversary of the grant date and will expire 10 years
from the date of grant, three months following termination of employment by
means other than death or disability, or one year following termination of
employment due to either death or disability.
Director's 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. The
number of shares authorized and reserved for issuance under the Directors' Plan
is 250,000 shares. Each nonemployee director is granted options to purchase an
additional 5,000 shares at the time of an initial election of such director. In
addition, each director will be automatically granted options to purchase 5,000
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 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.
41
44
INTEGRATED ELECTRICAL SERVICES, INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
As of September 30, 1999, the Company had total outstanding options under
these plans to purchase up to a total of approximately 3,750,457 shares of
common stock.
The following table summarizes activity under the Company's stock option
plans:
WEIGHTED AVERAGE
SHARES EXERCISE PRICE
--------- ----------------
Outstanding, September 30, 1997............................. -- --
Granted (range of exercise prices, $7.80 to $22.125)...... 3,464,014 $13.99
Forfeited (range of exercise prices, $13.00 to $22.125)... (225,063) 13.14
--------- ------
Outstanding, September 30, 1998............................. 3,238,951 13.48
Granted (range of exercise prices, $13.125 to $21.9375)... 1,248,125 16.93
Exercised (range of exercise prices, $7.80 to $13.00)..... (316,312) 9.55
Forfeited (range of exercise prices, $13.00 to $22.125)... (420,307) 15.20
--------- ------
Outstanding, September 30, 1999............................. 3,750,457 $14.81
========= ======
Exercisable, September 30, 1999............................. 759,656 $14.17
========= ======
Unexercised options expire at various dates from September 4, 2007 through
September 30, 2009.
The Company follows APB No. 25 in accounting for stock options issued to
employees. Under APB 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 No.
25, the company must also disclose the effects on its results of operations as
if an estimate of the value of stock-based compensation at the date of grant had
been recorded as an expense. The following compares the Company's reported
income and earnings per share to pro forma estimates of these amounts assuming
that the Company had expensed the estimated fair value (using the Black-Scholes
option pricing model) of options provided to its employees over the applicable
vesting period.
YEAR ENDED
SEPTEMBER 30,
-----------------
1998 1999
------- -------
Net income (loss) As reported......................... $ (52) $48,107
Pro forma for SFAS No. 123.......... $(2,173) $42,720
Basic earnings (loss) per share As reported......................... $ -- $ 1.41
Pro forma for SFAS No. 123.......... $ (0.11) $ 1.25
Diluted earnings (loss) per share As reported......................... $ -- $ 1.39
Pro forma for SFAS No. 123.......... $ (0.11) $ 1.23
The effects of applying SFAS No. 123 in the above pro forma disclosure may
not be indicative of future amounts since additional future awards are
anticipated and the Black-Scholes option pricing model involves subjective
assumptions which may vary materially as a result of actual events.
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:
SEPTEMBER 30,
-------------------
1998 1999
-------- --------
Expected dividend yield..................................... 0.00% 0.00%
Expected stock price volatility............................. 53.20% 52.23%
Weighted average risk free interest rate.................... 5.55% 5.24%
Expected life of options.................................... 6 years 6 years
Options outstanding at September 30, 1999, had exercise prices ranging from
$7.80 to $22.125, a weighted average remaining contractual life of 8.7 years and
a weighted average fair value of $9.45 per option.
42
45
INTEGRATED ELECTRICAL SERVICES, INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Initial Public Offering
On January 30, 1998, the Company completed its initial public offering,
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 the sale of $12.7 million.
11. RELATED-PARTY TRANSACTIONS:
The Company has transactions in the normal course of business with certain
affiliated parties. Amounts due from related parties at September 30, 1998 and
1999 were $242,000 and $220,000, respectively. Certain of the Founding and
Acquired Companies have entered into a number of lease arrangements with their
former owners for facilities used in their operations. These lease agreements
are for periods generally ranging from three to five years and are on terms
considered to be comparable to non-related party leases. Lease payments for the
years ended September 30, 1997, 1998 and 1999 were $216,000, $1,648,000, and
$2,850,000 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 agreed to purchase the stock of an officer for a
selling price of $800,000. The Company signed an installment promissory note
that provided for the payout of $800,000 over seven years at 8 percent interest,
secured by the purchased stock. Subsequent to the August 1996 transaction, the
executive remained an officer of the Company and was paid cash compensation of
approximately $372,000 during the last four months of 1996 and approximately
$252,000 during the first nine months of 1997. These amounts have been reflected
as compensation expense in the accompanying income statements for the applicable
periods. 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, representing the difference in the carrying amount of the note and the
consideration paid.
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. The Company provides a discretionary
matching of employee contributions. 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 board of directors.
The aggregate contributions to the 401(k) Plan and the Plans were $100,000,
$1,127,000 and $1,460,000 for the years ended September 30, 1997, 1998 and 1999,
respectively.
13. FAIR VALUE OF FINANCIAL INSTRUMENTS:
The Company's financial instruments consist of cash and cash equivalents,
accounts receivable, receivables from related parties, other receivables,
accounts payable, the Credit Facility, the Senior Subordinated Notes and
long-term debt. The Company's Senior Subordinated Notes have a face value of
$150.0 million and a fair value of $147.0 million. This difference is primarily
related to increases in prevailing market interest rates. Other than the Senior
Subordinated Notes, the Company believes that the carrying value of its other
instruments on the accompanying consolidated balance sheets approximates their
fair value.
43
46
INTEGRATED ELECTRICAL SERVICES, INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
14. COMMITMENTS AND CONTINGENCIES:
Litigation
The Company and its 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 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.
Insurance
The Company carries a broad range of insurance coverage, including business
auto liability, general liability, commercial property, workers' compensation
and general umbrella policy. The Company has not incurred significant uninsured
losses on any of these items.
15. 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 home builders 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 minimize any potential credit risk.
The Company routinely maintains cash balances in financial institutions in
excess of federally insured limits.
16. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED):
Quarterly financial information for the years ended September 30, 1998 and
1999 are summarized as follows (in thousands, except per share data):
FISCAL YEAR ENDED SEPTEMBER 30, 1998
------------------------------------------
DECEMBER MARCH JUNE SEPTEMBER
QUARTER QUARTER QUARTER QUARTER
-------- -------- -------- ---------
Revenues................................ $31,799 $ 72,534 $115,287 $167,101
Gross profit............................ $ 6,537 $ 15,670 $ 23,993 $ 34,469
Non-cash, non-recurring compensation
charge................................ $ -- $ 17,036 $ -- $ --
Net income (loss)....................... $ (681) $(13,842) $ 6,381 $ 8,090
Earnings (loss) per share:
Basic................................. $ (.15) $ (.76) $ .24 $ .28
Diluted............................... $ (.15) $ (.76) $ .24 $ .28
44
47
INTEGRATED ELECTRICAL SERVICES, INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The quarterly information for the fiscal year ended September 30, 1998, has
been restated to include the results of operations of Allen.
FISCAL YEAR ENDED SEPTEMBER 30, 1999
------------------------------------------
DECEMBER MARCH JUNE SEPTEMBER
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................................ $ .29 $ .30 $ .39 $ .41
Diluted.............................. $ .29 $ .30 $ .39 $ .41
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.
17. SUBSEQUENT EVENTS:
Subsequent to September 30, 1999, and through November 9, 1999, the Company
acquired two companies for an aggregate consideration of approximately 0.7
million shares of common stock and $10.9 million in cash, net of cash acquired.
The cash portion of such consideration was provided by borrowings under the
Company's credit facility and cash on hand.
18. EVENTS SUBSEQUENT TO DATE OF AUDITORS' REPORT (UNAUDITED):
Subsequent to November 9, 1999, and through December 14, 1999, the Company
acquired one company for consideration of approximately 0.1 million shares of
common stock and $1.0 million in cash, net of cash acquired. The cash portion of
such consideration was provided by cash on hand.
45
48
ITEM 9.CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The other information required by this item is incorporated by reference
from the sections entitled "Election of Directors" 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, 2000.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item is incorporated by reference from the
section entitled "Election of Directors" in the Proxy Statement. Nothing in this
report shall be construed to incorporate by reference the Board Compensation
Committee Report on Executive Compensation or the Performance Graph 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) Reports on Form 8-K.
A report on Form 8-K was filed with the SEC on July 27, 1999, in
connection with the acquisition by the Company of a business.
A report on Form 8-K was filed with the SEC on September 24, 1999, in
connection with the acquisition by the Company of a business.
(c) Exhibits.
EXHIBIT
NUMBER TITLE
------- -----
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.
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)
46
49
EXHIBIT
NUMBER TITLE
------- -----
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)
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.
(Incorporated by reference to 10.3 to the Registration
Statement on Form S-1 (File No. 333-38715) of the
Company)
10.4 -- Integrated Electrical Services, Inc. 1997 Directors Stock
Plan. (Incorporated by reference to 10.4 to the
Registration Statement on Form S-1 (File No. 333-38715)
of the Company)
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-4 (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 -- Transfer Restriction Agreements dated as September 30,
1999.
*21.1 -- List of Subsidiaries.
*23.1 -- Consent of Arthur Andersen LLP.
*27.1 -- Financial Data Schedule
- ---------------
* Filed herewith.
47
50
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 15, 1999.
INTEGRATED ELECTRICAL SERVICES, INC.
By: /s/ JIM P. WISE
-----------------------------------
Jim P. Wise
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 15, 1999.
SIGNATURE TITLE
--------- -----
/s/ JIM P. WISE Chief Executive Officer and Director
- -----------------------------------------------------
Jim P. Wise
/s/ STANLEY H. FLORANCE Chief Financial Officer
- -----------------------------------------------------
Stanley H. Florance
/s/ DONALD PAUL HODEL Director
- -----------------------------------------------------
Donald Paul Hodel
/s/ JERRY M. MILLS Director
- -----------------------------------------------------
Jerry M. Mills
/s/ BEN L. MUELLER Senior Vice President and Chief Operating
- ----------------------------------------------------- Officer -- Residential and Director
Ben L. Mueller
/s/ RICHARD MUTH Director
- -----------------------------------------------------
Richard Muth
/s/ JON POLLOCK Vice Chairman of the Board of Directors
- -----------------------------------------------------
Jon Pollock
/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
48
51
SIGNATURE TITLE
--------- -----
/s/ BOB WEIK Director
- -----------------------------------------------------
Bob Weik
/s/ NEIL DEPASCAL, JR. Vice President and Chief Accounting Officer
- -----------------------------------------------------
Neil DePascal, Jr.
49
52
EXHIBIT INDEX
EXHIBIT
NUMBER TITLE
------- -----
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.
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)
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.
(Incorporated by reference to 10.3 to the Registration
Statement on Form S-1 (File No. 333-38715) of the
Company)
10.4 -- Integrated Electrical Services, Inc. 1997 Directors Stock
Plan. (Incorporated by reference to 10.4 to the
Registration Statement on Form S-1 (File No. 333-38715)
of the Company)
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-4 (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 -- Transfer Restriction Agreements dated as September 30,
1999.
*21.1 -- List of Subsidiaries.
*23.1 -- Consent of Arthur Andersen LLP.
*27.1 -- Financial Data Schedule
- ---------------
* Filed herewith.