As filed with the Securities and Exchange Commission on October 12, 2005
Registration No. 333-125168
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Amendment No. 1
to
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
Integrated Electrical Services, Inc.
(Exact name of registrant as specified in its charter)
Delaware | 1731 | 76-0542208 | ||
(State or other jurisdiction of incorporation or organization) |
(Primary Standard Industrial Classification Code Number) |
(I.R.S. Employer Identification No.) |
1800 West Loop South
Suite 500
Houston, Texas 77027-3233
(713) 860-1500
(Address, including zip code, and telephone number, including
area code, of registrants principal executive offices)
C. Byron Snyder
President and Chief Executive Officer
1800 West Loop South
Suite 500
Houston, Texas 77027-3233
(713) 860-1500
(Name, address, including zip code, and telephone number, including area code, of agent for service)
Copy to:
Andrews Kurth LLP
600 Travis, Suite 4200
Houston, Texas 77002
(713) 220-4200
Attn: G. Michael OLeary
Henry Havre
Approximate date of commencement of proposed sale to the public: As soon as practicable after this Registration Statement becomes effective.
If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, please check the following box. x
If this form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. ¨
If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. ¨
If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. ¨
If delivery of the prospectus is expected to be made pursuant to Rule 434, please check the following box. ¨
CALCULATION OF REGISTRATION FEE
Title of Each Class of Securities to be Registered |
Amount to be Registered (1) |
Proposed Maximum Price (2) |
Amount of Registration Fee | |||
Common Stock, par value $0.01 |
15,384,615 | $25,692,307.05 | $3,023.98(3) | |||
(1) | Pursuant to Rule 416 under the Securities Act of 1933, this registration statement also covers such number of additional shares of common stock to be issued resulting from stock splits, stock dividends or similar transactions. |
(2) | Estimated solely for the purpose of calculating the registration fee in accordance with Rule 457(o) under the Securities Act 1933. |
(3) | The registrant has previously paid fees of $3,023.98. |
The Registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until the Registration Statement shall become effective on such date as the Commission, acting pursuant to said Section 8(a), may determine.
The information in this prospectus is not complete and may be changed. Integrated Electrical Services may not sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This prospectus is not an offer to sell these securities and it is not soliciting an offer to buy these securities in any state where the offer or sale is not permitted.
SUBJECT TO COMPLETION DATED OCTOBER 12, 2005
15,384,615 Shares
Integrated Electrical Services, Inc.
Common Stock
This prospectus relates to the resale by selling stockholders of up to an aggregate of 15,384,615 shares of our common stock, par value $0.01 per share, which offered shares are issuable to the selling stockholders upon conversion or repurchase of our 6.5% senior convertible notes due 2014. See Principal and Selling Stockholders.
Our common stock is traded on the New York Stock Exchange under the symbol IES. On October 7, 2005, the last reported sales price of our common stock was $2.56 per share.
Investing in our common stock involves risk. See Risk Factors beginning on page 3.
Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense.
The date of this prospectus is October 12, 2005
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MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
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SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT |
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UNITED STATES FEDERAL TAX CONSIDERATIONS FOR NON-UNITED STATES HOLDERS |
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F-1 |
You should rely only on the information contained in this prospectus or to which we have referred you. We have not authorized anyone to provide you with information that is different. This document may only be used where it is legal to sell these securities. The information in this document may only be accurate on the date of this document.
This prospectus includes market share and industry data and forecasts that we obtained from internal company surveys, market research, consultant surveys, publicly available information and industry publications and surveys.
In this prospectus, we use the terms Integrated Electrical Services, IES, we, us and our to refer to Integrated Electrical Services, Inc. together with its subsidiaries unless the context otherwise requires. These terms also refer to our subsidiaries unless the context otherwise requires.
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This summary highlights information contained elsewhere in this prospectus. You should read the entire prospectus carefully, including the risks discussed in the Risk Factors section, the historical financial statements and notes to those financial statements. This summary does not contain all of the information that investors should consider before investing in our common stock.
Our Company
We are a provider of electrical contracting services in the United States. We provide a broad range of services including designing, building, maintaining and servicing electrical, data communications and utilities systems for commercial, industrial and residential customers.
Our electrical contracting services include design of the electrical distribution systems within a building or complex, procurement and installation of wiring and connection to power sources, end-use equipment and fixtures as well as long-term contract maintenance. We service commercial, industrial, and residential markets and have a diverse customer base including: general contractors; property managers and developers; corporations; government agencies and municipalities; and homeowners. We provide services for a variety of projects including: high-rise residential and office buildings, power plants, manufacturing facilities, municipal infrastructure and health care facilities and residential developments. We also offer low voltage contracting services as a complement to our electrical contracting business. Our low voltage services include design and installation of external cables for corporations, universities, data centers and switching stations for data communications companies as well as the installation of fire and security alarm systems. Our utility services consist of overhead and underground installation and maintenance of electrical and other utilities transmission and distribution networks, installation and splicing of high-voltage transmission and distribution lines, substation construction and substation and right-of-way maintenance. Our maintenance services generally provide recurring revenues that are typically less affected by levels of construction activity. We also perform projects that require special expertise, such as design-and-build projects that utilize the capabilities of our in-house engineers or projects that require specific market expertise such as hospitals or power generation facilities, as well as service, maintenance and certain renovation and upgrade work, which tends to either be recurring, have lower sensitivity to economic cycles, or both.
Since our incorporation in 1997, we have expanded to approximately 140 locations currently serving the continental 48 states. This expansion was accomplished through acquisition and internal growth and does not include locations associated with recent divestitures. From 1997 to 2004, revenues for our businesses increased at a compounded annual growth rate of approximately 24%. Included in that growth was approximately five percent organic or same store sales growth. This includes a decline in our revenue base between 2002 and 2004 of approximately seven percent due to market conditions and strategic divestitures. From 1997 to 2004, excluding discontinued operations, our revenues increased at a compounded growth rate of approximately 21%. In 2003 and 2004, we continued to focus internally on integrating our information systems and established a regionally based management structure to enhance operating controls at all levels of our organization, as well as integrating a consolidated procurement program and structure to manage customers and vendors on a national basis.
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Recent Developments
On October 4, 2005, Moodys Investors Service, or Moodys, downgraded our corporate family credit rating and its credit rating of our long-term debt. Additionally, Moodys changed its ratings outlook from negative to stable. Moodys stated that its downgrades reflect the difficulty IES has had in returning to profitability and in generating positive cash flow and that it is concerned that our reduced access to surety bonding limits our ability to bid on larger projects and, thereby, our ability to grow. Moodys stated that the ratings outlook was revised upward reflecting, in part, our adequate liquidity relative to our obligations.
The Offering
We are registering an aggregate of 15,384,615 shares of common stock of Integrated Electrical Services, Inc., to be offered for sale by certain of our stockholders. The offered shares are issuable upon the conversion or repurchase of our 6.5% senior convertible notes due 2014. In order to estimate the number of shares of common stock issuable to the selling stockholders, we have made several assumptions. We have assumed that (1) all of the convertible notes are converted into shares of our common stock, (2) no make-whole premium is paid, (3) no redemption premium is paid, (4) the conversion price for all convertible notes is $3.25 and (5) interest on the convertible notes is paid on each semi-annual interest date, and as such, there is not a restriction on the number of shares we can so issue. These assumptions are necessary to estimate the number of shares to register for resale. These assumptions may not occur exactly as assumed. It is possible that more than the shares of common stock we estimate to be issued will be issued. To the extent the number of shares we issue to the selling stockholders exceeds the number of shares registered pursuant to the registration statement, of which this prospectus forms a part, we will need to file an additional registration statement to register those additional shares.
Use of Proceeds
We will not receive any of the proceeds from the sale of the offered shares by the selling stockholders. The proceeds from our sale of the senior convertible notes were used by us to pay down indebtedness under our then-existing credit facility ($40.8 million) and for general working capital purposes ($9.2 million).
The proceeds from our sale of the senior convertible notes were used to repay indebtedness under our credit facility and for general corporate purposes.
How You Can Contact Us
Our principal executive offices are located at 1800 West Loop South, Suite 500, Houston, Texas 77027, and our telephone number is (713) 860-1500.
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You should consider carefully the risks described below, as well as the other information included in this prospectus, before making an investment decision. Our business, results of operations or financial condition could be materially and adversely affected by any of these risks, and the value of your investment may decrease due to any of these risks.
Risks Related to Our Business
Downturns in construction could adversely affect our business because more than half of our business is dependent on levels of new construction activity.
More than half of our business involves the installation of electrical systems in newly constructed and renovated buildings, plants and residences. The construction industry is cyclical and 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, which will likely correlate with the cyclical nature of the construction industry. The number of new building starts will be affected by local economic conditions, and other factors, including the following:
| employment and income levels; |
| interest rates and other factors affecting the availability and cost of financing; |
| tax implications for homebuyers and commercial construction; |
| consumer confidence; |
| housing demand; and |
| cost of materials used in construction such as steel, copper, lumber and fuel. |
Additionally, a majority of our business is focused in the southeastern and southwestern portions of the United States, concentrating our exposure to local economic conditions in those regions. Downturns in levels of construction or housing starts in these geographic areas could result in a material reduction in our activity levels.
The highly competitive nature of our industry could affect our profitability by reducing our profit margins.
The electrical contracting industry is served by many small, owner-operated private companies, public companies and several large regional companies. We could also face competition in the future from new competitors entering these markets. Some of our competitors offer a greater range of services, including mechanical construction, facilities management, plumbing and heating or 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, higher bonding limits, or lower bonding costs and may, therefore, be able to provide services comparable to ours at lower rates than we do. If we are unable to offer our services at competitive prices or if we have to reduce our prices to remain competitive, our profitability would be impaired.
Our independent auditors identified material weaknesses in our internal control over financial reporting that could result in misstatements in our financial statements that may be material.
On August 13, 2004, we announced that we would be unable to timely file our quarterly report on Form 10-Q for the quarterly period ended June 30, 2004. An investigation of the factors surrounding certain identified material weaknesses in our internal controls and the accounting for an investment resulted in our restating earnings for the six months ended March 31, 2004, and the years ended September 30, 2002 and 2003. While management has implemented changes to its internal controls procedures as a result of its findings, the identification in the future of additional weaknesses in our internal controls could result in a material adverse effect on our business, financial condition and results of operations. As of the date of this registration statement, of which this prospectus forms a part, we do not believe that the material weakness relating to the timely updating of estimated costs to complete contracts has been fully remediated. If we are not able to remediate this weakness, we may not be able to prevent or detect a material misstatement of our financial results.
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The material weaknesses in our internal controls that were identified by Ernst & Young, our independent auditors, relate to two deficiencies in the design of our internal controls:
| First, at one subsidiary, certain administrative costs were inappropriately recorded as additional contract costs on a large cost-plus contract, which resulted in the deferral of expenses and overstatement of revenues for the first quarter of fiscal 2002. Additionally, the subsidiary recorded margin on that same contract of up to 8% when the contract only allowed for costs plus a maximum of 6%. |
| Second, we recorded an additional $4.3 million in adjustments to contract cost, reversal of revenue and other issues. The auditors concluded that our lack of timely updating of estimated costs to complete contracts and lack of monitoring revenue recognition policies was a deficiency and material weakness. |
Our management has instituted a number of measures to address the deficiencies raised by our independent auditors. We expect that further training, process improvement, and monitoring of compliance with our revenue recognition policies is required to remediate this material weakness. Our auditors concur that these steps are required to fully remediate the material weakness and include their suggestions.
During the second quarter 2005, we received a letter from our independent auditors identifying a material weakness in our internal control over financial reporting that relates to the operation of our financial reporting process, including an under resourced accounting staff that prevents adequate review and supervision, and the lack of certain management review during the financial reporting process. Our management is taking steps and instituting processes to remediate this material weakness. As of the date of the registration statement, of which this prospectus forms a part, we do not believe that this material weakness has been remediated. If we are not able to remediate this weakness, we may not be able to prevent or detect a material misstatement of our financial results.
There is currently a shortage of qualified electricians. Since the majority of our work is performed by electricians, this shortage may negatively affect our business, including our ability to grow.
There is currently a shortage of qualified electricians in the United States. In order to conduct our business, it is necessary to employ electricians and have those electricians qualified in the states where they do business. While overall economic growth has diminished, our ability to increase productivity and profitability may be limited by our ability to employ, train and retain skilled electricians required to meet our needs. Accordingly there can be no assurance, among other things, that:
| we will be able to maintain the skilled labor force necessary to operate efficiently; |
| our labor expenses will not increase as a result of a shortage in the skilled labor supply; and |
| we will be able to maintain the skilled labor force necessary to implement our planned internal growth. |
We depend on our employees to correctly estimate our costs for each job and to execute each job effectively and efficiently. The use of incorrect estimates or materially inefficient execution could result in losses on a fixed price contract. These losses could be material to our business.
We currently generate, and expect to continue to generate, more than half of our revenues under fixed price or guaranteed maximum price contracts. The cost of labor or materials may vary from the costs we originally estimate. Variations from estimated contract costs and failures to perform at acceptable levels of productivity 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 a fiscal quarter or year. We must estimate the costs of completing a particular project to bid for these fixed price contracts and the final costs may be higher than expected resulting in a smaller than expected profit margin or even a loss. Provisions for total estimated losses on uncompleted contracts are made in the period in which such losses are determined.
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We may experience difficulties in managing internal growth and change.
We expect to expend significant time and effort managing and changing existing operations. We cannot guarantee that our systems, procedures and controls will be adequate to support our operations, including the timely receipt of financial information. Growth and change impose significant added responsibilities on our senior management, such as the need to identify, recruit and integrate new senior managers and executives. If we are unable to manage our change in operations size, or if we are unable to attract and retain additional qualified management, our operations could be materially adversely affected.
We restated our earnings for the six months ended March 31, 2004, and the years ended September 30, 2002 and 2003. If we are required to restate our financial results in the future, our stock price could be adversely affected.
As a result of an investigation into our internal controls and procedures and our accounting for an investment, which resulted in our independent auditors determining that we had certain material weaknesses in our internal controls, we restated our earnings for the six months ended March 31, 2004, and the years ended September 30, 2002 and 2003. As of the date of the registration statement, of which this prospectus forms a part, we do not believe that the material weaknesses that were discovered in the investigation into our internal controls and procedures have been fully remediated. The identification in the future of weaknesses in our internal controls could require us to restate our financial statements. Any restatement of our financial results could adversely affect our stock price.
We may experience difficulties in managing our working capital.
Over half of our contracts are billed under fixed price arrangements, which are generally based upon achieving certain benchmarks and the work being accepted by our customers. If we are unable to demonstrate compliance with predetermined billing criteria our likelihood of collection could be delayed or impaired. If this were to occur over several large projects, it could have a materially adverse effect on our cash flows and our results of operations.
To service our indebtedness and to fund working capital, we 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 future 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. As of September 30, 2005, the amount of interest we are required to pay in cash under our senior subordinated notes due in February 2009 and our 6.5% senior convertible notes due 2014 is approximately $19.5 million. We expect capital expenditures of $8.0 million for the fiscal year ended September 30, 2006. Under our new credit facility, as amended, we are required to post approximately $6.3 million of additional cash collateral. Furthermore, we may be required to post additional cash collateral with our surety providers, our bank and our insurance carriers in the future.
Without continued sale of assets, we cannot provide assurance that our remaining business will generate sufficient cash flow from operations or asset sales and 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 provide assurance that we will be able to refinance any of our indebtedness on commercially reasonable terms or at all. Our inability to refinance our debt on commercially reasonable terms could materially adversely affect our business.
We have a substantial amount of debt. Our current debt level could limit our ability to fund future working capital needs and increase our exposure during adverse economic conditions.
Our indebtedness could have important consequences. For example, it could:
| increase our vulnerability to adverse operational performance and economic and industry conditions; |
| limit our ability to fund future working capital, capital expenditures and other general corporate requirements; |
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| limit our flexibility in planning for, or reacting to, changes in our business and the industry in which we operate; |
| restrict our ability to obtain surety bonds; |
| place us at a disadvantage compared to competitors that are less leveraged in the view of potential lenders or surety bonding companies; and |
| limit our ability to borrow additional funds. |
Additionally, a default or event of default under any one of our credit or debt agreements can immediately or with the passage of time, depending on the provision, result in a cross-default in all of our other credit and debt agreements and trigger rights such as acceleration of payment obligations. To cure such cross-defaults could require multiple amendments or waivers under the various agreements. Such amendments or waivers may not be available or the terms may not be attractive to us or we may not have sufficient ability to cure such cross-accelerated defaults and the debt holders may take action that would negatively affect our financial position.
A significant portion of our business depends on our ability to provide surety bonds. Impediments to our ability to obtain surety bonds could affect our operating results adversely and reduce future revenues materially.
Some customers, particularly on government funded projects and large new construction, require the company to post bid bonds to guarantee bids and payment and performance bonds.
The current conditions in the surety bonding industry are adversely affecting our ability to obtain bid and surety bonding on terms or in amounts consistent with past practices. At this time, we do not have a commitment from our surety company that it will continue to write bonds for our projects and can decline to write new bonds at any time. There are certain situations where, if we are unable to obtain a surety bond, we could be subject to claims or damages or withholding of payment by customers. If we are unable to obtain a bond in connection with such a project, we could be subject to a damage claim by the customer for the costs of replacing us with another contractor or the contractor could withhold payment to us. While we continue to have access to surety bonding at reduced levels (in comparison to our past experience), we are currently seeking a co-surety arrangement to increase our bonding capacity. However, we cannot assure you that we will be able to obtain increased surety arrangements, and consequently, we may be required to further abandon businesses for which surety arrangements are necessary. Furthermore, even when we dispose of such business, we remain liable for previous bonding obligations and other liabilities that relate back to our prior involvement with such businesses.
In certain cases, surety bond companies are willing to provide surety bonds only if cash or letters of credit are provided as collateral. As of September 30, 2005, we had an aggregate of $29.4 million in cash and letter of credit collateral posted with our surety. We have also provided our surety with a first priority security interest in some of our assets, including accounts receivable, inventory and equipment related to bonded jobs. Our surety could require additional collateral in the future that we may be unable or unwilling to provide. Such increased collateral requirements could restrict our ability or desire to obtain surety bonds in the future.
In all cases where payment and performance bonds have been provided, if we fail to perform under the terms of the contracts or fail to pay subcontractors or vendors who provided services or goods to the project, then the customers can demand that the surety perform such services or provide such goods under the terms of the bond. If the surety is forced to make any expenditures or arrange for any services, then we must reimburse the surety for those expenses.
Although there are alternatives available for surety bonds such as insurance products, alternative payment arrangements and increased retention, these alternatives are not common and not always available or acceptable. A loss of or a decrease in the availability of surety bonding can cause customer concern over our ability to perform and can cause an even greater need for bonds where customers that did not previously require surety
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bonds will begin to do so. Any diminishment of bonding capacity will have a negative economic effect on us since even with sufficient profitable work for growth, bonding limits will restrict that growth.
If the beneficial ownership in IES of any selling stockholder exceeds the Williams Act Limitation, which is currently 4.99%, set forth in the indenture related to our senior convertible notes, we will be unable to issue shares of common stock in payment of the indebtedness owed to such selling stockholder. Consequently, we may be required to repay the indebtedness in cash which could have an adverse impact on our business, operating results or financial condition.
Pursuant to the terms of the indenture related to our senior convertible notes, if the beneficial ownership of a selling stockholder exceeds the Williams Act Limitation set forth in the indenture, which is currently 4.99%, we will not be able to issue shares of common stock to such selling stockholder in repayment of the indebtedness under the senior convertible notes. If we are unable to repay the indebtedness under the senior convertible notes to such selling stockholder in shares of common stock, we may be required to repay the indebtedness in cash. If we do not have sufficient cash available to repay the indebtedness, our business would be materially adversely affected. Additionally, if we do have sufficient cash available to repay such indebtedness, the repayment of the indebtedness in cash may limit our ability to fund future working capital needs, capital expenditures and other general corporate requirements. The current conversion price of the senior convertible notes is $3.25, which is higher than the average trading price for our common stock over the last six months. The lower our market price is in relation to the conversion price, the greater the negative economic impact will be to us if we are required to repay the indebtedness in cash rather than shares of common stock.
We adopted tax positions in connection with our original acquisitions with which taxing authorities may disagree. If a taxing authority disagrees with our tax positions, our results may be adversely affected.
Beginning with our initial business acquisitions in 1997, we adopted certain tax positions with which taxing authorities may disagree. Our effective tax rate and cash paid for taxes are affected by numerous tax positions that we have adopted. Because of the number of acquisitions we consummated soon after our inception, we are particularly vulnerable to risks related to the recharacterization of our tax positions. We believe that we have adequate reserves in the event that a taxing authority differs with positions we have taken, however, there can be no assurance that our results of operations will not be adversely affected.
Our reported operating results could be adversely affected as a result of goodwill impairment write-offs.
When we acquire a business, we record an asset called goodwill if the amount we pay for the business, including liabilities assumed, is in excess of the fair value of the assets of the business we acquire. We adopted Statement of Financial Accounting Standards, or SFAS, No. 142 Goodwill and Other Intangible Assets which establishes new accounting and reporting requirements for goodwill and other intangible assets. Under SFAS No. 142, all of our goodwill amortization ceased effective October 1, 2001. Additionally, SFAS No. 142 requires that goodwill attributable to each of four reporting units be tested at least annually (absent any impairment indicators). The testing includes comparing the fair value of each reporting unit with its carrying value. Fair value is determined using discounted cash flows, market multiples and market capitalization. Significant estimates used in the methodologies include estimates of future cash flows, future short-term and long-term growth rates, weighted average cost of capital and estimates of market multiples for each of the reportable units. On an ongoing basis (absent any impairment indicators), we expect to perform impairment tests at least annually during the first fiscal quarter of each year. Impairment adjustments recognized after adoption, if any, generally are required to be recognized as operating expenses. Additionally, we are divesting several business units. If the sales proceeds are less than the sum of the net assets to be sold, the fair value of the goodwill associated with the assets to be sold and the costs to sell, we will be required to write down the carrying value of goodwill. We are uniquely at risk with respect to goodwill impairment write down due to the large number of acquisitions we have consummated and our recent divestiture activity. We cannot assure that we will not have future impairment adjustments to our recorded goodwill.
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We are in the process of selling the assets of some of our wholly owned subsidiaries, which could produce consequences adverse to our business.
We have determined to sell all or substantially all of the assets of a number of our wholly owned subsidiaries. Those sales are being made to facilitate the business needs and purposes of the organization as a whole. Since we were a consolidator of electrical contracting businesses, often the best candidates to purchase those assets are previous owners of those assets. That previous owner may sometimes still be associated with the subsidiary as an officer of that subsidiary. To facilitate the desired timing, the sales are being made with more than ordinary reliance on the representations of the purchaser, who is often the person most familiar with the business unit being sold. There is the potential in retaining the company structure that if the purchaser is unwilling or unable to satisfy the transferred liabilities, we may be forced to fulfill obligations that were assumed by others. We would then seek reimbursement from the parties that assumed those liabilities.
One of the reasons we have pursued, and continue to pursue, these asset sales is to reduce our need for surety bonds. However, when we divest assets of our subsidiaries that are related to ongoing bonded jobs, the selling subsidiary remains responsible for the bonded jobs. Accordingly, we may be required to support increased bond amounts for changes to the bonded jobs even after the sale of assets related to such bonded jobs.
Risks Related to this Offering
Our certificate of incorporation and bylaws, as well as Delaware law, contain provisions that could discourage acquisition bids or merger proposals, which may adversely affect this market price of our common stock.
Our certificate of incorporation authorizes our board of directors to issue preferred stock without stockholder approval. If our board of directors elects to issue preferred stock, it could be more difficult for a third party to acquire us. In addition, some provisions of our certificate of incorporation and bylaws could frustrate attempts to replace our management or our directors or effect a transaction that may be in the best interests of our stockholders, including:
| a classified board of directors, so that only approximately one-third of our directors are elected each year; |
| limitations on the removal of directors; |
| the prohibition of stockholder action by written consent; and |
| limitations on the ability of our stockholders to call special meetings and establish advance notice provisions for stockholder proposals and nominations for elections to the board of directors to be acted upon at meetings of stockholders. |
Delaware law prohibits us from engaging in any business combination with any interested stockholder, meaning generally that a stockholder who beneficially owns more than 15% of our stock cannot acquire us for a period of three years from the date this person became an interested stockholder, unless various conditions are met, such as approval of the transaction by our board of directors.
Because we have no plans to pay dividends on our common stock, investors must look solely to stock appreciation for a return on their investment in us.
We do not anticipate paying any cash dividends on our common stock in the foreseeable future. We currently intend to retain all future earnings to fund the development and growth of our business. Any payment of future dividends will be at the discretion of our board of directors and will depend on, among other things, our earnings, financial condition, capital requirements, level of indebtedness, statutory and contractual restrictions applying to the payment of dividends and other considerations that the board of directors deems relevant. The terms of our existing senior credit facility and the terms of our senior subordinated notes restrict our ability to pay dividends. Investors must rely on sales of their common stock after price appreciation, which may never occur, as the only way to realize a return on their investment. Investors seeking cash dividends should not purchase our common stock.
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A number of shares of our common stock are eligible for future sale including the offered shares, which could cause our stock price to decline and may encourage investors to take short positions on our common stock that may accelerate the decline.
The market price of our common stock could decline as a result of sales of a large number of shares of common stock in the public market or the perception that such sales could occur. The 15,384,615 shares of common stock issuable upon the conversion or repurchase of our convertible notes could cause substantial dilution to our stockholders, which could cause the market price of our common stock to decline. Additionally, approximately 3.3 million shares of our common stock are issuable upon exercise of options that are currently outstanding. These sales, or the possibility that these sales may occur, also might make it more difficult for us to sell equity securities in the future at a time and a price that we deem appropriate.
The sales of a large number of our shares, or the perception that such sales may occur, may encourage investors to take short positions with respect to our common stock. A short position occurs when an investor sells a stock he does not yet own, but has an obligation to purchase at a future date. Investors who take short positions on stocks believe that the stock price will fall from its then-current level. An increased ratio of short positions on our common stock could cause further declines in our stock price.
If the conversion price of the senior convertible notes decreases, we will be required to register additional shares of common stock for sale by the selling stockholders. This additional dilution could cause a decrease in our stock price.
The conversion price of the senior convertible notes, which is currently $3.25, is subject to adjustment under certain circumstances, including in the event we pay a dividend to our stockholders, issue rights to all of our stockholders allowing them to purchase shares of our capital stock or subdivide our common stock. While we do not presently intend to take any action that would cause a decrease in the conversion price of the senior convertible notes, we cannot guarantee that we will not do so. If the conversion price of the senior convertible notes is reduced, the selling stockholders would be entitled to receive a greater number of shares upon conversion of the notes. We will also be required to register those additional shares. The issuance of those additional shares, or the perception that the shares may be issued, could cause a decrease in our stock price.
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This prospectus contains forward-looking statements. We have based these forward-looking statements largely on our current expectations and projections about future events and financial trends affecting the financial condition of our business. These forward-looking statements are subject to a number of risks, uncertainties and assumptions, including, among other things, the risk factors discussed in this prospectus and other factors, most of which are beyond our control.
The words believe, may, will, estimate, continue, anticipate, intend, plan, expect and similar expressions are intended to identify forward-looking statements. All statements other than statements of current or historical fact contained in this prospectus are forward-looking statements.
This prospectus includes certain statements that may be deemed to be forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements are based on our expectations and involve risks and uncertainties that could cause our actual results to differ materially from those set forth in the statements. Such risks and uncertainties include, but are not limited to, the inherent uncertainties relating to estimating future operating results or our ability to generate sales, income, or cash flow, potential difficulty in addressing material weaknesses in our accounting systems that have been identified to us by our independent auditors, failure to timely pass Sarbanes-Oxley 404 testing, limitations on our ability to access the credit line under our credit facility or obtain a new facility, litigation risks and uncertainties, fluctuations in operating results because of downturns in levels of construction, incorrect estimates used in entering into and executing contracts, difficulty in managing the operation of existing entities, the high level of competition in the construction industry, changes in interest rates, the general level of the economy, increases in costs of labor, steel, copper and gasoline, limitations on the availability and the increased costs of surety bonds required for certain projects, inability to reach agreement with our surety bonding company to provide sufficient bonding capacity, inability to reach agreement with a co-surety, risk associated with failure to provide surety bonds on jobs where we have commenced work or are otherwise contractually obligated to provide surety bonds, loss of key personnel or change in senior management, inability to reach agreement for planned sales of assets, business disruption and transaction costs attributable to the sale of business units, costs associated with the closing of business units, unexpected liabilities associated with warranties or other liabilities attributable to the retention of the legal structure of business units where we have sold substantially all of the assets of the business unit, inability to fulfill the terms of the credit facility, difficulty in integrating new types of work into existing subsidiaries, uncertainty relating to the existing formal SEC investigation pending, disruption with changes in operating structure and procedures, potential reduction of revenues from sale of businesses that results in insufficient revenues to pay debt obligations, changes in market, customer or vendor perception of IES resulting in higher bond needs or slower payments, errors in estimating revenues and percentage of completion on contracts, and weather and seasonality. You should understand that the foregoing important factors, in addition to those discussed elsewhere in this document, including those under the heading Risk Factors, could affect our future results and could cause results to differ materially from those expressed in any forward-looking statements. We undertake no obligation to publicly update or revise any forward-looking statements to reflect events or circumstances that may arise after the date of this report.
10
We will not receive any proceeds from the sale of the offered shares by the selling stockholders. The proceeds from our sale of the senior convertible notes were used by us to pay down indebtedness under our then-existing credit facility ($40.8 million) and for general working capital purposes ($9.2 million).
DETERMINATION OF OFFERING PRICE
The selling stockholders will determine at what price they may sell the offered shares, and such sales may be made at prevailing market prices, or at privately negotiated prices.
PRICE AND RELATED INFORMATION CONCERNING REGISTERED SHARES
Our common stock is listed on the New York Stock Exchange under the symbol IES.
The following tables set forth for the period indicated the high and low bid prices for our common stock for the periods indicated for 2003, 2004 and 2005.
2005 |
High |
Low | ||||
First Quarter |
$ | 5.44 | $ | 2.10 | ||
Second Quarter |
$ | 4.76 | $ | 2.73 | ||
Third Quarter |
$ | 2.89 | $ | 1.40 | ||
Fourth Quarter |
$ | 3.34 | $ | 1.85 | ||
2004 |
High |
Low | ||||
First Quarter |
$ | 9.75 | $ | 6.70 | ||
Second Quarter |
$ | 11.90 | $ | 9.20 | ||
Third Quarter |
$ | 11.66 | $ | 7.40 | ||
Fourth Quarter |
$ | 8.61 | $ | 3.77 | ||
2003 |
High |
Low | ||||
First Quarter |
$ | 4.28 | $ | 3.10 | ||
Second Quarter |
$ | 4.50 | $ | 3.50 | ||
Third Quarter |
$ | 7.60 | $ | 4.23 | ||
Fourth Quarter |
$ | 7.76 | $ | 5.76 |
The high and low sales prices represent the intra-day prices on the New York Stock Exchange.
On October 7, 2005, the last reported bid price of our common stock was $2.56 per share. As of October 7, 2005, there were approximately 1,311 record holders of our common stock and four record holders of our restricted common stock.
We have not declared or paid any dividends on our common stock, and we do not currently anticipate paying any dividends on our common stock in the foreseeable future. We currently intend to retain all future earnings to fund the development and growth of our business. Any future determination relating to our dividend policy will be at the discretion of our board of directors and will depend on our results of operations, financial condition, capital requirements and other factors deemed relevant. We are also currently restricted in our ability to pay dividends under our credit facility and our senior subordinated notes.
11
SELECTED HISTORICAL FINANCIAL DATA
The following table sets forth our selected historical financial information for the periods shown. The following information should be read in conjunction with Managements Discussion and Analysis of Financial Condition and Results of Operations and our financial statements included elsewhere in this prospectus. The amounts for each historical annual period presented below were derived from our audited financial statements. The interim financial statement data for the nine months ended June 30, 2004 and 2005 are unaudited. All dollar amounts in the following table are shown in thousands, except per share data.
Year Ended September 30, |
Nine Months Ended June 30, |
|||||||||||||||||||||||||||
2000 |
2001 |
2002 |
2003 |
2004 |
2004 |
2005 |
||||||||||||||||||||||
(restated) | (restated) | |||||||||||||||||||||||||||
Revenues |
$ | 1,459,621 | $ | 1,458,009 | $ | 1,252,613 | $ | 1,238,793 | $ | 1,202,707 | $ | 902,284 | $ | 844,729 | ||||||||||||||
Cost of Services |
1,193,804 | 1,193,440 | 1,066,838 | 1,064,783 | 1,053,238 | 785,561 | 740,462 | |||||||||||||||||||||
Gross profit |
265,817 | 264,569 | 185,775 | 174,010 | 149,469 | 116,723 | 104,267 | |||||||||||||||||||||
Selling, general and administrative expenses |
202,881 | 195,573 | 157,043 | 136,624 | 142,054 | 97,574 | 110,376 | |||||||||||||||||||||
Restructuring charges |
| | 5,556 | | | | | |||||||||||||||||||||
Goodwill Impairment Charge |
11,501 | 11,273 | | | 87,369 | | | |||||||||||||||||||||
Income (loss) from operations |
51,435 | 57,723 | 23,176 | 37,386 | (79,954 | ) | 19,149 | (6,109 | ) | |||||||||||||||||||
Other income (expense): |
||||||||||||||||||||||||||||
Interest expense |
(23,497 | ) | (26,039 | ) | (26,694 | ) | (25,759 | ) | (23,198 | ) | (17,966 | ) | (20,877 | ) | ||||||||||||||
Other, net |
889 | (308 | ) | (760 | ) | (177 | ) | (5,854 | ) | (5,530 | ) | 63 | ||||||||||||||||
Interest and other expense, net |
(22,608 | ) | (26,347 | ) | (27,454 | ) | (25,936 | ) | (29,052 | ) | (23,496 | ) | (20,814 | ) | ||||||||||||||
Income (loss) from continuing operations |
28,827 | 31,376 | (4,278 | ) | 11,450 | (109,006 | ) | (4,347 | ) | (26,923 | ) | |||||||||||||||||
Provision (benefit) for income taxes |
15,513 | 15,947 | (1,832 | ) | 1,314 | 7,395 | (9,163 | ) | 2,331 | |||||||||||||||||||
Net income (loss) from continuing operations |
13,314 | 15,429 | (2,446 | ) | 10,136 | (116,401 | ) | 4,816 | (29,254 | ) | ||||||||||||||||||
Discontinued operations: |
||||||||||||||||||||||||||||
Income (loss) from discontinued operations |
13,972 | 23,005 | 17,750 | 15,564 | (4,774 | ) | 7,774 | (15,426 | ) | |||||||||||||||||||
Provision for income taxes |
6,130 | 9,724 | 7,028 | 6,263 | 3,689 | 3,088 | 69 | |||||||||||||||||||||
Net income (loss) from discontinued operations |
7,842 | 13,281 | 10,722 | 9,301 | (8,463 | ) | 4,686 | (15,495 | ) | |||||||||||||||||||
Cumulative effect of change in accounting principle, net of tax |
| | (283,284 | ) | | | | | ||||||||||||||||||||
Net income (loss) |
$ | 21,156 | $ | 28,710 | $ | (275,008 | ) | $ | 19,437 | $ | (124,864 | ) | $ | 9,502 | $ | (44,749 | ) | |||||||||||
Basic earnings (loss) per share: |
||||||||||||||||||||||||||||
Basic earnings (loss) per share from continuing operations |
$ | 0.33 | $ | 0.38 | $ | (0.06 | ) | $ | 0.26 | $ | (3.01 | ) | $ | 0.13 | $ | (0.75 | ) | |||||||||||
Basic earnings (loss) per share from discontinued operations |
$ | 0.20 | $ | 0.33 | $ | 0.27 | $ | 0.24 | $ | (0.22 | ) | $ | 0.12 | $ | (0.40 | ) | ||||||||||||
Cumulative effect of change in accounting principle |
$ | | $ | | $ | (7.11 | ) | $ | | $ | | $ | | $ | | |||||||||||||
Basic earnings (loss) per share |
$ | 0.53 | $ | 0.71 | $ | (6.90 | ) | $ | 0.50 | $ | (3.23 | ) | $ | 0.25 | $ | (1.15 | ) | |||||||||||
Diluted earnings (loss) per share: |
||||||||||||||||||||||||||||
Diluted earnings (loss) per share from continuing operations |
$ | 0.33 | $ | 0.38 | $ | (0.06 | ) | $ | 0.26 | $ | (3.01 | ) | $ | 0.12 | $ | (0.75 | ) | |||||||||||
Diluted earnings (loss) per share from discontinued operations |
$ | 0.19 | $ | 0.32 | $ | 0.27 | $ | 0.24 | $ | (0.22 | ) | $ | 0.12 | $ | (0.40 | ) | ||||||||||||
Cumulative effect of change in accounting principle |
$ | | $ | | $ | (7.11 | ) | $ | | $ | | | | |||||||||||||||
Diluted earnings (loss) per share |
$ | 0.52 | $ | 0.70 | $ | (6.90 | ) | $ | 0.50 | $ | (3.23 | ) | $ | 0.24 | $ | (1.15 | ) | |||||||||||
Shares used in the computation of earnings (loss) per share: |
||||||||||||||||||||||||||||
Basic |
40,207,940 | 40,402,533 | 39,847,591 | 39,062,776 | 38,610,326 | 38,529,576 | 39,091,521 | |||||||||||||||||||||
Diluted |
40,410,400 | 40,899,790 | 39,847,591 | 39,225,312 | 38,610,326 | 39,171,986 | 39,091,521 | |||||||||||||||||||||
12
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Managements Overview
In response to the SECs Release No. 33-8040, Cautionary Advice Regarding Disclosure About Critical Accounting Policies, we have identified the accounting principles which we believe are most critical to our reported financial status by considering accounting policies that involve the most complex or subjective decisions or assessments. We identified our most critical accounting policies to be those related to revenue recognition, the assessment of goodwill impairment, accounting for discontinued operations, our allowance for doubtful accounts receivable, the recording of our self-insurance liabilities and our estimation of the valuation allowance for deferred tax assets. These accounting policies, as well as others, are described in the Note 2 of Notes to Consolidated Financial Statements of our Annual report on Form 10-K for the year ended September 30, 2004 and at relevant sections in this discussion and analysis.
We enter into contracts principally on the basis of competitive bids. We frequently negotiate the final terms and prices of those contracts with the customer. Although the terms of our contracts vary considerably, most are made on either a fixed price or unit price basis on which we agree to perform the work for a fixed amount for the entire project (fixed price) or for units of work performed (unit price). We also perform services on a cost-plus or time and materials basis. We are generally able to achieve higher margins on fixed price and unit price than on cost-plus contracts. We currently generate, and expect to continue to generate, more than half of our revenues under fixed price contracts. Our most significant cost drivers are the cost of labor, the cost of materials and the cost of casualty and health insurance. These costs may vary from the costs we originally estimated. Variations from original estimated contract costs and variations from ongoing estimates of costs to complete projects in progress, along with other risks inherent in performing fixed price and unit price contracts, may result in actual revenue and gross profits or interim projected revenue and gross profits for a project differing from those we estimated and could result in losses on projects. Depending on the size of a particular project, variations from estimated project costs could have a significant impact on our operating results for any quarter or fiscal year. We believe our exposure to losses on fixed price contracts is limited in aggregate by the high volume and relatively short duration of the fixed price contracts we undertake. Additionally, we derive a significant amount of our revenues from new construction and from contracts performed in the southern United States. Downturns in new construction activity in the southern part of the United States could negatively affect our results.
We complete most projects in less than one year. We frequently provide service and maintenance work under open-ended, unit price master service agreements which are renewable annually. We recognize revenue on service and time and material work when services are performed. Work performed under a construction contract generally provides that customers accept completion of progress to date and compensate us for services rendered measured in terms of units installed, hours expended or some other measure of progress. Revenues from construction contracts are recognized on the percentage-of-completion method in accordance with the American Institute of Certified Public Accountants Statement of Position 81-1 Accounting for Performance of Construction-Type and Certain Production-Type Contracts. Percentage of completion for construction contracts is measured principally by the percentage of costs incurred and accrued to date for each contract to the estimated total costs for each contract at completion. We generally consider contracts to be substantially complete upon departure from the work site and acceptance by the customer. Contract costs include all direct material and labor costs and those indirect costs related to contract performance, such as indirect labor, supplies, tools, repairs and depreciation costs. Changes in project management, job performance, job conditions, estimated contract costs and profitability and final contract settlements may result in revisions to costs and income, and the effects of these revisions are recognized in the period in which the revisions are determined. Provisions for total estimated losses on uncompleted contracts are made in the period in which such losses are determined.
We evaluate goodwill for potential impairment in accordance with Statement of Financial Accounting Standards No. 142, Goodwill and Other Intangible Assets. Included in this evaluation are certain assumptions
13
and estimates to determine the fair values of reporting units such as estimates of future cash flows, discount rates, as well as assumptions and estimates related to the valuation of other identified intangible assets. Changes in these assumptions and estimates or significant changes to the market value of our common stock could materially impact our results of operations or financial position.
We provide an allowance for doubtful accounts for unknown collection issues in addition to reserves for specific accounts receivable where collection is considered doubtful. Inherent in the assessment of the allowance for doubtful accounts are certain judgments and estimates including, among others, our customers access to capital, their willingness to pay, general economic conditions and our ongoing relationships and the strength of our claim and associated lien rights. In addition to these factors, our business and the method of accounting for construction contracts requires the review and analysis of not only the net receivables, but the amount of billings in excess of costs and costs in excess of billings integral to the overall review of collectibility associated with our billings in total. The analysis management utilizes to assess collectibility of its receivables includes a detailed review of older balances and analysis of days sales outstanding where we include in the calculation, in addition to accounts receivable balances net of any allowance for doubtful accounts, the level of costs in excess of billings netted against billings in excess of costs. The net of costs in excess of billings and billings in excess of costs on uncompleted contracts provides an indication of amounts billed ahead or behind the recognition of revenue on our construction contracts and are key in understanding our ability to control operational cash flows related to the revenue cycle.
We are insured for workers compensation, automobile liability, general liability, employment practices and employee-related health care claims, subject to large deductibles. Our general liability program provides coverage for bodily injury and property damage that is neither expected nor intended. Losses up to the deductible amounts are accrued based upon our estimates of the liability for claims incurred and an estimate of claims incurred but not reported. The accruals are derived from actuarial studies, known facts, historical trends and industry averages utilizing the assistance of an actuary to determine the best estimate of the ultimate expected loss. We believe such accruals to be adequate. However, insurance liabilities are difficult to assess and estimate due to unknown factors, including the severity of an injury, the determination of our liability in proportion to other parties, the number of incidents not reported and the effectiveness of our safety program. Therefore, if actual experience differs from the assumptions used in the actuarial valuation, adjustments to the reserve may be required and would be recorded in the period that the experience becomes known.
We regularly evaluate valuation allowances established for deferred tax assets for which future realization is uncertain. We perform this evaluation at least quarterly at the end of each fiscal quarter at such time as events have occurred or are anticipated to occur that may change our most recent assessment. The estimation of required valuation allowances includes estimates of future taxable income. In assessing the realizability of deferred tax assets at June 30, 2005, we considered whether it was more likely than not that some portion or all of the deferred tax assets would not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. We consider the scheduled reversal of deferred tax liabilities, projected future taxable income and tax planning strategies in making this assessment. If actual future taxable income differs from our estimates, our results could be affected.
14
Nine months ended June 30, 2005 compared to nine months ended June 30, 2004
The following table presents selected unaudited historical financial information for the nine months ended June 30, 2004 and 2005.
Nine Months Ended June 30, |
||||||||||||||
2004 |
% |
2005 |
% |
|||||||||||
(dollars in millions) | ||||||||||||||
Revenues |
$ | 902.3 | 100 | % | $ | 844.7 | 100 | % | ||||||
Cost of services (including depreciation) |
785.6 | 87 | % | 740.5 | 88 | % | ||||||||
Gross profit |
116.7 | 13 | % | 104.2 | 12 | % | ||||||||
Selling, general & administrative expenses |
97.6 | 11 | % | 110.4 | 13 | % | ||||||||
Income (loss) from operations |
19.1 | 2 | % | (6.2 | ) | (1 | )% | |||||||
Interest and other expense, net |
23.5 | 3 | % | 20.8 | 2 | % | ||||||||
Income (loss) before income taxes |
(4.4 | ) | (1 | )% | (27.0 | ) | (3 | )% | ||||||
Provision (benefit) for income taxes |
(9.2 | ) | (1 | )% | 2.4 | 0 | % | |||||||
Income (loss) from continuing operations |
4.8 | 1 | % | (29.4 | ) | (3 | )% | |||||||
Net income (loss) from discontinued operations |
4.7 | 1 | % | (15.5 | ) | (2 | )% | |||||||
Net income (loss) |
$ | 9.5 | 1 | % | $ | (44.9 | ) | (5 | )% | |||||
Revenues
Percent of Total Revenues |
||||||
Nine Months Ended June 30, |
||||||
2004 |
2005 |
|||||
Commercial and Industrial |
75 | % | 73 | % | ||
Residential |
25 | % | 27 | % | ||
Total Company |
100 | % | 100 | % | ||
Total revenues decreased $57.6 million, or 6.4%, from $902.3 million for the nine months ended June 30, 2004, to $844.7 million for the nine months ended June 30, 2005. This decrease in revenues is primarily the result of a decrease in revenues of $59.3 million in commercial and industrial revenues and an increase of $1.8 million in residential revenues for the nine months ended June 30, 2005.
Commercial and industrial revenues decreased $59.3 million, or 8.8%, from $675.5 million for the nine months ended June 30, 2004, to $616.2 million for the nine months ended June 30, 2005. The decline is due to a decrease of $31.3 million in industrial revenues, a decrease of $14.0 million in service and maintenance revenues and a decrease of $14.0 million in commercial revenues for the nine months ended June 30, 2005 versus June 30, 2004. These decreases can be attributed to a decrease in the award of bonded projects, more selective bidding on new project work and the closing utility and plant work at one subsidiary.
Residential revenues increased $1.8 million, or 0.8%, from $226.8 million for the nine months ended June 30, 2004 to $228.6 million for the nine months ended June 30, 2005, primarily as a result of increased demand for new single-family and multi-family housing in the South and Southwest.
15
Gross Profit
Segment Gross Profit Margins As a Percent of Segment Revenues |
||||||
Nine Months Ended June 30, |
||||||
2004 |
2005 |
|||||
Commercial and Industrial |
10.7 | % | 9.1 | % | ||
Residential |
19.5 | % | 21.2 | % | ||
Total Company |
12.9 | % | 12.3 | % |
Gross profit decreased $12.5 million, or 10.7%, from $116.7 million for the nine months ended June 30, 2004, to $104.3 million for the nine months ended June 30, 2005. Gross profit margin as a percentage of revenues decreased from 12.9% to 12.3% for the nine months ended June 30, 2004 compared to nine months ended June 30, 2005.
Commercial and industrial gross profit decreased $16.6 million, or 22.9%, from $72.5 million for the nine months ended June 30, 2004 to $55.9 million for the nine months ended June 30, 2005. Commercial and industrial gross profit margin as a percentage of revenues decreased from 10.7% for the nine months ended June 30, 2005, to 9.1% for the nine months ended June 30, 2004. This decline in gross margin from the nine months ended June 30, 2005 compared to the nine months ended June 30, 2004 was primarily due to a combination of an increase in insurance reserves of $2.6 million, increased competition and costs of materials that have not fully been passed to customers, reduced job profitability at specific subsidiaries and decreased award of bonded projects in our commercial and industrial segment. During the nine months ended June 30, 2005, we recorded $0.2 million additional accumulated amortization in cost of services for leasehold improvements. Additionally, we are also closing the utility and plant work at one subsidiary which accounted for approximately $3.1 million gross profit loss during the nine months ended June 30, 2005.
Residential gross profit increased $4.1 million, or 9.4%, from $44.2 million for the nine months ended June 30, 2004, to $48.4 million for the nine months ended June 30, 2005. Residential gross profit margin as a percentage of revenues increased from 19.5% for the nine months ended June 30, 2004, to 21.2% for the nine months ended June 30, 2005. This increase in gross profit margin as a percentage of revenues was primarily the result of increased demand for new single-family and multi-family housing.
Selling, General And Administrative Expenses
Selling, general and administrative expenses increased $12.8 million, or 13.1%, from $97.6 million for the nine months ended June 30, 2004, to $110.4 million for the nine months ended June 30, 2005. Selling, general and administrative expenses as a percentage of revenues increased from 10.8% for the nine months ended June 30, 2004 to 13.1% for the nine months ended June 30, 2005. Additional costs of $3.2 million in legal fees resulted from the combination of not timely filing our fiscal third quarter 2004 Form 10-Q and other litigation during the nine months ended June 30, 2005. Additional consulting fees during the nine months ended June 30, 2005 associated with Sarbanes-Oxley compliance and increased audit fees was $2.7 million that were not incurred during the nine months ended June 30, 2004. Additional costs of $3.1 million were incurred during the nine months ended June 30, 2005 associated with an incentive program that were not incurred during the nine months ended June 30, 2004. Additional costs for the impairment of goodwill were included during the nine months ended June 30, 2005 relating to a company formerly included in discontinued operations and currently included in continuing operations of $0.6 million. During the nine months ended June 30, 2005, we recorded $0.5 million additional accumulated amortization in selling, general and administrative expenses for leasehold improvements. These costs were incurred to correct errors from prior periods where we amortized leasehold improvements over a period longer than the original lease term. We do not believe these errors or the related correction is material to any affected period.
16
Income From Operations
Income from operations decreased $25.3 million, or 131.9%, from $19.1 million for the nine months ended June 30, 2004, to an operating loss of $6.1 million for the nine months ended June 30, 2005. This decrease in income from operations was attributed to a decrease in the award of bonded projects, increased competition and costs of materials that have not fully been passed to customers, closing utility and plant work at one subsidiary and additional accumulated depreciation recorded for leasehold improvements during the nine months ended June 30, 2005 over the same period in the prior year and the increase in selling, general, and administrative costs of $12.8 million during the nine months ended June 30, 2005.
Net Interest And Other Expense
Interest and other expense, net decreased from $23.5 million for the nine months ended June 30, 2004, to $20.8 million for the nine months ended June 30, 2005. This decrease in net interest and other expense was primarily the result of a $5.2 million loss associated with retiring $75 million of senior subordinated notes during the nine months ended June 30, 2004 not included during the nine months ended June 30, 2005, a $1.1 million gain related to the sale of assets primarily associated with the closure of utility and plant work at one subsidiary during the nine months ended June 30, 2005, and $0.4 million interest income related to cash collateral on our surety bonds. This decrease is partially offset by an increase in interest expense during the nine months ended June 30, 2005 for our senior convertible notes issued in November 2004, $0.7 million in non-cash mark-to-market interest associated with the embedded conversion option on the convertible notes, and an increase in amortization of deferred financing costs related to the amendments to the credit facility.
Provision for Income Taxes
Our tax provision increased from a tax benefit of $6.1 million for the nine months ended June 30, 2004 to a tax provision of $2.4 million for the nine months ended June 30, 2005. This increase is attributable a pretax net loss, permanent differences required to be added back for income tax purposes, the impairment of non-deductible goodwill, an additional valuation allowance against certain federal and state deferred tax assets and a change in contingent tax liabilities.
Discontinued Operations
During October 2004, we announced plans to begin a strategic alignment including the planned divestiture of certain commercial segments, underperforming subsidiaries and those that rely heavily on surety bonding for obtaining a majority of their projects. During November 2004, management committed to a plan to complete the divestiture of these companies by the end of fiscal 2005. This plan included managements actively seeking potential buyers of the selected companies among other activities necessary to complete the sales. Management expects to be able to sell all considered subsidiaries at their respective fair market values at the date of sale determined by a reasonably accepted valuation method. Management does not foresee any significant changes in the plan, nor anticipates events requiring withdrawal from the plan. The discontinued operations disclosures include only those identified subsidiaries qualifying for discontinued operations treatment for the periods presented; therefore, other subsidiaries included in our divestiture plan will be included in future periods as they qualify for discontinued operations treatment.
17
During the nine months ended June 30, 2005, the Company completed the sale of all the net assets of eleven of its operating subsidiaries for $36.3 million in cash. These operating subsidiaries primarily provided electrical contracting services for the commercial segment. Including the goodwill impairment, the sales generated an after-tax loss of $13.4 million and has been recognized in the nine months ended June 30, 2005 as discontinued operations in the consolidated income statement and the prior years nine months ended June 30, 2004 results of operations have been reclassified. The tables which follow present summarized financial data for discontinued operations (In thousands):
Nine Months Ended June 30, |
|||||||
2004 |
2005 |
||||||
Revenues |
$ | 164,926 | $ | 95,271 | |||
Gross profit |
$ | 20,023 | $ | 6,970 | |||
Pretax income/(loss) |
$ | 7,774 | $ | (15,426 | ) | ||
Three Months Ended June 30, |
|||||||
2004 |
2005 |
||||||
Revenues |
$ | 55,780 | $ | 20,521 | |||
Gross profit |
$ | 5,475 | $ | 1,690 | |||
Pretax income/(loss) |
$ | 1,715 | $ | (4,563 | ) | ||
Balance as of |
|||||||
September 30, 2004 |
June 30, 2005 |
||||||
Accounts receivable, net |
$ | 55,978 | $ | 9,307 | |||
Inventory |
3,099 | 20 | |||||
Costs and estimated earnings in excess of billings on uncompleted contracts |
10,065 | 2,711 | |||||
Other current assets |
381 | 497 | |||||
Property and equipment, net |
3,777 | 640 | |||||
Goodwill, net |
15,203 | | |||||
Other noncurrent assets |
1,603 | (143 | ) | ||||
Total assets |
$ | 90,106 | $ | 13,032 | |||
Accounts payable and accrued liabilities |
$ | 16,115 | $ | 3,578 | |||
Billings in excess of costs and estimated earnings on uncompleted contracts |
6,301 | 773 | |||||
Long term debt, net of current portion |
26 | | |||||
Other long term liabilities |
888 | 361 | |||||
Total liabilities |
23,330 | 4,712 | |||||
Net assets |
$ | 66,776 | $ | 8,320 | |||
During the three and nine months ended June 30, 2005, we recorded a net goodwill impairment charge of $4.3 million and $12.9 million related to the identification of certain subsidiaries for disposal by sale prior to the end of the fiscal third quarter 2005. This impairment charge is included in the net loss from discontinued operations caption in the statement of operations. The impairment charge was calculated based on the assessed fair value ascribed to the subsidiaries identified for disposal less the net book value of the assets related to those subsidiaries. The fair value utilized in this calculation was the same as that discussed in the preceding paragraph addressing the impairment of discontinued operations. Where the fair value did not exceed the net book value of
18
a subsidiary including goodwill, the goodwill balance was impaired as appropriate. This impairment of goodwill was determined prior to the calculation of any additional impairment of the identified subsidiary disposal group as required pursuant to Statement of Financial Accounting Standards No. 144, Accounting for the Impairment of Disposal of Long-Lived Assets. As of June 30, 2005, we had only sold a portion of the subsidiaries included in our divestiture plan; therefore, we utilized estimated gross proceeds to calculate the fair values associated with the goodwill impairment charge. We do not expect any significant differences between those estimates and the actual proceeds to be received upon the sale of the subsidiaries, nor expect any significant effect on the goodwill impairment charge taken.
In accordance with Statement of Financial Accounting Standards No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets, during the three and nine months ended June 30, 2005, we recorded an impairment charge of $0.5 million and $1.5 million, respectively, related to the identification of certain subsidiaries for disposal by sale prior to the end of the fiscal third quarter 2005. The impairment was calculated as the difference between the fair values, less costs to sell, assessed at the date the companies individually were selected for sale and their respective net book values after all other adjustments had been recorded. In determining the fair value for the disposed assets and liabilities, we evaluated past performance, expected future performance, management issues, bonding requirements, market forecasts and the carrying value of such assets and liabilities and received a fairness opinion from an independent consulting and investment banking firm in support of this determination for certain of the subsidiaries included in the assessment. The impairment charge was related to subsidiaries included in the commercial and industrial segment of our operations (see Note 2).
Results of Operations
The following table presents selected historical results of operations of IES and our subsidiaries with dollar amounts in thousands. These historical statements of operations include the results of operations for businesses acquired through purchases beginning on their respective dates of acquisition.
Year Ended September 30, |
|||||||||||||||||||||
2002 |
2003 |
2004 |
|||||||||||||||||||
(restated) | (restated) | ||||||||||||||||||||
(In thousands) | |||||||||||||||||||||
Revenues |
$ | 1,252,613 | 100 | % | $ | 1,238,793 | 100 | % | $ | 1,202,707 | 100 | % | |||||||||
Cost of services (including depreciation) |
1,066,838 | 85 | 1,064,783 | 86 | 1,053,238 | 88 | |||||||||||||||
Gross profit |
185,775 | 15 | 174,010 | 14 | 149,469 | 12 | |||||||||||||||
Selling, general and administrative expenses |
157,043 | 13 | 136,624 | 11 | 142,050 | 12 | |||||||||||||||
Restructuring charges |
5,556 | | | | | | |||||||||||||||
Goodwill impairment |
| | | | 87,373 | 7 | |||||||||||||||
Income (loss) from continuing operations |
23,176 | 2 | 37,386 | 3 | (79,954 | ) | (7 | ) | |||||||||||||
Interest and other expense, net |
(27,454 | ) | (2 | ) | (25,936 | ) | (2 | ) | (29,052 | ) | (2 | ) | |||||||||
Income (loss) from continuing operations before income taxes |
(4,278 | ) | | 11,450 | 1 | (109,006 | ) | (9 | ) | ||||||||||||
Provision for income taxes |
(1,832 | ) | | 1,314 | | 7,395 | 1 | ||||||||||||||
Net income (loss) from continuing operations |
(2,446 | ) | | 10,136 | 1 | (116,401 | ) | (10 | ) | ||||||||||||
Discontinued operations: |
|||||||||||||||||||||
Income (loss) from discontinued operations |
17,750 | 1 | 15,564 | 1 | (4,774 | ) | | ||||||||||||||
Provision for income taxes |
7,028 | | 6,263 | | 3,689 | | |||||||||||||||
Net income (loss) from discontinued operations |
10,722 | 1 | 9,301 | 1 | (8,463 | ) | (1 | ) | |||||||||||||
Cumulative effect of change in accounting principle, net of tax |
(283,284 | ) | (23 | ) | | | | | |||||||||||||
Net income (loss) |
$ | (275,008 | ) | (22 | )% | $ | 19,437 | 2 | % | $ | (124,864 | ) | (10 | )% | |||||||
19
Year ended September 30, 2004 compared to year ended September 30, 2003
Revenues
Revenues Year ended September 30, |
Percentage of Total Revenues |
Percentage Growth (Decline) |
|||||||
2003 |
2004 |
2004 |
|||||||
Commercial and Industrial |
78 | % | 74 | % | (7 | )% | |||
Residential |
22 | % | 26 | % | 12 | % | |||
Total Company |
100 | % | 100 | % | (3 | )% |
Revenues decreased $36.1 million, or 3%, from $1,238.8 million for the year ended September 30, 2003 to $1,202.7 million for the year ended September 30, 2004. The decrease in total revenues is the result of a $69.4 million decrease in commercial and industrial revenues offset by an increase of $33.3 million in residential revenues. The decline in commercial and industrial revenues is primarily attributable to declines in the commercial and industrial construction market in Texas and for our traveling companies offset by increases in commercial and industrial revenues from our markets on the East Coast. The increase in residential revenues is attributable to the strong housing environment resulting from low interest rates and good execution by our residential management where we have seen increases at all of our subsidiaries focused primarily on residential electrical contracting.
Gross Profit
Segment Gross Margins as a Percentage of Segment Revenues |
||||||
Year ended September 30, |
2003 |
2004 |
||||
Commercial and Industrial |
12 | % | 10 | % | ||
Residential |
21 | % | 19 | % | ||
Total Company |
14 | % | 12 | % |
Gross profit decreased $24.5 million, or 14% from $174.0 million for the year ended September 30, 2003 to $149.5 million for the year ended September 30, 2004. The decline in commercial and industrial gross profit from $116.4 million for the year ended September 30, 2003, to $90.0 million for the year ended September 30, 2004, was due to gross profit on a lower revenue base earned year over year of approximately $8.4 million, a decline in gross profit margin at one subsidiary of $6.0 million, increased costs associated with the procurement of copper wire, steel products and fuel, as well as overall declines in margins as a result of increased competition in markets we serve. The increase in residential gross profit from $57.7 million for the year ended September 30, 2003, to $59.5 million for the year ended September 30, 2004, was due to gross profit on a higher revenue base earned year over year of approximately $7.0 million, offset by increased costs associated with the procurement of copper wire, steel products and fuel.
Overall gross margin as a percentage of revenues decreased from 14% for the year ended September 30, 2003 to 12% for the year ended September 30, 2004. Had we earned last years gross margin of 14%, gross profit for the year ended September 30, 2004 would have been $172.6 million, an increase of $23.2 million. The decline in gross margin during the year ended September 30, 2004 was primarily due to increased competition for available commercial and industrial work, the decline in gross profit margin at one subsidiary of $6.0 million and increased costs associated with the procurement of copper wire, steel products and fuel.
Selling, General and Administrative Expenses
Selling, general and administrative expenses increased $5.4 million, or 4%, from $136.6 million for the year ended September 30, 2003 to $142.1 million for the year ended September 30, 2004. This increase is due
20
primarily to an $8.0 million charge to settle a lawsuit taken during the fourth quarter ended September 30, 2004. This increase is also due to increased legal fees of $3.7 million, increased bad debt expense of $1.2 million due to receivable write-offs and $1.1 million in severance expenses recorded during the year ended September 30, 2004 as compared to the year ended September 30, 2003. These increased selling general and administrative expenses were offset by approximately $7.8 million of reduced employment related expenses including employee paid medical insurance, bonuses and commissions and other variable expenses. As a result of these charges, selling, general and administrative expenses as a percent of revenue increased from 11% for the year ended September 30, 2003 to 12% for the year ended September 30, 2004.
Goodwill Impairment Charge
During the year ended September 30, 2004, we recorded a charge of $87.4 million related to impairments to the carrying value of goodwill. This charge was entirely associated with the commercial and industrial segment of our operations. See Liquidity and Capital Resources which follows for further information.
Income From Operations
Income from operations decreased $117.3 million, or 314%, from $37.4 million for the year ended September 30, 2003 to a $80.0 million operating loss for the year ended September 30, 2004. As a percentage of revenues, income from operations decreased from 3% for the year ended September 30, 2003, to a 7% operating loss for the year ended September 30, 2004. This decrease in income from operations was primarily attributed to the $87.4 million of goodwill impairment to the carrying value of goodwill, the accrual of $8.0 million for the settlement of a lawsuit included in selling, general and administrative and the $24.5 million decline in gross profits earned during the year ended September 30, 2004 as compared to the year ended September 30, 2003.
Net Interest and Other Expense
Interest and other expense, net increased $3.1 million, or 12%, from $25.9 million in 2003 to $29.1 million in 2004. This increase is primarily due to $5.2 million in costs incurred during the year ended September 30, 2004 associated with the early extinguishment of $75.0 million of high-yield subordinated debt. This increase was offset by a $3.3 million decrease in interest expense during the year ended September 30, 2004 due to a lower amount of average debt outstanding during the year ended September 30, 2004 compared to the year ended September 30, 2003, and a shift to lower cost senior secured debt from subordinated debt during the year ended September 30, 2004.
Provision for Income Taxes
Our effective tax rate decreased from 11% for the year ended September 30, 2003 to negative 7% for the year ended September 30, 2004. The decease is attributable to a pretax net loss, permanent differences required to be added back for income tax purposes, the impairment of non-deductible goodwill, additional valuation allowance against certain federal and state deferred tax assets and a change in contingent tax liabilities.
In assessing the realizability of deferred tax assets at September 30, 2004, we considered whether it was more likely than not that some portion or all of the deferred tax assets will not be realized. Our realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which these temporary differences become deductible. However, SFAS 109, Accounting for Income Taxes places considerably more weight on historical results and less weight on future projections when there is negative evidence such as cumulative pretax losses in recent years. We incurred a cumulative pretax loss of $101.8 million for September 30, 2002, 2003 and 2004 including goodwill impairment of $87.3 million in the year ended September 30, 2004 and excluding $283.3 million resulting from the adoption of SFAS 142 in the year ended September 30, 2002. In the absence of specific favorable evidence of sufficient weight to offset the negative evidence of the cumulative pretax loss, we have provided $27.4 million of valuation allowances for certain federal and state deferred tax assets.
21
Discontinued Operations
During October 2004, we announced plans to begin a strategic alignment including the planned divestiture of certain commercial segment, underperforming subsidiaries and those that rely heavily on surety bonding for obtaining a majority of their projects. During November 2004, management committed to a plan to complete the divestiture of these companies by the end of fiscal 2005. This plan included managements actively seeking potential buyers of the selected companies among other activities necessary to complete the sales. Management does not foresee any significant changes in the plan, nor anticipates events requiring withdrawal from the plan. The discontinued operations disclosures include only those identified subsidiaries qualifying for discontinued operations treatment as of June 30, 2005 for the periods presented; therefore, other subsidiaries included in our divestiture plan will be included in future periods as they qualify for discontinued operations treatment (In thousands).
Year Ended September 30, |
|||||||
2003 |
2004 |
||||||
Revenues |
$ | 208,970 | $ | 221,393 | |||
Gross profit |
$ | 32,423 | $ | 24,461 | |||
Pretax income (loss) |
$ | 15,564 | $ | (4,774 | ) | ||
Balance as of |
|||||||
September 30, 2003 |
September 30, 2004 |
||||||
Accounts receivable, net |
$ | 46,959 | $ | 55,978 | |||
Inventory, net |
2,704 | 3,099 | |||||
Costs and estimated earnings in excess of billings on uncompleted contracts |
8,951 | 10,065 | |||||
Other current assets |
1,014 | 381 | |||||
Property and equipment, net |
4,750 | 3,777 | |||||
Goodwill, net |
27,628 | 15,203 | |||||
Other noncurrent assets |
1,222 | 1,603 | |||||
Total assets |
$ | 93,228 | $ | 90,106 | |||
Accounts payable and accrued liabilities |
$ | 15,805 | $ | 16,115 | |||
Billings in excess of costs and estimated earnings on uncompleted contracts |
6,317 | 6,301 | |||||
Long term debt, net of current portion |
80 | 26 | |||||
Other long term liabilities |
977 | 888 | |||||
Total liabilities |
23,179 | 23,330 | |||||
Net assets |
$ | 70,049 | $ | 66,776 | |||
Year ended September 30, 2003 compared to year ended September 30, 2002
Revenues
Revenues Year ended September 30, |
Percentage of Total Revenues |
Percentage Growth (Decline) |
|||||||
2002 |
2003 |
2003 |
|||||||
Commercial and Industrial |
78 | % | 78 | % | (1 | )% | |||
Residential |
22 | % | 22 | % | (1 | )% | |||
Total Company |
100 | % | 100 | % | (1 | )% | |||
22
Revenues decreased $13.8 million, or 1%, from $1,252.6 million for the year ended September 30, 2002 to $1,238.8 million for the year ended September 30, 2003. The decrease in total revenues is the result of $41.6 million in lost revenues on divested or closed companies that were included in revenues for the year ended September 30, 2002, but not during the year ended September 30, 2003. These lost revenues were partially offset by $32.2 million of revenues from an acquisition during the year ended September 30, 2003. The decline in commercial and industrial revenues is attributable to $29.9 million decline in communications work due to market contractions, particularly in California, Colorado, Washington, D.C. and Virginia. The decrease in residential revenues is attributable to a $34.6 million decline in multi-family residential construction projects, primarily in Colorado and Maryland, offset by a $31.0 million increase in single-family construction spending. We believe record low interest rates during the last 12-18 months is driving demand for new homes, leading to record levels of single-family residential construction spending. As families move into their new single-family homes, the demand for multi-family housing has dropped.
Gross Profit
Segment Gross Margins as a Percentage of Segment Revenues |
||||||
Year ended September 30, |
2002 |
2003 |
||||
Commercial and Industrial |
13 | % | 12 | % | ||
Residential |
22 | % | 21 | % | ||
Total Company |
15 | % | 14 | % |
Gross profit decreased $11.8 million, or 6% from $185.8 million for the year ended September 30, 2002 to $174.0 million for the year ended September 30, 2003. The decline in commercial and industrial gross profit was due to lower revenues earned year over year as discussed and due to a shift in the type of commercial and industrial work performed during the year ended September 30, 2003. The related service and maintenance work for commercial and industrial customers, which tends to earn higher gross margins than fixed price contracts, declined $6.5 million in gross profit during the year. This decline was moderated by a $102.2 million increase in larger project work awarded during the year, particularly industrial contracts in excess of $1 million. These larger projects produce more gross profits but tend to earn lower gross margins as a percentage of revenue due to the competitive bidding procedures in place to be awarded this type of work.
Overall gross margin as a percentage of revenues decreased from 15% for the year ended September 30, 2002 to 14% for the year ended September 30, 2003. Had we earned the fiscal 2002 gross margin of 15%, gross profit for the year ended September 30, 2003 would have been $183.7 million, an increase of $9.7 million. The decline in gross margin during the year ended September 30, 2003 was due to the shift in type of commercial and industrial work performed and due to the increased competition for available residential work. We believe low interest rates during the last 12-18 months are driving demand for new homes, leading to record levels of single-family residential construction spending. This increased demand for residential construction has increased pricing pressure for available work, particularly affecting our operating units that perform limited amounts of residential work in addition to their commercial and industrial contract expertise.
Selling, General and Administrative Expenses
Selling, general and administrative expenses decreased $20.4 million, or 13%, from $157.0 million for the year ended September 30, 2002 to $136.6 million for the year ended September 30, 2003. This decline is due to the organizational restructuring that occurred during the year ended September 30, 2002. In the last 12 months, we have combined administrative offices and functions, leading to a decline in operating locations from approximately 150 locations to approximately 134 locations. We also divested or closed non-performing companies, which decreased our selling, general and administrative cost structure by approximately $7.9 million.
23
Finally, we streamlined our administrative cost structure, yielding savings of $14.3 million in salaries and benefits. As a result of these changes, selling, general and administrative expenses as a percent of revenue decreased 2% from 13% for the year ended September 30, 2002 to 11% for the year ended September 30, 2003.
Restructuring Charges
In October 2001, we began implementation of a workforce reduction program. The purpose of this program was to cut costs by reducing the number of administrative staff both in the field and at the home office. The total number of terminated employees was approximately 450. As a result of the program implementation, we recorded pre-tax restructuring charges of $5.6 million associated with 45 employees during the year ended September 30, 2002 and presented these charges as a separate component of our results of operations for the period then ended. No restructuring charges were incurred for the year ended September 30, 2003. The charges were based on the costs of the workforce reduction program and include severance and other special termination benefits. We believe the reduction of these personnel resulted in annual savings of approximately $4.1 million in salaries and benefits. At September 30, 2002, approximately $2.0 million of these charges that related to five individuals had not been paid and were included in accounts payable and accrued expenses. At September 30, 2003, approximately $1.3 million of these charges that relate to three individuals have not been paid and are included in accounts payable and accrued expenses. The remaining payments accrued under this restructuring were made during the year ended September 30, 2004.
Income From Operations
Income from operations increased $14.2 million, or 61%, from $23.2 million for the year ended September 30, 2002 to $37.4 million for the year ended September 30, 2003. As a percentage of revenues, income from operations increased from 2% for the year ended September 30, 2002 to 3% for the year ended September 30, 2003. This increase in income from operations was primarily attributed to $5.6 million in restructuring charges recorded during the year ended September 30, 2002, and a $20.4 million decrease selling, general and administrative expenses year over year, offset by a $11.8 million decline in gross profits earned during the year ended September 30, 2003.
Net Interest and Other Expense
Interest and other expense, net decreased $1.5 million, or 6%, from $27.5 million in 2002 to $25.9 million in 2003. The decrease was primarily the result of a $1.0 million decrease in interest expense during the year ended September 30, 2003 due to a lower amount of average debt outstanding during the year ended September 30, 2003 compared to the year ended September 30, 2002. During the year ended September 30, 2003, other expense, net included a $0.4 million gain from the sale of certain subsidiaries and a $0.8 million loss recorded on our investment in Energy Photovoltaics, Inc. This was a decrease from other expense, net, for the year ended September 30, 2002, which included a $1.0 million gain resulting from the retirement of $27.1 million of our 9 3/8% senior subordinated notes due February 1, 2009 in the last quarter of the year ended September 30, 2002, a $1.5 million net gain resulting from the sale of certain subsidiaries and offset by a $1.7 million loss recorded on our investment in Energy Photovoltaics, Inc. and losses on sales of assets of $0.9 million.
Provision for Income Taxes
Our effective tax rate decreased from 43% for the year ended September 30, 2002 to 11% for the year ended September 30, 2003. This decrease is attributable to the release of $3.3 million of tax valuation allowances that were included in income during the year ended September 30, 2003. We released these valuation allowances because we believe that we will now realize a portion of the deferred tax assets for which they were established. Without the impact of these valuation allowance releases, our effective tax rate was 40% for the year ended September 30, 2003.
24
Discontinued Operations
During October 2004, we announced plans to begin a strategic alignment including the planned divestiture of certain commercial segment, underperforming subsidiaries and those that rely heavily on surety bonding for obtaining a majority of their projects. During November 2004, management committed to a plan to complete the divestiture of these companies by the end of fiscal 2005. This plan included managements actively seeking potential buyers of the selected companies among other activities necessary to complete the sales. Management expects to be able to sell all considered subsidiaries at their respective fair market values at the date of sale determined by a reasonably accepted valuation method. Management does not foresee any significant changes in the plan, nor anticipates events requiring withdrawal from the plan. The discontinued operations disclosures include only those identified subsidiaries qualifying for discontinued operations treatment as of June 30, 2005 for the periods presented; therefore, other subsidiaries included in our divestiture plan will be included in future periods as they qualify for discontinued operations treatment (In thousands).
Year Ended September 30, | ||||||
2002 |
2003 | |||||
Revenues |
$ | 221,848 | $ | 208,970 | ||
Gross profit |
$ | 35,655 | $ | 32,423 | ||
Pretax income (loss) |
$ | 17,750 | $ | 15,564 | ||
Balance as of | ||||||
September 30, 2002 |
September 30, 2003 | |||||
Accounts receivable, net |
$ | 44,420 | $ | 46,959 | ||
Inventory, net |
2,883 | 2,704 | ||||
Costs and estimated earnings in excess of billings on uncompleted contracts |
7,726 | 8,951 | ||||
Other current assets |
1,082 | 1,014 | ||||
Property and equipment, net |
5,994 | 4,750 | ||||
Goodwill, net |
27,628 | 27,628 | ||||
Other noncurrent assets |
578 | 1,222 | ||||
Total assets |
$ | 90,311 | $ | 93,228 | ||
Accounts payable and accrued liabilities |
$ | 16,396 | $ | 15,805 | ||
Billings in excess of costs and estimated earnings on uncompleted contracts |
9,181 | 6,317 | ||||
Long term debt, net of current portion |
140 | 80 | ||||
Other long term liabilities |
1,115 | 977 | ||||
Total liabilities |
26,832 | 23,179 | ||||
Net assets |
$ | 63,479 | $ | 70,049 | ||
Cost Drivers
As a service business, our cost structure is highly variable. Our primary costs include labor, materials and insurance. Approximately 49% of our costs are derived from labor and related expenses. For the years ended September 30, 2002, 2003 and 2004, our labor-related expenses totaled $466.1 million, $456.2 million and $509.9 million, respectively. As of September 30, 2004, we had approximately 11,600 employees. Approximately 9,635 employees were field electricians, the number of which fluctuates depending upon the number and size of the projects undertaken by us at any particular time. Approximately 1,974 employees were project managers, job superintendents and administrative and management personnel, including executive
25
officers, estimators or engineers, office staff and clerical personnel. We provide a health, welfare and benefit plan for all employees subject to eligibility requirements. We have a 401(k) plan pursuant to which eligible employees may make contributions through a payroll deduction. We make matching cash contributions of 25% of each employees contribution up to 6% of that employees salary. We also have an employee stock purchase plan that provides eligible employees the opportunity to contribute up to 100% of their cash compensation, up to $21,250 annually, toward the annual purchase of our common stock at a discounted price; 1,124 employees participated in this plan during the year ended September 30, 2004.
Approximately 50% of our costs incurred are for materials installed on projects. This component of our expense structure is variable based on the demand for our services. We generally incur costs for materials once we begin work on a project. We generally order materials when needed, ship them directly to the jobsite, and install them within 30 days. Materials consist of commodity-based items such as conduit, wire and fuses as well as specialty items such as fixtures, switchgear and control panels. For the years ended September 30, 2002, 2003 and 2004, our materials expenses (net of earned rebates) totaled $444.3 million, $456.6 million and $527.3 million, respectively.
We are insured for workers compensation, employers liability, auto liability, general liability and health insurance, subject to large deductibles. Losses up to the deductible amounts are accrued based upon actuarial studies and our estimates of the ultimate liability for claims incurred and an estimate of claims incurred but not reported. The accruals are based upon known facts and historical trends and management believes such accruals to be adequate. Expenses for claims administration, claims funding and reserves funding totaled $49.3 million, $40.8 million and $37.1 million for the years ended September 30, 2002, 2003, and 2004, respectively.
Working Capital
September 30, 2004 |
June 30, 2005 | |||||
CURRENT ASSETS: |
||||||
Cash and cash equivalents |
$ | 22,232 | $ | 31,518 | ||
Restricted cash |
| 10,006 | ||||
Accounts receivable: |
||||||
Trade, net of allowance of $3,988 and $3,711 respectively |
201,608 | 192,448 | ||||
Retainage |
61,725 | 56,410 | ||||
Costs and estimated earnings in excess of billings on uncompleted contracts |
31,751 | 25,731 | ||||
Inventories |
19,558 | 24,293 | ||||
Prepaid expenses and other current assets |
12,926 | 21,967 | ||||
Assets held for sale associated with discontinued operations |
90,106 | 13,032 | ||||
Total current assets |
$ | 439,906 | $ | 375,405 | ||
CURRENT LIABILITIES: |
||||||
Current maturities of long-term debt |
$ | 42,993 | 43 | |||
Accounts payable and accrued expenses |
133,384 | 127,047 | ||||
Billings in excess of costs and estimated earnings on uncompleted contracts |
31,288 | 34,969 | ||||
Liabilities related to assets held for sale associated with discontinued operations |
23,330 | 4,712 | ||||
Total current liabilities |
$ | 230,995 | $ | 166,771 | ||
Working capital |
$ | 208,911 | $ | 208,634 | ||
Total current assets decreased $64.5 million, or 14.6%, from $439.9 million as of September 30, 2004 to $375.4 million as of June 30, 2005. This decrease is primarily the result of a $9.2 million decrease in trade accounts receivable, net, due to a company-wide focus on collections and the timing of billings on projects in
26
progress, $77.1 million decrease in assets held for sale associated with discontinued operations due to the sale of eleven business units during the nine months ended June 30, 2005; partially offset by an increase in prepaid expenses and other current assets of $9.1 million from additional cash collateral deposited with our surety bonding company, and a net increase in cash and restricted cash of $19.3 resulting from the proceeds received from the issuance of our senior convertible bonds in November 2004, proceeds received from assets sales and the focus on collections.
As of June 30, 2005, the status of our costs in excess of billings versus our billings in excess of costs improved over that at September 30, 2004; and days sales outstanding improved 4 days from 81 days at September 30, 2004 to 77 days at June 30, 2005. Our receivables and costs and earnings in excess of billings on uncompleted contracts as compared to quarterly revenues increased from 94.2% at September 30, 2004 to 94.8% at June 30, 2005, when adjusted for a balance of $5.2 million as of June 30, 2005 in long-standing receivables also outstanding at September 30, 2004, but not fully collected by June 30, 2005. As is common in the construction industry, some of these receivables are in litigation or require us to exercise our contractual lien rights and are expected to be collected. These receivables are primarily associated with a few operating companies within our commercial and industrial segments. Some of our receivables are slow pay in nature or require us to exercise our contractual or lien rights. We believe that our allowances for doubtful accounts are sufficient to cover any uncollectible accounts.
Total current liabilities decreased $64.2 million, or 27.8%, from $231.0 million as of September 30, 2004 to $166.8 million as of June 30, 2005. This decrease is primarily the result of a $42.9 million decrease in current maturities of long-term debt related to payments on our former credit facility, $6.3 million decrease in accounts payable and accrued expenses due to the timing of payments made and reduced operating activity resulting from the seasonality of our business during the nine months ended June 30, 2005, a $18.6 million decrease related to the sale of eleven business units during the nine months ended June 30, 2005 pursuant to a divestiture plan previously disclosed; partially offset by a $3.7 million increase in billings in excess of costs.
Working capital decreased $0.3 million, or 0.1%, due primarily to a net decrease of $58.0 million in the net assets held for sale associated with discontinued operations, a decrease of $2.3 million in costs and estimated earnings in excess of billings versus billings in excess of costs and estimated earnings on uncompleted contracts and a net decrease in accounts payable and accrued expenses of $4.1 million, substantially offset by an increase to working capital related to a reduction in current maturities of long-term debt of $42.9 million, an increase in cash and cash equivalents of $9.3 million, an increase in restricted cash of $10.0 million. See Liquidity and Capital Resources below for further information.
Liquidity And Capital Resources
As of June 30, 2005, we had cash and cash equivalents of $31.5 million, restricted cash of $10.0 million, working capital of $208.6 million, no outstanding borrowings under our credit facility and term loan, $44.8 million of letters of credit outstanding, and available capacity under our credit facility of $12.6 million. The amount outstanding under our senior subordinated notes was $172.9 million and $50.0 million outstanding under our senior convertible notes.
During the nine months ended June 30, 2005, we used $5.8 million of net cash from operating activities. This net cash used by operating activities comprised of a net loss of $44.7 million, decreased by a $15.5 million net loss from discontinued operations, $8.2 million net operating cash flows from discontinued operations, and $17.7 million of non-cash charges related primarily to $4.0 million of amortization of deferred financing costs and $8.3 million of other depreciation and amortization expense, and $1.9 million bad debt expense; and offset by changes in working capital of $3.1 million. Working capital changes consisted of a $9.5 million increase in prepaid expenses and other current assets due to cash deposited with our surety bonding company collateralizing our surety bonds and a $4.8 million increase in inventories; offset by a $11.8 million decrease in accounts receivable due to the timing of and increased focus on collections. Additionally, accounts payable and accrued
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expenses decreased $8.8 million due to the timing of payments from period to period, and billings in excess of costs increased $3.4 million. Net cash provided by investing activities was $26.4 million, consisting primarily of $38.0 million in proceeds received for the sale of eleven business units during the nine months ended June 30, 2005 included in net cash provided by investing activities related to discontinued operations, offset by $3.6 million related to the purchase of property and equipment and an increase of $10.0 million in restricted cash. Net cash used in financing activities was $11.3 million, resulting primarily from the receipt of $60.0 million in senior convertible notes and additional drawings on our credit facility and $0.6 million in proceeds from exercise of stock options, offset by $68.0 million in payments made on our Credit Facility and term loan and $4.3 million in capitalized deferred financing costs incurred primarily in connection with the issuance of our senior convertible notes.
On November 5, 2003, we commenced a share repurchase program of up to $13 million. We used approximately $4.6 million in cash generated from operations to repurchase 549,200 shares during the year ended September 30, 2004 under this program. The terms of our credit facility, as amended, restrict our ability to repurchase shares under this program; therefore, no shares were repurchased under this program for the nine months ended June 30, 2005.
Credit Facilities
On February 27, 2004, we amended and restated our $125.0 million revolving credit facility to a $125.0 million revolving credit facility and a $50.0 million term loan led by JPMorgan Chase Bank, N.A. formerly known as Bank One, N.A. We used the proceeds from the term loan and available cash to redeem $75.0 million principal amount of our long term bonds. Since February 27, 2004, and through May 24, 2005, we amended the credit facility five times. The amendments provided, among other things, for covenants or waivers that permitted us to file our Form 10-Q for the quarter ended June 30, 2004 on or before December 15, 2004, permitted us to issue senior convertible notes, specified mandatory debt reduction amounts by quarter, adjusted and redefined financial covenants on a monthly basis beginning December 31, 2004, increased pricing, established the borrowing base at 70 percent of qualifying receivables and permit us to release certain collateral related to bonded jobs to companies providing surety bonding. These amendments required the payments of fees upon their execution. These fees were capitalized as deferred financing costs and amortized over the life of the facility. The credit facility, as amended, was scheduled to mature on August 31, 2005. At June 30, 2005, the term loan had no outstanding borrowings. Amounts borrowed under the credit facility, as amended, accrued interest at an annual rate of the banks prime rate plus two percent. Fees of one percent per annum were assessed on the outstanding credit facility commitment as of the beginning of each quarter. Our direct and indirect subsidiaries guaranteed the repayment of all amounts due under the facility and the facility was secured by a first perfected security interest in all the assets of the company and those subsidiaries, including all of the outstanding capital shares of the capital stock of those subsidiaries. Among other restrictions, the financial covenants included minimum EBITDA, as defined in the credit agreement, requirements for core and all operations, a maximum senior secured debt to EBITDA ratio and a minimum interest coverage ratio. As of June 30, 2005, we would not have been in compliance with the minimum EBITDA covenant of the credit facility but we replaced the facility on August 1, 2005.
On August 1, 2005, we entered into a three-year $80 million asset-based revolving credit facility with Bank of America, N.A., as administrative agent. The new credit facility replaced our revolving credit facility with JPMorgan Chase Bank, N.A., which was scheduled to mature on August 31, 2005.
IES and each of its operating subsidiaries are co-borrowers and are jointly and severally liable for all obligations under the new credit facility. Our other subsidiaries have guaranteed all of the obligations under the new credit facility. The obligations of the borrowers and the guarantors are secured by a pledge of substantially all of the assets of IES and its subsidiaries, excluding any assets pledged to secure surety bonds procured by us and our subsidiaries in connection with their operations.
The new credit facility allows us to obtain revolving credit loans and provides for the issuance of letters of credit. The amount available at any time under the new credit facility for revolving credit loans or the issuance of
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letters of credit is determined by a borrowing base calculated at a percentage of accounts receivable, inventory and equipment. The borrowing base is limited to $80 million, reduced by a fixed reserve which is currently $15 million.
Generally, outstanding borrowings under the new credit facility are priced at LIBOR plus a margin that varies from 2.5% to 3.5%, or at our option, a domestic bank rate plus a margin that varies between 0.5% and 1.5%. We are charged a fronting fee equal to 0.25% of each letter of credit issued, and a letter of credit fee equal to the margin applicable to LIBOR based loans, if we set aside cash equal to 100% of the amount of the letter of credit as collateral, the fee is reduced by 0.75%. We may elect to prepay the new credit facility at any time subject to a termination fee if prepaid during the first year.
The new credit facility contains covenants restricting our ability to: (1) incur indebtedness; (2) grant liens; (3) enter into certain merger or liquidation transactions; (4) dispose of assets; (5) make capital expenditures; (6) pay dividends; (7) enter into certain other agreements and (8) make payments on our subordinated debt. The new credit facility also includes customary covenants regarding reporting obligations and requires us to maintain a consolidated fixed charge coverage.
In addition to customary events of default, the new credit facility provides that an event of default will occur if: (1) we or our subsidiaries default on any debt in excess of $500,000; (2) certain changes of control occur; (3) an event of default occurs with respect to our 9 3/8% Senior Subordinated Notes due 2009, the Companys Series A 6.5% Senior Convertible Notes or the Companys Series B 6.5% Senior Convertible Notes if such default is not cured within the applicable grace period; (4) an event of default occurs under our agreements with Federal Insurance Company, or Chubb, and as a result thereof Chubb has ceased issuing surety bonds on behalf of the Company, has made demand for performance thereunder or has otherwise commenced exercising any remedies thereunder, or if any claim is made on Chubb related to any bonded contract against the issuer of any surety bond or (6) an event or condition occurs which has a material adverse effect on us and our subsidiaries taken as a whole.
If an event of default occurs under the new credit facility, then the lenders may: (1) terminate their commitments under the new credit facility; (2) declare any outstanding indebtedness under the new credit facility to be immediately due and payable; and (3) foreclose on the collateral pledged to secure the obligations.
The borrowers currently have no borrowings outstanding under the new credit facility other than a letter of credit, or the Back-Up Letter of Credit, issued by Bank of America in favor of JP Morgan Chase in the face amount of $42.1 million. The Back-Up Letter of Credit has been issued to secure the letters of credit issued by JP Morgan Chase in connection with our former credit facility.
On August 1, 2005, Bank of America and Chubb entered into a letter agreement that sets forth certain agreements among the parties thereto with respect to the commingling of cash proceeds from collateral granted to Chubb to secure our surety obligations and the cash proceeds from collateral granted to Bank of America in connection with the new credit facility. We have agreed to provide Chubb with an additional $5 million letter of credit that will be held by Chubb as additional security for our surety obligations.
Furthermore, we expect to record a non-cash charge in the quarter ended September 30, 2005, of approximately $0.6 million to write off the remaining deferred financing costs related to our former credit facility.
On September 30, 2005, IES and certain of its subsidiaries entered into an amendment to the new credit facility. The amendment (1) revises the determination of EBITDA for the purpose of calculating the Fixed Charge Coverage Ratio (as defined in the new credit facility) and for the purpose of determining the relevant Applicable Margin (as defined in the new credit facility) by including certain adjustments as described in the amendment to Adjusted Net Earnings fro Operations (as defined in the new credit facility) for any period that includes August or September 2005, (2) provides that we will make ratable monthly payments to the lender in order to increase the amount of cash collateral held by the lender as security for our obligations under the new
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credit facility to $17.5 million, from $11.2 million at October 4, 2005 and (3) provides that the interest rate applicable to our obligations under the new credit facility will be increased by 0.25% during the period ending on the earlier of December 31, 2005, or such time as the lender syndicates the credit facility.
Senior Subordinated Notes
We have outstanding two different series of senior subordinated notes with similar terms. The notes bear interest at 9 3/8% and will mature on February 1, 2009. We pay interest on the notes on February 1 and August 1 of each year. The notes are unsecured senior subordinated obligations and are subordinated to all of 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. During the nine months ended June 30, 2004, we redeemed $75.0 million principal amount of our senior subordinated notes, paying a call premium of 4.7%, or $3.5 million. This premium along with a write off of previously capitalized deferred financing costs of $1.6 million was recorded as a loss in other income and expense. At June 30, 2005, we had $172.9 million in outstanding senior subordinated notes. We failed to timely file our June 30, 2004 Form 10-Q resulting in defaults under the indenture relating to our subordinated debt and senior secured credit facility. We have since cured all defaults under our subordinated debt. If the senior credit facility is accelerated as a result of the existing default, then the trustee may declare a default under the senior subordinated notes.
Senior Convertible Notes
On November 24, 2004, we entered into a purchase agreement for a private placement of $36.0 million aggregate principal amount of our 6.5% Senior Convertible Notes due 2014. Investors in the notes agreed to a purchase price equal to 100% of the principal amount of the notes. The notes require payment of interest semi-annually in arrears at an annual rate of 6.5%, have a stated maturity of November 1, 2014, constitute senior unsecured obligations, are guaranteed on a senior unsecured basis by our significant domestic subsidiaries, and are convertible at the option of the holder under certain circumstances into shares of our common stock at an initial conversion price of $3.25 per share, subject to adjustment. On November 1, 2008, we have the option to redeem the Senior Convertible Notes, subject to certain conditions. The net proceeds from the sale of the notes were used to prepay a portion of our senior secured credit facility and for general corporate purposes. The notes, the guarantees and the shares of common stock issuable upon conversion of the notes to be offered have not been registered under the Securities Act of 1933, as amended, or any state securities laws and, unless so registered, the securities may not be offered or sold in the United States except pursuant to an exemption from, or in a transaction not subject to, the registration requirements of the Securities Act and applicable state securities laws. An acceleration under the credit facility or the senior subordinated notes that is not cured within 30 days is also a cross default under the senior convertible notes.
On February 24, 2005, and following shareholder approval, we sold $14 million in principal amount of our Series B 6.5% Senior Convertible Notes due 2014, pursuant to separate option exercises by the holders of the aforementioned $36 million aggregate principal amount of Notes issued by us in an initial private placement on November 24, 2004. The senior convertible notes are a hybrid instrument comprised of two components: (1) a debt instrument and (2) certain embedded derivatives. The embedded derivatives include a redemption premium and a make-whole provision and the value of the redemption premium that may be due in the event we redeem the notes prior to the stated maturity. In accordance with the guidance that Statement of Financial Accounting Standards No. 133, as amended, Accounting for Derivative Instruments and Hedging Activities, (SFAS 133) and Emerging Issues Task Force Issue No. 00-19, Accounting for Derivative Financial Instruments Indexed to, and Potentially Settled in, a Companys Own Stock (EITF 00-19) provide, the embedded derivatives must be removed from the debt host and accounted for separately as a derivative instrument. These derivative instruments will be marked-to-market each reporting period. During the three months ended December 31, 2004, we were required to also value the portion of the Notes that would settle in cash because shareholder approval of the notes had not yet been obtained. The initial value of this derivative was $1.4 million and the value at December 31, 2004 was $4.0 million and consequently, a $2.6 million mark to market loss was recorded. The value of this
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derivative immediately prior to the affirmative shareholder vote was $2.0 million and accordingly, we recorded a mark to market gain of $2.0 million during the three months ended March 31, 2005. The calculation of the fair value of the conversion option was performed utilizing the Black-Scholes option pricing model with the following assumptions effective over the nine months period ended June 30, 2005: expected dividend yield of 0.00%, expected stock price volatility of 40.00%, weighted average risk free interest rate ranging from 3.67% to 4.15% and an expected term of four to ten years. The valuation of the other embedded derivatives was derived by other valuation methods, including present value measures and binomial models. At June 30, 2005, the fair value of the two remaining derivatives was $1.6 million. Additionally, we recorded at June 30, 2005 a net discount of $0.9 million which is being amortized over the remaining term of the Notes.
Off-balance Sheet Arrangements
As is common in our industry, we have entered into certain off balance sheet arrangements that expose us to increased risk. Our significant off balance sheet transactions include commitments associated with noncancelable operating leases, letter of credit obligations and surety guarantees.
We enter into noncancelable operating leases for many of our vehicle and equipment needs. These leases allow us to retain our cash when we do not own the vehicles or equipment and we pay a monthly lease rental fee. At the end of the lease, we have no further obligation to the lessor. We may determine to cancel or terminate a lease before the end of its term. Typically we are liable to the lessor for various lease cancellation or termination costs.
Some of our customers require us to post letters of credit as a means of guaranteeing performance under our contracts and ensuring payment by us to subcontractors and vendors. If our customer has reasonable cause to effect payment under a letter of credit, we would be required to reimburse our creditor for the letter of credit. Depending on the circumstances surrounding a reimbursement to our creditor, we may have a charge to earnings in that period. To date we have not had a situation where a customer has had reasonable cause to effect payment under a letter of credit. At June 30, 2005, $2.1 million of our outstanding letters of credit were to collateralize our customers.
Some of the underwriters of our casualty insurance program require us to post letters of credit as collateral. This is common in the insurance industry. To date we have not had a situation where an underwriter has had reasonable cause to effect payment under a letter of credit. At June 30, 2005, $36.3 million of our outstanding letters of credit were to collateralize our insurance program.
Many of our customers require us to post performance and payment bonds issued by a surety. Those bonds guarantee the customer that we will perform under the terms of a contract and that we will pay subcontractors and vendors. In the event that we fail to perform under a contract or pay subcontractors and vendors, the customer may demand the surety to pay or perform under our bond. Our relationship with our sureties is such that we will indemnify the sureties for any expenses they incur in connection with any of the bonds they issues on our behalf. To date, we have not incurred significant costs to indemnify our sureties for expenses they incurred on our behalf. As of June 30, 2005, our cost to complete projects covered by surety bonds was approximately $110.8 million and utilized a combination of $17.5 million in cash and letters of credit totaling $6.4 million to collateralize its bonding program.
In April 2000, we committed to invest up to $5.0 million in EnerTech Capital Partners II L.P., or EnerTech. EnerTech is a private equity firm specializing in investment opportunities emerging from the deregulation and resulting convergence of the energy, utility and telecommunications industries. Through June 30, 2005, we had invested $3.9 million under our commitment to EnerTech. Since the acquisition of this investment, we have received distributions and recorded net realized losses of $0.7 million. The carrying value of this EnerTech investment at September 30, 2004 and June 30, 2005 was $3.0 million and $3.2 million, respectively. This investment is accounted for on the cost basis of accounting and accordingly, we do not record unrealized losses for the EnerTech investment that we believe are temporary in nature. As of June 30, 2005, the fair value of our share of the EnerTech fund approximated the carrying value. If facts arise that lead us to determine that such unrealized losses are not temporary, we would write down our investment in EnerTech through a charge to other expense during the period of such determination.
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Our future contractual obligations due by September 30 of each of the following fiscal years include (in thousands)(1):
2005 |
2006 |
2007 |
2008 |
2009 |
Thereafter |
Total | |||||||||||||||
Debt obligations |
$ | 34 | $ | 22 | $ | 13 | $ | 3 | $ | 172,888 | $ | 50,000 | $ | 222,960 | |||||||
Operating lease obligations |
3,989 | 10,499 | 7,622 | 4,720 | 3,160 | 3,200 | 33,190 | ||||||||||||||
Deferred and contingent tax liabilities |
266 | 8,886 | 4,578 | 236 | | | 13,966 | ||||||||||||||
Capital lease obligations |
10 | 12 | 3 | 3 | 2 | 1 | 31 |
(1) | The tabular amounts exclude the interest obligations that will be created if the debt and capital lease obligations are outstanding for the periods presented. |
Our other commercial commitments expire by September 30 of each of the following fiscal years (in thousands):
2005 |
2006 |
2007 |
2008 |
2009 |
Thereafter |
Total | ||||||||||||||||
Standby letters of credit |
$ | | $ | 44,845 | $ | | $ | | $ | | $ | | $ | 44,845 | ||||||||
Other commercial commitments |
$ | | $ | | $ | | $ | | $ | | $ | 1,100 | (2) | $ | 1,100 |
(2) | Balance of investment commitment in EnerTech. |
Outlook
Economic conditions across the country are challenging, although construction industry spending is expected to increase by two percent in 2005 according to F.W. Dodge. We continue to focus on collecting receivables and reducing days sales outstanding. We will continue to take steps to reduce our costs. We have made significant reductions in administrative overhead at the home office and in the field. We have elected to sell or close certain operations. Those operations that we have designated to be sold or closed generated total revenues in fiscal 2004 of $90.5 million and operating income of $5.3 million. If we are successful in our efforts to sell these operations, their revenue and income (loss) contributions will no longer be included in our results of operations and the sales proceeds will be used primarily to reduce our indebtedness. As we continue to divest of operations and cut costs our outlook will change. Therefore, we are not providing guidance at this time on future results.
We expect to generate cash flow from operations, sales of businesses and borrowing under our credit facility. Our cash flows from operations tend to track with the seasonality of our business and historically have improved in the latter part of our fiscal year. We anticipate that these combined cash flows will provide sufficient cash to enable us to meet our working capital needs, debt service requirements and capital expenditures for property and equipment through the next twelve months. We expect capital expenditures of approximately $5.0 million for the fiscal year ended September 30, 2005. Our ability to generate cash flow is dependent on many factors, including demand for our products and services, the availability of projects at margins acceptable to us, the ultimate collectibility of our receivables, the ability to consummate transactions to dispose of businesses and our ability to borrow on our credit facility. We continue to look for ways to reduce our overall leverage. See Disclosure Regarding Forward-Looking Statements.
Seasonality and Quarterly Fluctuations
Our results of operations from residential construction are seasonal, depending on weather trends, with typically higher revenues generated during spring and summer and lower revenues during fall and winter. The commercial and industrial aspect of our business is less subject to seasonal trends, as this work generally is performed inside structures protected from the weather. Our service and maintenance business is generally not affected by seasonality. In addition, the construction industry has historically been highly cyclical. Our volume of business may be adversely affected by declines in construction projects resulting from adverse regional or
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national economic conditions. Quarterly results may also be materially affected by the timing of new construction projects, 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 2002 and 2003, inflation did not have a significant effect on our results in those fiscal years or on any of the acquired businesses during similar periods. During fiscal 2004 and year to date 2005, however, we experienced significant increases in the commodity prices of copper products, steel products and fuel. Over the long-term, we expect to be able to pass those increased costs to our customers.
Recent Accounting Pronouncements
On December 16, 2004, the Financial Accounting Standards Board (FASB) issued Statement No. 123 (revised 2004), Share Based Payment, (SFAS 123R). SFAS 123R requires all share-based payments to employees, including restricted stock grants and grants of employee stock options, to be recognized in income and measured at fair value. Additionally, employee stock purchase programs have increased restrictions to be considered noncompensatory; therefore, most of these plans, formerly accounted for as noncompensatory stock purchase plans, will be required to be measured and recorded at fair value. Fair value is calculated utilizing a stock-option pricing model, where necessary, including specific input assumptions delineated in the standard. SFAS 123R utilizes a modified grant-date approach where, regardless of vesting conditions based on service and performance, measurement of the fair value of awards is calculated on the grant date and amortized into income over the requisite service period for all awards that vest. Where vesting of awards does not occur, no compensation cost will be recognized. SFAS 123R also significantly changes the treatment of taxes related to share based payments from that required under SFAS 123 or Accounting Principles Board Opinion No. 25, Account for Stock Issued to Employees, (APB 25). Through June 30, 2005, we have accounted for share-based payments pursuant to APB 25 and provided the requisite pro forma disclosures delineated in SFAS 123 in the notes to the consolidated financial statements. Pursuant to APB 25, we have only recognized compensation expense for certain restricted stock grants made in the fiscal years 2002 and 2004; however, no compensation expense has been required to be recognized for any stock option grants nor for the employee stock purchase plan. We are required to adopt SFAS 123R effective July 1, 2005 and have two transition options under the new standard; however, the recognition of compensation cost is the same under both options. We believe the adoption of SFAS 123R will have a material effect on our consolidated financial results during the period of adoption, however, the full effect the adoption of SFAS 123R has not been fully determined as of June 30, 2005.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Management is actively involved in monitoring exposure to market risk and continues to develop and utilize appropriate risk management techniques. Our exposure to significant market risks include outstanding borrowings under our floating rate credit facility and fluctuations in commodity prices for copper products, steel products and fuel. As of June 30, 2005 there were no borrowings outstanding under our credit facility and outstanding borrowings under our senior convertible notes was $50.0 million. The senior convertible notes are a hybrid instrument comprised of two components: (1) a debt instrument and (2) certain embedded derivatives. The embedded derivatives include a redemption premium and a make-whole provision. In accordance with the guidance that Statement of Financial Accounting Standards No. 133, as amended, Accounting for Derivative Instruments and Hedging Activities, (SFAS 133) and Emerging Issues Task Force Issue No. 00-19, Accounting
for Derivative Financial Instruments Indexed to, and Potentially Settled in, a Companys Own Stock (EITF 00-19) provide, the embedded derivatives must be removed from the debt host and accounted for separately as a derivative instrument. These derivative instruments will be marked-to-market each reporting period. During the three months ended December 31, 2004, we were required to also value the portion of the Notes that would settle
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in cash because shareholder approval of the notes had not yet been obtained. The initial value of this derivative was $1.4 million and the value at December 31, 2004 was $4.0 million and consequently, a $2.6 million mark to market loss was recorded. The value of this derivative immediately prior to the affirmative shareholder vote was $2.0 million and accordingly, we recorded a mark to market gain of $2.0 million during the three months ended March 31, 2005. The calculation of the fair value of the conversion option was performed utilizing the Black-Scholes option pricing model with the following assumptions effective over the nine months period ended June 30, 2005: expected dividend yield of 0.00%, expected stock price volatility of 40.00%, weighted average risk free interest rate ranging from 3.67% to 4.15% and an expected term of four to ten years. The valuation of the other embedded derivatives was derived by other valuation methods, including present value measures and binomial models. At June 30, 2005, the fair value of the two remaining derivatives was $1.6 million. Additionally, we recorded at June 30, 2005 a net discount of $0.9 million which is being amortized over the remaining term of the Notes. Management does not use derivative financial instruments for trading purposes or to speculate on changes in interest rates or commodity prices.
As a result, our exposure to changes in interest rates results from our short-term and long-term debt with both fixed and floating interest rates. The following table presents principal or notional amounts (stated in thousands) and related interest rates by fiscal year of maturity for our debt obligations and their indicated fair market value at June 30, 2005:
2005 |
2006 |
2007 |
2008 |
2009 |
Thereafter |
Total |
||||||||||||||||||
LiabilitiesDebt: |
||||||||||||||||||||||||
Fixed Rate (senior subordinated notes) |
$ | | $ | | $ | | $ | | $ | 172,885 | $ | | $ | 172,885 | ||||||||||
Fixed Interest Rate |
| | | | 9.375 | % | | 9.375 | % | |||||||||||||||
Fixed Rate (senior convertible notes) |
$ | | $ | | $ | | $ | | $ | | $ | 50,000 | $ | 50,000 | ||||||||||
Fixed Interest Rate |
| | | | | 6.5 | % | 6.5 | % | |||||||||||||||
Fair Value of Debt: |
||||||||||||||||||||||||
Fixed Rate (senior subordinated notes) |
$ | 129,232 | ||||||||||||||||||||||
Fixed Rate (senior convertible notes) |
$ | 51,595 |
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General
We are a provider of electrical contracting services in the United States. We provide a broad range of services including designing, building, maintaining and servicing electrical, data communications and utilities systems for commercial, industrial and residential customers.
Our electrical contracting services include design of the electrical distribution systems within a building or complex, procurement and installation of wiring and connection to power sources, end-use equipment and fixtures as well as long-term contract maintenance. We service commercial, industrial, and residential markets and have a diverse customer base including: general contractors; property managers and developers; corporations; government agencies and municipalities; and homeowners. We provide services for a variety of projects including: high-rise residential and office buildings, power plants, manufacturing facilities, municipal infrastructure and health care facilities and residential developments. We also offer low voltage contracting services as a complement to our electrical contracting business. Our low voltage services include design and installation of external cables for corporations, universities, data centers and switching stations for data communications companies as well as the installation of fire and security alarm systems. Our utility services consist of overhead and underground installation and maintenance of electrical and other utilities transmission and distribution networks, installation and splicing of high-voltage transmission and distribution lines, substation construction and substation and right-of-way maintenance. Our maintenance services generally provide recurring revenues that are typically less affected by levels of construction activity. We focus on projects that require special expertise, such as design-and-build projects that utilize the capabilities of our in-house engineers or projects that require specific market expertise such as hospitals or power generation facilities, as well as service, maintenance and certain renovation and upgrade work, which tends to either be recurring, have lower sensitivity to economic cycles, or both.
Since our incorporation in 1997, we have expanded through acquisition and internal growth to approximately 140 locations currently serving the continental 48 states. From 1997 to 2004, revenues for our businesses increased at a compounded annual growth rate of approximately 24%. Included in that growth was approximately five percent organic or same store sales growth. This includes a decline in our revenue base between 2002 and 2004 of approximately seven percent due to market conditions and strategic divestitures. For the same period, excluding discontinued operations, our businesses increased at a compounded annual growth rate of approximately 21%. In 2003 and 2004, we continued to focus internally on integrating to our information systems and established a regionally based management structure to enhance operating controls at all levels of our organization, as well as integrating a consolidated procurement program and structure to manage customers and vendors on a national basis.
Industry Conditions
Using the most recently available data from F.W. Dodge and historical data from EC&M Magazine, we estimate the electrical contracting industry will generate annual revenues in excess of $90 billion in 2004. Data from EC&M Magazine indicates that the electrical contracting industry is highly fragmented, with more than 70,000 companies, most of which are small, owner-operated businesses. This data also indicates that there are only 14 U.S. electrical contractors with revenues in excess of $200 million. F. W. Dodge data indicates total construction industry revenues have grown at an average compound rate of approximately seven percent from 1997 through 2003, with all years showing growth over the previous year. F. W. Dodge forecasts total construction revenues for 2004 through 2009 to continue to grow at a more conservative pace of approximately four percent annually.
During the last decade, electrical contractors have experienced a growing demand for their services as a result of more stringent electrical codes, increased use of electrical power, increased demand for bandwidth, demand for bundled services, and construction of smart houses with integrated audio, video, computer,
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temperature control and security systems. Additionally, residential construction spending continues to achieve record levels. This overall construction market, while up in 2004 over the past two years, has been depressed since 2001 due to decreased commercial and industrial construction spending.
Competitive Strengths
Our competitive strengths include the following:
| Geographic diversityWe have 140 locations, currently serving the continental 48 states and have worked on more than 2,000 contracts over $250,000 and more than 6,000 contracts overall in 2004. Our national presence mitigates much of the region specific economic slowdowns. Our presence in states such as Virginia and Texas has been particularly beneficial through this most recent construction decline, because these areas were less impacted than some of the other areas of the U.S. Since 1997, much of our revenues have been derived from the Sunbelt states which have had higher growth rates than overall U.S. construction. Our geographic diversity also enables us to better serve national customers with multiple locations. |
| Customer diversityOur diverse customer base includes general contractors, property developers and managers, facility owners and managers of large retail establishments, manufacturing and processing facilities, utilities, government agencies and homeowners. No single customer accounted for more than 10% of our revenues for the year ended September 30, 2004. We believe that customer diversity provides us with many advantages including reducing our dependence on any single customer. |
We service a wide variety of customers, which tends to cushion us somewhat from sector declines. The impact on our company of a slowdown in a particular industry is typically muted when compared to our smaller, more geographically or sector concentrated competitors. Additionally, our expertise in a variety of industries allows us to be flexible and to share our expertise across regions.
The composition of our backlog shifts from time to time. During 2004, our backlog of work in progress for commercial and industrial work declined by approximately 14% in the areas of hotels and condominiums, health care facilities, utility work, highway, waste water and military; while areas of backlog growth expanded by 11% and included retail, institutions, office buildings, heavy industry and manufacturing. Over the past two years the duration of our backlog has decreased because we have fewer larger projects in our backlog. Therefore, our backlog turns quicker because the average project size and length of that project is declining.
| ExpertiseWe have developed areas of expertise in high-rise buildings including hotels, condominiums and office buildings, retail centers, hospitals, switching centers and utility substations and single-family and multi-family residential homes. We believe that our technical expertise provides us with (1) access to higher margin design-and-build projects; (2) access to growth markets including wireless telecommunications, highway lighting and traffic control, video and security and fire systems; and (3) the ability to deliver quality service with greater reliability than that of many of our competitors. |
| Ability to Service National ProjectsOur nationwide presence and name recognition helps us compete for larger, national contracts with customers that operate throughout the U.S. Additionally, we believe our size and national service offering uniquely positions us as the only single source open shop electrical contracting service provider able to execute projects on a national basis. We are able to take on very large and complex projects, often with a national scope, that would strain the capabilities and resources of most of our competitors. This type of work represents a growing market and we have made significant progress in pursuing these sizable accounts. |
| Proprietary systems and processesWe have proprietary systems and processes that help us bid on projects, manage projects once they have been awarded and maintain and track customer information. In addition, we developed and perfected techniques and processes for installation on a variety of different projects, including a prefabrication processes we implemented throughout the organization. Through the consolidation of over 85 entities, we have taken the best practices within our company and leveraged those systems and processes across the entire organization for best in class practices. |
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| Utilization of prefabrication processesOur size and 100% merit shop environment has allowed us to quickly implement best prefabrication practices across our company. We prefabricate and preassemble or prepackage significant portions of electrical installations off-site and ship materials to the installation sites in specific sequences to optimize materials management, improve efficiency and minimize our employees time on job sites. This is safer, more efficient and more cost effective for both us and our customers. |
| Experienced managementOur management teams have extensive experience and well-known reputations in the markets they serve. In addition, we have developed a strong team of executive officers with extensive operating experience. |
Strategy
During the last three years we have been implementing a three-phase strategy. Phase one, Back to Basics, emphasized basic business fundamentals of increasing backlog, controlling costs and generating positive cash flow.
| Excluding discontinued operations, our backlog of work in progress has decreased to approximately $382.8 million as of June 30, 2005 from $565.6 million for the same units at June 30, 2004 and $435.4 million for the same units at March 31, 2005. The lower year to year backlog is primarily due to the companys increased efforts to obtain higher margin work and its more restricted bonding availability. Gross margin in backlog from continuing operations increased by forty basis points during the quarter. |
| To control costs, we have taken and will continue to take steps to operate more efficiently and reduce expenses. These steps will, if successful, increase our profitability and allow us to remain competitive within the industry. We believe that by focusing on cost reduction, we are better positioned for competitive success in any business environment. |
| We have been and continue to focus on cash flows from operations. This includes utilizing effective tax planning strategies to reduce cash taxes paid and processes focused on collecting receivables and billing retainage. |
Phase two, One Company. One Plan., focused on processes and systems necessary to integrate various decentralized business units.
| This strategy included a realigned management structure supported by additional financial reporting and planning processes through the implementation of an information system that is now 90% complete. We also undertook to bring commonality to our employee programs such as healthcare, incentive compensation and project management training. We implemented safety programs across the organization improving our recordable accidents to less than half the industry average. We now track procurement spending with national vendors centrally and have negotiated procurement savings. Additionally, we are focused on developing stronger national customer relationships. |
Phase three, Continued Growth, was designed to expand our businesses internally and via selective acquisitions.
| This phase will be achieved primarily through internal growth in select markets by increasing service offerings and market share. While we did purchase one company in February 2003, we do not intend to grow through external growth. We have put our growth strategy on hold to focus on the core profitability and capital efficiency of the company. Although we continue to strive to grow some of our business, we are currently in the process of effecting several strategic dispositions. |
Since 2002, when the strategy was developed and implemented we accomplished a number of our objectives while reducing debt and repurchasing shares of common stock.
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During the summer of 2004 we announced that we would not be able to timely issue our financial results for the third fiscal quarter. Since that time we have diligently worked to remedy the matters that gave rise to those events. While we determined that the matters were not widespread, the process and surrounding events have caused us to modify our strategy to take a closer look at the overall operating and capital efficiency of our units to insure an optimal return on the capital invested in the company.
During October 2004, we began a process to strategically review the performance of each of our 49 business units over the last three years. This process involves analyzing the financial performance of each unit with particular emphasis on the relative consistency of its results, returns on invested capital (unit level working capital and fixed assets), the required invested capital at each unit including capital costs associated with surety bonding, construction spending and growth trends in each geographic market, management strength and other factors.
Based on that analysis, we determined that certain businesses did not meet our criteria and have decided to sell these units in order to improve our overall profitability and capital efficiency. Subsequent to September 30, 2004, we sold thirteen operating units from our commercial and industrial segment for total proceeds of $49.9 million. These subsidiaries had a combined revenues of $240.2 million, $218.6 million and $236.8 million, and income from operations of $22.2 million, $17.7 million, and an operating loss of $0.4 million for the years ended September 30, 2002, 2003, and 2004, respectively. In addition to divestitures, we have closed two business units subsequent to September 30, 2004. These units had combined revenues of $7.6 million and an operating loss of $2.5 million in fiscal 2004. By closing these units, we will monetize our assets and eliminate the monthly management burden devoted to their supervision and daily operation.
The Markets We Serve
Commercial and Industrial Market. Our commercial and industrial work consists primarily of electrical, communications, utility installations and upgrade, renovation, replacement and service and maintenance work in:
| airports; |
| community centers; |
| high-rise apartments and condominiums; |
| hospitals and health care centers; |
| hotels; |
| manufacturing and processing facilities; |
| military installations; |
| office buildings; |
| refineries, petrochemical and power plants; |
| retail stores and centers; |
| schools; and |
| theaters, stadiums and arenas. |
Our commercial and industrial customers include:
| general contractors; |
| developers; |
| building owners and managers; |
| engineers; |
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| architects; and |
| consultants. |
Demand for our commercial and industrial services is driven by construction and renovation activity levels, as well as more stringent local and national electrical codes. From fiscal 1997 through 2004, our pro forma combined revenues from commercial and industrial work has grown at a compound annual rate of approximately 1.3% per year, including a decline of 8.1% in the period from 2001 to 2004 during which commercial and industrial spending declined due to soft market conditions. For the same period, our pro forma combined revenues from commercial and industrial work, excluding discontinued operations, has grown at a compound annual rate of approximately 0.39% per year. According to F. W. Dodge, the non-residential construction industry has grown at a compound annual rate of approximately 4.1% per year, including a decline of 8.4% from 2001 to 2004. Commercial and industrial work represented approximately 78%, 78% and 74% of our revenues for the years ended September 30, 2002, 2003 and 2004, respectively. Pro forma combined revenues include revenues generated by our subsidiaries prior to acquisition by us. For additional segment information for each of the three years ended September 30, 2004, see Note 11 to the Consolidated Financial Statements.
New commercial and industrial work begins with either a design request or engineers plans from the owner or general contractor. Initial meetings with the parties allow us to prepare preliminary, detailed design specifications, engineering drawings and cost estimates. Projects we design and build generally provide us with higher margins. Design and build gives full or partial responsibility for the design specifications of the installation. Design and build is an alternative to the traditional plan and spec model, where the contractor builds to the exact specifications of the architect and engineer. We prefer to perform design and build work, because it allows us to use past experience to install a more cost effective project for the customer with higher profitability to us. Once a project is awarded, it is conducted in scheduled phases and progress billings are rendered to our customer for payment, less a retention of 5% to 10% of the construction cost of the project. We generally provide the materials to be installed as a part of these contracts, which vary significantly in size from a few hundred dollars to several million dollars and vary in duration from less than a day to more than a year. Actual fieldwork is coordinated during this time, including:
| ordering of equipment and materials; |
| fabricating or assembling of certain components (pre-fabrication); |
| delivering of materials and components to the job site; and |
| scheduling of work crews and inspection and quality control. |
Our size enables us to effectively prefabricate significant portions of certain projects at an alternative site and drop ship materials in specific sequences. Prefabrication allows us to optimize materials management and minimize the amount of time specialized employees spend on the job site, as well as minimizing the overall time it takes to complete a project because working in a controlled assembly environment is more efficient than preparing all materials on site.
Our service and maintenance revenues are derived from service calls and routine maintenance contracts, which tend to be recurring and less sensitive to economic fluctuations. Service and maintenance is supplied on a long-term and per-call basis. Long-term service and maintenance is provided through contracts that require the customer to pay an annual or semiannual fee for periodic diagnostic services at a specific discount from standard prices for repair and replacement services. Per-call service and maintenance is initiated when a customer requests emergency repair service. Service technicians are scheduled for the call or routed to the customers residence or business by the dispatcher. We will then follow up with the customer to schedule periodic maintenance work. Most service work is warranted for thirty days. 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; |
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| diagnoses the problem; |
| prepares and discusses a price quotation; and |
| performs the work and often collects payment from the customer immediately. |
We design and install communications and utility infrastructure systems and low voltage systems for the commercial and industrial market as a complement to our primary electrical contracting services. We believe the demand for our communications services is driven by the following factors: 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 market for broadband internet access. Demand for our utilities services is driven by industry deregulation, limited maintenance or capital expenditures on existing systems and increased loads and supply and delivery requirements. Demand for our low voltage systems is driven by the construction industry growth rate and our ability to cross-sell among our customers.
Residential Market. Our work for the residential market consists primarily of electrical installations in new single-family housing and low-rise, multi-family housing, for local, regional and national homebuilders and developers. We believe demand for our residential services is dependent on the number of single-family and multi-family home starts in the markets we serve. Single-family home starts are affected by the level of interest rates and general economic conditions. A competitive factor particularly important in the residential market is our ability to develop relationships with homebuilders and developers by providing services in multiple areas of their operations. This ability has become increasingly important as consolidation has occurred in the residential construction industry and homebuilders and developers have sought out service providers that can provide consistent service in all of their operating regions.
We are currently one of the largest providers of electrical contracting services to the U.S. residential construction market. Our residential business has experienced significant growth. Our pro forma combined revenues from residential electrical contracting have grown at a compound annual rate of approximately 12.9% from fiscal 1997 through 2004 compared to an industry average of approximately 10.4% according to F. W. Dodge. Residential electrical contracting represented approximately 22%, 22% and 26% of our revenues from continuing operations for the years ended September 30, 2002, 2003 and 2004, respectively.
New residential installations begin with a builder providing potential subcontractors the architectural or electrical drawings for the residences within the tract being developed. We typically submit a bid or contract proposal for the work. Our personnel analyze the plans and drawings and estimate the equipment, materials and parts and the direct and supervisory labor required to complete the project. We deliver a written bid or negotiate an arrangement for the job. The installation work is coordinated by our field supervisors and the builders personnel. Payments for the project are generally obtained within 30 days, at which time any mechanics and materialmens liens securing these payments are released. Interim payments are often obtained to cover labor and materials costs on larger projects.
The residential business is generally more profitable and less capital intensive than our commercial and industrial business and has a much lower surety bonding need. For additional segment information for each of the three years ended September 30, 2004, see Note 11 to the Consolidated Financial Statements. Our results of operations from residential construction are seasonal, depending on weather trends, with typically higher revenues generated during spring and summer and lower revenues during fall and winter.
Customers
Major Customers. We have a diverse customer base. We intend to continue our emphasis on developing and maintaining relationships with our customers by providing superior, high-quality service. During the years ended September 30, 2002, 2003, and 2004, no single customer accounted for more than 10% of our revenues.
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Company Operations
Employee Screening, Training and Development. We are committed to providing the highest level of customer service through the development of a highly trained workforce. Employees are encouraged to complete a progressive training program to advance their technical competencies and to ensure that they understand and follow the applicable codes, our safety practices and other internal policies. We support and fund continuing education for our employees, as well as apprenticeship training for 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. Some employees have also obtained specialized licenses in areas including security systems and fire alarm installation. In some areas, licensing boards have set continuing education requirements for maintenance of licenses. Because of the lengthy and difficult training and licensing process for electricians, we believe that the number, skills and licenses of our employees constitute a competitive strength in the industry.
We actively recruit and screen applicants for our technical positions and have established programs in some locations to recruit apprentice technicians directly from high schools and vocational technical schools. Prior to hiring new employees, we assess their technical competence level, confirm background references and conduct drug testing.
Materials and Supplies. As a result of economies of scale, we believe we have been able to purchase equipment, parts and supplies at discounts to prices made available to our smaller competitors. In addition, as a result of our size, we are able to lower our costs for (i) the purchase or lease of vehicles; (ii) property, casualty and liability insurance; (iii) health insurance and related benefits; (iv) retirement benefits administration; and (v) office and computer equipment.
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 one of these outside sources for our supplies.
Control and Information Systems. We are committed to performing those controls and procedures that improve our efficiency and the monitoring of our operations. We are approximately 90% complete in deploying a standard Enterprise Resource Planning, or ERP, software to all of our operating companies. We believe ERP applications are paramount to a growing business with our diverse geographic platform. Additionally, we have implemented a financial reporting and planning application to complement the ERP application that provides a uniform structure and analytical tools for the reporting process. This application was utilized for our 2003, 2004 and 2005 planning processes. We now expect to have the implementation completed during fiscal 2006. Implementation of this ERP system and the complementary financial reporting application allows us to obtain more timely results of operating performance and perform more detailed analyses. In addition to our ERP system, other controls and procedures we have in place include:
| pre-determined approval levels for bidding jobs. Each subsidiary may approve certain jobs based on each subsidiarys gross revenues, the level of experienced estimating personnel on staff, the type of work to be bid (i.e. niche vs. non-niche work to take advantage of our centers of excellence), and manpower availability. If a job exceeds these parameters additional approvals must be obtained. |
| an automated uniform monthly reporting process with data controls. |
| a series of quarterly reviews conducted by our senior management team. These meeting locations are rotated quarterly between the corporate office in Houston, Texas and various locations. The content of such meetings includes discussing safety performance, previous operating results, forecasts for the future, opportunities and concerns. |
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| a formalized planning process that involves analyzing industry trends at a county level for each subsidiary. This planning also formalizes the capital allocation process. |
| monthly job review meetings involving finance and operations. |
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 contracting services. In the future, we may encounter competition 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; |
| price; |
| 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. |
We believe we have all licenses required 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 or an inability to perform government work.
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 area are held by multiple IES employees within that area.
Risk Management and Insurance
The primary risks in our operations include health, bodily injury, property damage and injured workers compensation. We maintain automobile and general liability insurance for third party health, bodily injury and property damage and workers compensation coverage, which we consider appropriate to insure against these risks. Our third-party insurance is subject to large deductibles for which we establish reserves and, accordingly, we effectively self-insure for much of our exposures.
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Employees
At August 31, 2005, we had approximately 8,700 employees. We are not a party to any collective bargaining agreements with our employees. We believe that our relationship with our employees is satisfactory.
Properties
Our principal executive offices are located at 1800 West Loop South, Suite 500, Houston, Texas 77027. We currently conduct our business from 140 locations in 28 states, 12 of which we own and 128 of which we lease. We believe that our leased and owned properties are adequate for our current needs.
Legal Proceedings
We 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 any of these proceedings with certainty and it is possible that the results of legal proceedings individually or cumulatively may materially adversely affect us, in our opinion, these proceedings are either adequately covered by insurance or financial reserves 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.
Between August 20 and October 4, 2004, five putative securities fraud class actions were filed against IES and certain of our officers and directors in the United States District Court for the Southern District of Texas. The five lawsuits were consolidated under the caption In re Integrated Electrical Services, Inc. Securities Litigation, No. 4:04-CV-3342. On March 23, 2005, the court appointed Central Laborer Pension Fund as lead plaintiff and appointed lead counsel. Pursuant to the parties agreed scheduling order, lead plaintiff filed its amended complaint on June 6, 2005. The amended complaint alleges that defendants violated Section 10(b) and 20(a) of the Securities Exchange Act of 1934 by making materially false and misleading statements during the proposed class period of November 10, 2003 to August 13, 2004. Specifically, the amended complaint alleges that defendants misrepresented our financial condition in 2003 and 2004, as evidenced by the restatement, violated generally accepted accounting principles, and misrepresented the sufficiency of our internal controls so that they could engage in insider trading at artificially-inflated prices, retain their positions at IES, and obtain a $175 million credit facility for IES.
On August 5, 2005, the defendants moved to dismiss the amended complaint for failure to state a claim. The defendants argued that the amended complaint fails to allege fraud with particularity as required by Rule 9(b) of the Federal Rules of Civil Procedure and fails to satisfy the heightened pleading requirements for securities fraud class actions under the Private Securities Litigation Reform Act of 1995. Specifically, defendants argue that the amended complaint does not allege fraud with particularity as to numerous GAAP violations and opinion statements about internal controls, fails to raise a strong inference that defendants acted knowingly or with severe recklessness, and includes vague and conclusory allegations from confidential witnesses without a proper factual basis. The lead plaintiff will have 45 days to respond and defendants will have 21 days to file a reply.
On September 3, 2004, Chris Radek filed a shareholder derivative action in the District Court of Harris County, Texas naming Herbert R. Allen, Richard L. China, William W. Reynolds, Britt Rice, David A. Miller, Ronald P. Badie, Donald P. Hodel, Alan R. Sielbeck, C. Byron Snyder, Donald C. Trauscht, and James D. Woods as individual defendants and IES as nominal defendant. In this derivative action, the plaintiff makes substantially similar claims as made in the putative class action complaints, and adds common law claims against the individual defendants. The plaintiff in the shareholder derivative action seeks unspecified amounts of damages, interest and costs, including legal fees. By agreement, the defendants will not respond to this action until the plaintiff files an amended petition, which has not yet occurred.
On March 10, 2005, one of IES wholly-owned subsidiaries was served with a lawsuit filed by Cynthia People alleging thirteen causes of action including employment, race and sex discrimination as well as claims for
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fraud, intentional infliction of emotional distress, negligence and conversion. On each claim plaintiff is demanding $5-10 million in compensatory damages; $10-20 million in punitive damages; attorneys fees and costs. This action was filed after the local office of the EEOC terminated their process and issued plaintiff a right to sue per her request. IES intends to vigorously contest any claims of wrongdoing in this matter and does not believe the claimed damages bear any likelihood of being found in this case. However, because this case is in its early stages, it is premature to predict liability or estimate damages, if any. If such damages were to be found, it would have a material adverse effect on our business, consolidated financial condition, results of operations and cash flows.
We intend to vigorously contest these actions. However, because they are at an early stage, it is premature at this time to predict liability or to estimate the damages, or the range of damages, if any, that we might incur in connection with these actions. An adverse outcome in these actions could have a material adverse effect on our business, consolidated financial condition, results of operations or cash flows.
We are the subject of a formal investigation ongoing at the Securities and Exchange Commission. The results of the investigation are difficult to predict. An adverse decision in this investigation could have an adverse effect on our business, consolidated financial condition, results of operations and cash flows.
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Directors, Executive Officers and Other Key Employees
The directors, executive officers and other key employees of Integrated Electrical Services and their respective ages and positions are as follows:
Name |
Age1 |
Position |
Class | |||
C. Byron Snyder | 57 | President & Chief Executive Officer, Chairman of the Board and Director |
Class II | |||
Richard C. Humphrey | 60 | Chief Operating Officer | | |||
Robert Stalvey | 55 | Senior Vice President | | |||
Curt L. Warnock | 50 | Senior Vice President, General Counsel and Secretary |
| |||
David A. Miller | 34 | Senior Vice President and Chief Financial Officer |
| |||
Gregory H. Upham | 34 | Vice President and Chief Accounting Officer |
| |||
Bob Callahan | 47 | Senior Vice President of Human Resources |
| |||
Ronald P. Badie | 62 | Director | Class I | |||
Alan R. Sielbeck | 52 | Director | Class I | |||
Donald Paul Hodel | 70 | Director | Class III | |||
Donald L. Luke | 68 | Director | Class II |
(1) | All ages are as of September 1, 2005. |
Set forth below is the description of the backgrounds of our directors, executive officers and other key employees.
C. Byron Snyder has been President and Chief Executive Officer since July 1, 2005 and a Director and Chairman of the Board of Directors since our inception. Mr. Snyder was a founding member and Senior Managing Director of Main Street Equity Ventures II, LP, a Houston-based private equity investment firm. Mr. Snyder was the President and owner of Sterling City Capital, L.L.C., a private investment company. Mr. Snyder was owner and President of Relco Refrigeration Co., a distributor of refrigerator equipment, from 1992 to 1998. Prior to 1992, Mr. Snyder was the owner and Chief Executive Officer of Southwestern Graphics International, Inc., a diversified holding company which owned Brandt & Lawson Printing Co., a Houston-based general printing business, and Acco Waste Paper Company, an independent recycling business. Brandt & Lawson Printing Co. was sold to Hart Graphics in 1989, and Acco Waste Paper Company was sold to Browning-Ferris Industries in 1990.
Richard C. Humphrey has been Chief Operating Officer since March 31, 2005. From December 31, 2001 until March 2005 he was a Regional Operating Officer of IES and from 1970 until December 2001 he was the President of ARC Electric, Inc., an electrical contracting company he established in 1970 in Norfolk, Virginia and which became a Company subsidiary in 1998.
Robert Stalvey has been Senior Vice President since September 2004. From October 2000 to September 2004 Mr. Stalvey was Senior Vice President, Operations Services and from July 1999, Vice President, Special Projects.
Curt L. Warnock has been Senior Vice President, General Counsel and Secretary since February 2005. From October 2002 to February 2005, Mr. Warnock was Vice President, Law and Secretary of IES from December 2004. From July 2001 to October 2002, Mr. Warnock served as Assistant General Counsel of IES. Prior to July 2001, Mr. Warnock spent sixteen years with Burlington Resources Inc., a large independent NYSE oil and gas company, serving in various positions. Prior to that, Mr. Warnock served as Senior Attorney to Pogo Producing Company, a NYSE oil and gas company; before that, he was in private practice. Mr. Warnock is licensed in Texas and federal courts and before the Fifth Circuit and before the United States Supreme Court.
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David A. Miller has been Senior Vice President and Chief Financial Officer and Chief Accounting Officer since January 2005. From October 2002 until January 2005, Mr. Miller was Vice President and Chief Accounting Officer of IES and between January 1998 and October 2002, Mr. Miller held the positions of Financial Reporting Manager, Assistant Controller, Controller and Chief Accounting Officer with IES. Prior to January 1998, Mr. Miller held various positions in public accounting and private industry. Mr. Miller is a Certified Public Accountant.
Gregory H. Upham has been Vice President and Chief Accounting Officer since June 2005. Prior to joining IES, Mr. Upham held various financial positions within multiple industries. Since 2004, he served as a consultant for Game Ventures, Inc., a start up in the video game development industry. From 2000 to 2003, he held the positions of Chief Financial Officer, Treasurer, and Corporate Controller for Hostcentric, Inc., a privately held Internet infrastructure service provider. Prior to that, Mr. Upham held positions with Coach USA and Arthur Andersen LLP. Mr. Upham is a Certified Public Accountant.
Bob Callahan has been Senior Vice President of Human Resources since June 2005. Mr. Callahan was Vice President of Human Resources from February 2005 to June 2005 and was Vice President of Employee Relations since 2004. Mr. Callahan joined IES in 2001, after 11 years with the H.E. Butt Grocery Company where he served as Director of Human Resources. Mr. Callahan has also served as a faculty member at the University of Texas at San Antonio where he taught Employment Law, Human Resources Management and Business Communications.
Ronald P. Badie has been a Director since 2003. Mr. Badie is the retired Vice Chairman of Deutsche Bank Alex Brown (now Deutsche Bank Securities), Deutsche Banks investment banking subsidiary. From 1966 until his retirement in March 2002, Mr. Badie held a variety of management positions with Deutsche Bank and its predecessor, Bankers Trust Company. Mr. Badie has served on the advisory boards of Merrill Lynch Capital Appreciation Fund, Stonington Capital Appreciation Fund, and Green Equity Capital Fund. He also was a member of the advisory board of The Price Center for Entrepreneurial Studies at the Anderson School of Management at U.C.L.A. Mr. Badie also serves on the board of directors of Merisel, Inc., a supplier of graphic image art, Amphenol Corporation, an electronics components manufacturer and Nautilus, Inc. a leading marketer, developer and manufacturer of branded health and fitness products that is listed on the New York Stock Exchange.
Alan R. Sielbeck has been a Director since 1998. Mr. Sielbeck currently serves as chief executive officer of LogisticsXperts, LLC, an inventory management and quality control company serving the manufacturing industry. He served as Chairman of the Board and Chief Executive Officer of Service Experts, Inc., a publicly traded heating, ventilation and air conditioning service company, from its inception in March 1996 until January 2000. Mr. Sielbeck has served as Chairman of the Board and President of AC Service and Installation Co. Inc. and Donelson Air Conditioning Company, Inc. since 1990 and 1991, respectively. From 1985 to 1990, Mr. Sielbeck served as President of RC Mathews Contractor, Inc., a commercial building general contractor, and Chief Financial Officer of RCM Interests, Inc., a commercial real estate development company. Mr. Sielbeck serves as a director for Midsouth Wire Products and Nashville Wire.
Donald Paul Hodel has been a Director since 1998. Mr. Hodel is a Managing Director of Summit Group International, Ltd. (and related companies), an energy and natural resources consulting firm he founded in 1989. From 2003 until February 2005 he was also President and CEO of Focus on the Family, a charitable organization. Mr. Hodel served as United States Secretary of the Interior from 1985 to 1989 and Secretary of Energy from 1982 to 1985. Mr. Hodel has served as director of both publicly traded and privately held companies and is the recipient of the Presidential Citizens Medal and honorary degrees from three universities. Mr. Hodel serves on the boards of directors of: Salem Communications, Inc., a NASDAQ listed company, which owns and operates radio stations; and the North American Electric Reliability Council.
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Donald L. Luke has been a Director since September 2005. From 2001 until April 2005, Mr. Luke was Chairman and Chief Executive Officer of American Fire Protection Group, Inc., a private company involved in the design, fabrication, installation and service of products in the fire sprinkler industry. From 1997 to 2000, Mr. Luke was President and Chief Operating Officer of Encompass Services. Mr. Luke had held a number of key positions in product development, marketing and executive management in multiple foreign and domestic publicly traded companies. Mr. Luke also serves on the board of directors of American Fire Protection Group, Inc. and has been nominated to be a director of CL Support Services LLC, which manages the affiliated Olshan Foundation Repair companies.
Board of Directors
Our Amended and Restated Certificate of Incorporation, as amended, and our bylaws provide that the number of members of the Board shall be fixed from time to time by the Board but shall not be less than one nor more than 15 persons. The Certificate of Incorporation divides the Board into three classes, designated as Class I, Class II and Class III. Each class of directors is to be elected to serve a three-year term and is to consist, so far as possible, of one-third of the number of directors required at the time to constitute the full Board. If the number of directors is not evenly divided into thirds, the Board shall determine which class or classes shall have one extra director. The Board has set the number of directors at six; two directors are designated as Class I directors, two as Class II directors and two as Class III directors, whose terms of office expire with the 2005, 2006 and 2007 annual stockholders meetings, respectively, and until their respective successors are elected and qualified. The holders of the Restricted Voting Common Stock are entitled to elect one director.
Committees
Audit Committee
The Audit Committee of the Board is comprised of Messrs. Sielbeck (Chairman), Badie and Hodel. Mr. Hodel was named to the Audit Committee on June 6, 2005. Pursuant to its written charter, a copy of which may be found on our website and paper copies are also available free of charge upon written request to us. Our board of directors has determined that Mr. Sielbeck is an audit committee financial expert as such term is defined in Item 401 of Regulation S-K. The Audit Committee assists the Board in:
| fulfilling its responsibility to oversee managements implementation of, and the integrity of, our financial statements; |
| monitoring the qualifications, independence and performance of our internal and independent auditors; |
| monitoring our compliance with legal and regulatory requirements; and |
| preparing the report that SEC rules require be included in our annual proxy statement. |
In fulfilling these duties, the Audit Committee generally:
| reviews the annual financial statements with management and the independent auditor; |
| recommends to the Board whether our annual audited financial statements and accompanying notes should be included in our Annual Report on Form 10-K; |
| reviews with management and the independent auditor the effect of regulatory and accounting initiatives as well as contingent liabilities and off-balance sheet structures, if any, on our financial statements; |
| reviews with management and the independent auditor our quarterly financial statements filed in our Quarterly Reports on Form 10-Q; |
| discusses periodically with management our major financial risk exposure and steps implemented to monitor and control the same; |
| reviews major changes to our auditing and accounting principles and practices as suggested by the independent auditor, internal auditors or management; |
| has the sole authority to engage, oversee and evaluate the performance of, and, when the Audit Committee determines it to be appropriate, terminate our independent auditor, approve all audit engagement fees and terms and approve all significant non-audit engagements, if any, with the independent auditor; |
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| reviews the independence of the independent auditor, giving consideration to the range of audit and non-audit services performed by the independent auditor; |
| reviews periodically the experience, qualifications and performance of the senior members of our internal auditing team and the internal audit activities, staffing and budget; |
| reviews significant reports to management, prepared in connection with internal audits and managements responses; |
| reviews with the independent auditor any problems or difficulties the auditor may encounter and any management letter provided by the auditor and our response to that letter; |
| advises the Board with respect to our policies and procedures regarding conflicts of interest and compliance with material laws and regulations; |
| reviews legal matters that may have a material impact on the financial statements, our compliance policies and any material reports or inquiries received from regulators or government agencies; and |
| establishes procedures to handle complaints regarding our accounting practices, internal controls or auditing matters and to permit confidential anonymous submission to the Audit Committee of concerns by employees regarding accounting or auditing matters. |
Nominating/Governance Committee
The Nominating/Governance Committee is comprised of Messrs. Badie (Chairman), Hodel and Sielbeck. Messrs. Badie and Hodel were appointed to the Nominating/Governance Committee on January 6, 2005. Pursuant to its written charter, a copy of which may be found on our website and paper copies are also available free of charge upon written request to us, the Nominating/Governance Committee assists the Board in:
| establishing standards for Board and committee members and overseeing the performance of the Board and its members; |
| establishing criteria to select new directors and recommending to the Board a process for orientation of new Board or committee members; |
| identifying individuals qualified to become members of the Board and recommending such individuals to the Board as nominees to fill any existing or expected vacancy; and |
| evaluating our corporate governance procedures and recommending to the Board changes that the Nominating/Governance Committee deems appropriate. |
Human Resources and Compensation Committee
The Human Resources and Compensation Committee is comprised of Messrs. Hodel (Chairman), Badie and Sielbeck. Mr. Badie was appointed to the Human Resources and Compensation Committee on January 6, 2005 and Mr. Sielbeck was appointed on July 26, 2005. Pursuant to its written charter, a copy of which may be found on our website and paper copies are also available free of charge upon written request to us, the Human Resources and Compensation Committee assists the Board in:
| discharging its responsibilities relating to compensation of our executives; and |
| producing an annual report on executive compensation for inclusion in our annual proxy statement. |
In fulfilling these duties, the Human Resources and Compensation Committee generally:
| establishes our compensation philosophy and ensures that the compensation program is aligned with our objectives and consistent with the interest of our stockholders; |
| reviews and approves new compensation plans; |
| evaluates the performance of the Chief Executive Officer and determines the compensation for the Chief Executive Officer; |
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| reviews salaries, salary increases and other compensation of executive officers and evaluates the competitiveness of total compensation levels for executives; |
| receives recommendations regarding the selection of officers and key employees for participation in incentive compensation plans and regarding the establishment of performance goals and awards for those officers and key employees who participate in such incentive plans; |
| reviews and monitors benefits under our employee plans; |
| makes recommendations to the Board with respect to our management organization; |
| reviews and approves incentive compensation and equity based plans; and |
| evaluates, periodically, compensation paid to outside members of the Board, including monitoring the competitiveness and composition of director compensation. |
Executive Committee
Although our board has previously established an Executive Committee, due to the departure of two of the committees three members, the board has decided to suspend the authority of the Executive Committee. When active, the Executive Committees charter provides that the committee is authorized to act upon any urgent issues that arise between regularly scheduled meetings of the Board.
The Executive Committee, however, may not:
| approve, adopt or recommend to the stockholders any matter or action expressly required by the Delaware General Corporation Law to be submitted to the stockholders for approval; or |
| adopt, amend or repeal any bylaw of IES. |
Compensation of Executive Officers
The following table summarizes all compensation earned by our Chief Executive Officer and our four other most highly compensated executive officers with total annual salary and bonuses exceeding $100,000 for services rendered in all capacities to us during the year ended September 30, 2004.
Summary Compensation Table
Annual Compensation |
Long-Term Compensation |
All Other Compensation (2) | ||||||||||||||
Year |
Salary |
Bonus |
Other Annual Compensation (1) |
Restricted Stock Awards (#) |
Securities Underlying Options (#) |
|||||||||||
Herbert R. Allen (3) |
2004 | $ | 522,500 | | | | | $ | 2,919 | |||||||
2003 | $ | 475,000 | | | | | $ | 2,505 | ||||||||
2002 | $ | 380,002 | | | | 330,000 | $ | 2,717 | ||||||||
Richard L. China (4) |
2004 | $ | 407,000 | | | | | $ | 4,122 | |||||||
2003 | $ | 370,000 | | | | | $ | 3,672 | ||||||||
2002 | $ | 309,997 | | | | 185,000 | $ | 2,330 | ||||||||
Robert Stalvey |
2004 | $ | 285,000 | | | | | $ | 4,413 | |||||||
2003 | $ | 270,000 | | | | | $ | 3,549 | ||||||||
2002 | $ | 240,624 | 58,500 | | | | $ | 2,120 | ||||||||
Miles Dickinson (5) |
2004 | $ | 281,750 | | | 7,269 | | $ | 2,712 | |||||||
2003 | $ | 268,000 | | | | | $ | 3,821 | ||||||||
2002 | $ | 218,750 | 102,217 | | | | $ | 2,503 | ||||||||
Margery M. Harris (6) |
2004 | $ | 245,000 | | | | | $ | 3,710 | |||||||
2003 | $ | 230,000 | | | | | $ | 3,881 | ||||||||
2002 | $ | 197,750 | 24,050 | | | 60,000 | $ | 3,910 |
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(1) | No executive officer received perquisites or other personal benefits in excess of 10% of such officers total annual salary and bonus. |
(2) | All other compensation for fiscal years 2002, 2003 and 2004 consists of IES contributions to the IES Corp. Executive Savings Plan ad the IES, Inc. 401(k) Retirement Savings Plan. |
(3) | Mr. Allens employment with IES terminated effective June 30, 2005. In connection with the termination of Mr. Allens employment, IES and Mr. Allen entered into a Consulting Agreement that terminates on July 1, 2006. Pursuant to the Consulting Agreement, Mr. Allen will receive a retainer of $145,000, a monthly consulting fee of $40,000, continued health care coverage, a company vehicle and expense reimbursement. |
(4) | Mr. Chinas employment with IES terminated effective November 9, 2004. In connection with his termination, Mr. China entered into a Settlement and Release Agreement with IES, pursuant to which he received a lump sum payment of $103,609 and an additional sum of $610,500 to be paid in semi-monthly increments in the future. We also agreed to pay the cost of continuing medical and dental health care coverage for Mr. China and his eligible dependents under COBRA for a period of 18 months. |
(5) | Mr. Dickinsons employment with IES terminated effective April 30, 2005. |
(6) | Ms. Harris employment with IES terminated effective January 15, 2005. In connection with her termination, Ms. Harris entered into a Mutual Agreement and Release with IES, pursuant to which received a severance payment in the amount of $61,250 to be paid in semi-monthly increments in the future. We also agreed to pay the cost of continuing medical and dental care coverage for Ms. Harris and her eligible dependents under COBRA for a period of six months. |
Option Grants
No stock options were granted to any of the named executive officers during fiscal year 2004.
Aggregated Option Exercises in Fiscal 2004 and Fiscal Year-End Option Values
The following table sets forth information concerning options exercised during the last fiscal year and the value of their unexercised options at September 30, 2004.
Number of Shares Underlying Unexercised Options at September 30, 2004 |
Value of Unexercised In-the-Money Options at September 30, 2004 | ||||||||||||||
Shares Acquired on Exercise |
Value Realized |
Exercisable |
Unexercisable |
Exercisable |
Unexercisable | ||||||||||
Herbert R. Allen |
30,000 | $ | 225,468 | 277,666 | 88,334 | $ | 166,232 | $ | 100,517 | ||||||
Richard L. China |
20,000 | 151,216 | 156,667 | 48,333 | 86,233 | 54,716 | |||||||||
Robert Stalvey |
| | 94,472 | 10,000 | 21,400 | 10,700 | |||||||||
Miles Dickinson |
10,000 | 39,759 | 27,167 | 10,000 | 10,700 | 10,700 | |||||||||
Margery M. Harris |
| | 88,000 | 12,000 | 21,400 | 10,700 |
Compensation of Directors
Directors who are our employees do not receive a retainer or fees for service on the board or any committees. We pay non-employee members of the board for their service as directors. Directors who are not employees currently receive a fee of $1,500 for each board and committee meeting attended in person, and a fee, effective January 1, 2005, of $750 for attendance at a meeting held telephonically. The fee for telephonic meetings prior to January 1, 2005 was $500. Each non-employee director also receives, upon first election to the board and annually thereafter an immediately exercisable stock option to purchase 3,000 shares of our common stock at the market price on the day of grant. Finally, effective April 1, 2005, each non-employee director receives an annual retainer, paid quarterly, of $12,000 cash and 6,000 shares of our common stock. Prior to April 1, 2005, directors received $12,000 cash and $24,000 in shares of our common stock. The Chairmen of the Compensation and Nominating/Governance Committees also receive an annual retainer, paid quarterly, of $10,000 cash and the Chairman of the Audit Committee, effective April 1, 2005, receives $25,000 cash. Prior to
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this change the Committee Chairman of the Audit Committee received $15,000 and all Chairmen retainers were paid one half in cash and one half in shares of our common stock. Directors are reimbursed for reasonable out-of-pocket expenses incurred in attending meetings of the board or committees and for other reasonable expenses related to the performance of their duties as directors.
Severance and Employment Agreements
The Human Resources and Compensation Committee reviews the employment agreements of executive officers on an annual basis to determine the continuing need for such agreements as well as the amount and nature of compensation potentially payable in the event a change in control or other provision is triggered. As a result of this review in 2004, the Human Resources and Compensation Committee made no changes in outstanding agreements. It was determined the terms and conditions as well as potential payments under the agreements were appropriate to insure the continued employment of the executives party to such agreements and to protect our interest relating to non-competition in the event the executive left our employ.
We have entered into employment agreements with Messrs. Stalvey and Dickinson effective January 27, 2003 and May 13, 2004 respectively. The term of Mr. Dickinsons agreement continues until terminated by either Mr. Dickinson or IES. Mr. Stalveys agreement has a three year term and continues on a year-to-year basis thereafter, unless notice of non-renewal is provided at least 90 days prior to the end of the initial or extended term. Each agreement provides for severance benefits of up to one years base pay in the event of termination of employment by IES without Cause, or in the case of Mr. Stalvey, for Good Reason, as defined in the employment agreement. These agreements also contain restrictions on competing with us, which may be reduced under certain circumstances in the case of Mr. Stalvey. On December 2, 2004, the Board approved a waiver of our conflict of interest policy and an amendment to Mr. Dickinsons employment agreement to permit Mr. Dickinson to provide a loan and consulting services to DFI, Inc. in connection with DFIs acquisition of substantially all of the assets of Delco Electric, Inc. For a discussion of this transaction, see Certain Relationships and Related Transactions, below. Mr. Dickinson resigned his employment with IES as of April 30, 2005.
Effective October 27, 2004, Mr. China resigned as a director of IES. Effective November 9, 2004, Mr. China resigned all positions with IES. In connection with his termination, Mr. China entered into a Settlement and Release Agreement with us and, pursuant thereto, received a lump sum payment of $103,609 and an additional sum of $610,500 to be paid in semi-monthly increments in the future. We also agreed to pay the cost of continuing medical and dental health care coverage for Mr. China and his eligible dependents under COBRA for a period of 18 months. In accordance with the terms of our stock option plans, Mr. China was also entitled to retain and exercise, for a period of 90 days following his termination as an employee of IES, options to acquire up to 190,000 shares of common stock that had vested prior to his resignation. Mr. China exercised options to acquire 76,667 shares of common stock following his termination as an employee, and the remainder of his options were cancelled.
On December 15, 2004, we entered into a Mutual Agreement and Release with Margery Harris pursuant to which Ms. Harris and IES agreed to terminate their employment relationship effective January 15, 2005. In accordance with the terms of the agreement, Ms. Harris will receive a settlement payment in the amount of $61,250 to be paid in semi-monthly increments in the future. We also agreed to pay the cost of continuing medical and dental health care coverage for Ms. Harris and her eligible dependents under COBRA for a period of six months. In accordance with the terms of our stock option plans, Ms. Harris was also entitled to retain and exercise, for a period of 90 days following her termination as an employee of IES, options to acquire up to 88,000 shares of common stock that had vested prior to her resignation. Ms. Harris has exercised options to acquire 10,000 shares of common stock following her termination as an employee and the remainder of her options have expired.
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Compensation Committee Interlocks and Insider Participation
During fiscal year 2004, no executive officer of IES served as (i) a member of the compensation committee (or other board committee performing equivalent functions or, in the absence of any such committee, the entire board of directors) of another entity, one of whose executive officers served on the Human Resources and Compensation Committee (formerly known as the Compensation Committee) of IES, (ii) a director of another entity, one of whose executive officers served on the Human Resources and Compensation Committee of IES or (iii) a member of the compensation committee (or other board committee performing equivalent functions or, in the absence of any such committee, the entire board of directors) of another entity, one of whose executive officers served as a director of IES.
During fiscal year 2004, no member of our Human Resources and Compensation Committee (i) was an officer or employee of IES, (ii) was formerly an officer of IES or (iii) had any business relationship or conducted any business with IES.
Report of the Human Resources and Compensation Committee on Executive Compensation
The following is the report of the Human Resources and Compensation Committee of the Board (formerly known as the Compensation Committee), which meets regularly and is comprised of Messrs. Hodel (Chairman), Badie and Sielbeck.
The Human Resources and Compensation Committee is pleased to present the 2004 report on executive compensation. This report of the Human Resources and Compensation Committee documents the components of our executive officer compensation program and describes the basis on which the compensation program determinations were made by the Human Resources and Compensation Committee with respect to the executive officers of IES. The duty of the Human Resources and Compensation Committee is to establish the compensation of the Chief Executive Officer, review compensation levels of senior members of management, and administer our various incentive plans including our annual bonus plan and our stock option plan.
Executive Compensation Program Philosophy
Our compensation philosophy and program objectives are directed by two primary guiding principles. First, the program is intended to provide levels of compensation sufficient to attract, motivate and retain talented executives. Second, the program is intended to create an alignment of interests between our executives and stockholders such that a portion of each executives compensation is directly linked to maximizing stockholder value.
In support of this philosophy, the executive compensation program is designed to reward performance that is directly relevant to our short-term and long-term success. As such, we provide both short-term and long-term incentives. The Human Resources and Compensation Committee has structured the executive compensation program with three primary underlying components: base salary, annual incentives, and long-term incentives. Our compensation philosophy is to (i) compensate our executive officers at a base level that is near the average salaries paid by companies of similar size and nature; (ii) provide the opportunity for our executive officers to earn additional compensation in the form of annual bonuses if individual and business performance goals are met; and (iii) design long-term incentive plans to focus executive efforts on the long-term goals of IES and to maximize total return to our stockholders.
Base Salary
The Human Resources and Compensation Committee utilizes market compensation data that is reflective of the markets in which we compete for employees. Based on such data, the Human Resources and Compensation Committee believes that the salaries paid to our executive officers are at or below the average of executive officers compensation in similar companies. The Human Resources and Compensation Committee intends to insure that our executive officers compensation is consistent with our stated policies. Therefore, as part of its responsibilities, the Human Resources and Compensation Committee reviews the salaries for our executive
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officers. Individual salary changes are based on a combination of factors such as the performance of the executive, salary level relative to the competitive market, level of responsibility, growth of our operations and the recommendation of our Chief Executive Officer.
Annual Bonus
Our annual bonus is intended to reward key employees based on IES and individual performance, motivate key employees, and provide competitive cash compensation opportunities. Target award opportunities vary by individual position and are expressed as a percentage of base salary. The individual target award opportunities are set at market median levels, but actual payouts may vary based on performance so that actual awards may fall below the 50th or above the 75th percentile. The amount a particular executive may earn is directly dependent on the individuals position, responsibility, and ability to impact our financial success. During the 2004 fiscal year, no bonuses were paid to our executive officers, while serving in that position.
Long-term Incentives
Our long-term incentive plan is designed to focus executive efforts on the long-term goals of IES and to maximize total return to our stockholders. The key devices the Human Resources and Compensation Committee has traditionally used are stock options and restricted stock. During 2004, the Human Resources and Compensation Committee retained the services of an independent compensation consultant to assist in its determination of the appropriate amount and nature of long term incentives and salary for our executives. The consultant reviewed an extensive data base of compensation paid by both general industry and our peers. As a result of this review, the Human Resources and Compensation Committee authorized modest salary adjustments for the executives as well as grants of non-qualified stock options to be effective commencing the beginning of fiscal year 2005. In the interim, we were unable to timely file with the SEC our Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2004, and the Human Resources and Compensation Committee subsequently rescinded the proposed salary increases and option grants.
CEO Compensation
In May 2004, in addition to the retention of the independent compensation consultant discussed above, the Human Resources and Compensation Committee undertook its annual detailed review of the performance of our then-current Chief Executive Officer. A 22-point evaluation was used that highlighted all material aspects of the position, Mr. Allen was rated on each item by the Board and our senior management. In order to insure anonymity, the results of the evaluation were forwarded to our independent auditors for compilation.
As a result of the above evaluation, and the review performed by the compensation consultant, the Human Resources and Compensation Committee authorized a modest salary increase and grant of non-qualified stock options for Mr. Allen that was effective October 1, 2004. In light of the subsequent failure by IES to timely file with the SEC our Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2004, the Human Resources and Compensation Committee subsequently rescinded the salary increase and option grant.
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Stock Performance Graph
The following performance graph compares our cumulative total stockholder return on our common stock with the cumulative total return of (i) the S&P 500 Index, (ii) the Russell 2000, and (iii) a peer group stock index (the Peer Group) selected in good faith by IES made up of the following publicly traded companies: Comfort Systems USA, Inc., Dycom Industries Inc., Emcor Group Inc., Fluor Corp (Massey Energy Company was distributed as a dividend to Flour Corp stockholders on December 22, 2000 and the value of such dividend is reflected as a reinvestment), Jacobs Engineering Group, Mastec Inc., and Quanta Services Inc. Due to activities such as reorganizations and mergers, additions and deletions are made to the Peer Group from time to time. The cumulative total return computations set forth in the Performance Graph assume the investment of $100 in our common stock, the S&P 500 Index, the Russell 2000, and the Peer Group, on September 30, 1999.
Cumulative Total Return | ||||||||||||
9/99 |
9/00 |
9/01 |
9/02 |
9/03 |
9/04 | |||||||
INTEGRATED ELECTRICAL SERVICES, INC. |
100.00 | 43.48 | 34.15 | 23.65 | 43.64 | 30.42 | ||||||
S & P 500 |
100.00 | 113.28 | 83.13 | 66.10 | 82.22 | 93.63 | ||||||
RUSSELL 2000 |
100.00 | 123.39 | 97.22 | 88.18 | 120.36 | 142.96 | ||||||
PEER GROUP |
100.00 | 150.41 | 97.67 | 64.28 | 108.75 | 111.24 |
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CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS
During fiscal year 2004, Delco Electric, Inc., a wholly owned subsidiary of IES, leased office and warehouse space from Mr. Miles Dickinson. The aggregate rentals paid by Delco under the lease for fiscal year 2004 were $68,166.
On December 6, 2004, we sold substantially all of the assets of Delco Electric, Inc. to DFI Group, Inc. Mr. Terry Foley, who served as president of Delco prior to the sale, is president of DFI. Mr. Jason Dickinson, who is the son of Mr. Miles Dickinson, is a director and principal stockholder of DFI. Prior to the sale, Mr. Jason Dickinson was also employed by Delco and received compensation in excess of $60,000 during fiscal year 2004. Pursuant to the terms of the purchase agreement governing the sale, the adjusted purchase price for the assets was $951,102. In connection with the transaction, Mr. Miles Dickinson loaned a portion of the purchase price to DFI and will provide certain consulting services to DFI in the future. On December 2, 2004, the Board approved a waiver of our conflict of interest policy and an amendment to Mr. Miles Dickinsons employment agreement to permit Mr. Dickinson to provide the loan and consulting services. Mr. Miles Dickinsons employment with IES terminated effective April 30, 2005.
Ace/Putzel Electric, Inc., a wholly owned subsidiary of IES, leased office and warehouse space from Mr. Robert Stalvey and his brother Mr. Thomas E. Stalvey Sr. The aggregate rentals paid by Ace under the lease for fiscal year 2004 were $122,917. On January 7, 2005, we entered into an Asset Purchase Agreement among IES, Ace, Ace Electric, Inc., or the Buyer, and Mr. Thomas E. Stalvey, Sr., as guarantor, providing for the sale of substantially all of the assets of Ace to the Buyer for an adjusted purchase price of $3,944,404. In determining the sales price for the disposed assets and liabilities, IES evaluated past performance, expected future performance, management issues, bonding requirements, market forecasts and the carrying value of such assets and liabilities and received a fairness opinion from an independent consulting and investment banking firm in support of this determination. The transactions contemplated by the Asset Purchase Agreement were consummated on January 10, 2005. Mr. Thomas E. Stalvey, Sr. was the president of Ace prior to the sale and is the president and owner of the Buyer.
Mr. C. Byron Snyder is general partner of the 1996 Snyder Family Partnership Ltd., a Delaware limited partnership. The partnership owns a majority interest in Commercial America Insurance Company, a commercial insurance company that sub-leases office space from us at our corporate offices. The lease provides for lease payments in the aggregate amount of $5,000 per month. The lease may be cancelled by either party upon 30 days notice.
Mr. Herbert R. Allens son and Mr. Robert Stalveys brother were both employed by subsidiaries of IES in fiscal year 2004, and each of them received compensation in excess of $60,000 during fiscal year 2004.
We believe that the terms of each of these transactions are reasonable and no less favorable than the terms of similar arrangements with unrelated third parties.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Exchange Act requires our directors, executive officers and persons holding more than ten percent of a registered class of our equity securities to file with the SEC and any stock exchange or automated quotation system on which the common stock may then be listed or quoted (i) initial reports of ownership, (ii) reports of changes in ownership and (iii) annual reports of ownership of common stock and other equity securities of IES. Such directors, officers and ten-percent stockholders are also required to furnish us with copies of all such filed reports.
Based solely upon review of the copies of such reports furnished to us and written representations that no other reports were required during 2004, we believe that all Section 16(a) reporting requirements related to our directors and executive officers were timely fulfilled during 2004.
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SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth information with respect to the beneficial ownership of our common stock as of September 1, 2005 by:
| each person who is known by us to own beneficially 5% or more of our outstanding common stock; |
| our named executive officers; |
| our directors; |
| all of our executive officers and directors as a group; and |
| the selling stockholders in this offering. |
Except as otherwise indicated, the person or entities listed below have sole voting and investment power with respect to all shares of our common stock beneficially owned by them, except to the extent this power may be shared with a spouse. Unless otherwise indicated, the address of each stockholder listed below is 1800 West Loop South, Suite 500, Houston, Texas 77027.
Name of Beneficial Owner |
Shares Beneficially Owned |
||||
Number |
Percent(1) |
||||
Ronald P. Badie (2) |
41,008 | * | |||
Donald Paul Hodel (3) |
56,532 | * | |||
Alan R. Sielbeck (4) |
103,481 | * | |||
C. Byron Snyder (5) |
2,626,401 | 6.68 | % | ||
Robert Stalvey (6) |
134,614 | * | |||
Richard C. Humphrey (7) |
162,634 | * | |||
Donald L. Luke (8) |
7,830 | * | |||
Directors and officers as a group (11 persons) (9) |
3,195,785 | 8.06 | % | ||
Barclays Global Investors, NA, and affiliates (10) |
3,537,475 | 9.00 | % | ||
Dimensional Fund Advisors Inc. (11) |
3,172,456 | 8.07 | % | ||
Jeffrey L. Gendell (12) |
3,696,200 | 9.40 | % | ||
State Street Research & Management Co. (13) |
2,758,810 | 7.02 | % | ||
Ardsley Advisory Partners (14) |
2,000,000 | 5.09 | % | ||
FMR Corp (15) |
4,740,500 | 12.06 | % | ||
Artisan Partners Limited Partnership (16) |
2,183,900 | 5.56 | % | ||
Amulet Limited (17) |
7,692,307 | 16.37 | % | ||
Marathon Global Convertible Master Fund Ltd. (18) |
3,846,153 | 8.91 | % | ||
Marathon Special Opportunity Master Fund, Ltd. (19) |
3,846,153 | 8.91 | % | ||
Southpoint Capital Advisors LP (20) |
3,196,700 | 8.13 | % |
* | Less than one percent. |
(1) | For the purposes of calculating percent of class, shares of restricted voting common stock are treated as options to acquire an equal number of shares of common stock that are exercisable within 60 days. |
(2) | Includes 12,000 shares of common stock underlying options that are exercisable within 60 days. |
(3) | Includes 33,000 shares of common stock underlying options that are exercisable within 60 days. |
(4) | Includes 33,000 shares of common stock underlying options that are exercisable within 60 days. |
(5) | The shares attributed to Mr. Snyder are as follows: (i) 2,585,829 shares are held in the 1996 Snyder Family Partnership, (ii) 699 shares are held in the 1998 Snyder Family Partnership Management Trust, (iii) 9,599 shares are held by the Worth Byron Snyder Trust, and (iv) 9,582 shares are held by the Gregg Layton Snyder Trust. These shares attributed to Mr. Snyder comprise all of our outstanding restricted voting common stock. Such shares may be converted into common stock in specific circumstances. Mr. Snyder disclaims beneficial ownership as to 1,118,193 of these shares which are attributable to the interests in the 1996 Partnership held by Mr. Snyders children. Includes 11,692 shares owned directly and 9,000 shares of common stock underlying options that are exercisable within 60 days. |
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(6) | Includes 104,472 shares of common stock underlying options that are exercisable within 60 days. |
(7) | Includes 89,140 shares of common stock underlying options that are exercisable within 60 days. |
(8) | Includes 6,000 shares of common stock underlying options that are exercisable within 60 days. |
(9) | Includes 2,605,709 shares of restricted voting common stock described in Note (5) above, 326,945 shares of common stock underlying options that are exercisable within 60 days, and 1,481 shares of common stock held in our 401(k) Plan. |
(10) | According to an amended Schedule 13G filed with the SEC on February 4, 2005, the following entities, which are affiliates of one another, are the beneficial owners of 3,537,475 shares of Common Stock and have sole voting power with respect to 3,300,301 shares and sole dispositive power with respect to all of the shares. The following affiliates own common stock in the amounts and manner indicated: Barclays Global Investors, NA, beneficial owner of 3,165,703 shares of common stock, with sole voting power with respect to 2,928,529 shares and sole dispositive power with respect to 3,165,703 shares; Barclays Global Fund Advisors, beneficial owner of 371,772 shares of common stock, with sole voting and sole dispositive power with respect to all of the shares. The Schedule 13G states that the shares reported are held by the company in trust accounts for the economic benefit of the beneficiaries of those accounts. Barclay Global Investors address is 45 Fremont Street, San Francisco, CA 94105. |
(11) | Dimensional Fund Advisors Inc. is an investment adviser registered under Section 203 of the Investment Advisers Act of 1940 which furnishes investment advice to four investment companies registered under the Investment Company Act of 1940. Dimensional has sole voting and sole dispositive power with respect to all of the shares, but disclaims beneficial ownership. Dimensionals mailing address is 1299 Ocean Avenue, 11th Floor, Santa Monica, CA 90401. This information is based solely on the Schedule 13G/A filed by Dimensional on February 9, 2005. |
(12) | Mr. Gendell has shared voting and dispositive power in (i) Tontine Partners, L.P., 1,305,600 shares, (ii) Tontine Capital Partners, L.P., 795,600 shares, (iii) Tontine Management, L.L.C., 1,305,600 shares, (iv) Tontine Capital Management, L.L.C., 795,600 shares, and (v) Tontine Overseas Associates, L.L.C., 1,459,700 shares. Mr. Gendell holds 135,300 shares with sole voting and sole dispositive power. Mr. Gendells address is 55 Railroad Avenue, 3rd Floor, Greenwich, CT 06830. This information is based solely on the Schedule 13G/A filed by Jeffrey L. Gendell on February 8, 2005. |
(13) | State Street Research and Management Company is an investment adviser registered under the Investment Advisers Act of 1940. State Street has sole voting and sole dispositive power with respect to all of the shares, but disclaims beneficial ownership. All of the shares are owned by clients of State Street, whose address is One Financial Center, 31st Floor, Boston, MA 02111-2690. This information is based solely on the Schedule 13G/A filed by State Street on January 27, 2005. |
(14) | Ardsley Advisory Partners, a Connecticut general partnership, whose address is 262 Harbor Drive, Stamford, Connecticut 06902, serves as Investment Manager of Ardsley Offshore Fund, Ltd., a British Virgin Islands Corporation) with respect to the 965,000 shares owned directly by Ardsley, and the Investment Advisor of Ardsley Partners Fund II, L.P., a Delaware limited partnership with respect to the 660,000 shares owned directly by AP II and Ardsley Partners Institutional Fund, L.P., a Delaware limited partnership with respect to the 325,000 shares owned directly by Ardsley Institutional and certain other managed accounts. The address of AP II and Ardsley Institutional is also 262 Harbor Drive, Stamford, Connecticut 06902. The address of Ardsley Offshore is Romasco Place, Wickhams Cay 1, Roadtown Tortola, British Virgin Islands. Ardsley Advisory, Ardsley Offshore, AP II and Ardsley Institutional have shared voting and dispositive power over the shares noted. |
Philip J. Hempleman, whose address is 262 Harbor Drive, Stamford, Connecticut 06902, is the Managing Partner of Ardsley Advisory and Ardsley Partners and in that capacity directs their operations and therefore may be deemed to be the indirect beneficial owner of the shares owned by Ardsley Offshore, AP II, Ardsley Institutional and certain managed accounts. Ardsley Advisory, the Investment Manager of Ardsley Offshore and the Investment Advisor of certain managed accounts, has the power to vote and direct the disposition of the proceeds from the sale of the shares owned by Ardsley Offshore and the managed accounts, and accordingly may be deemed the direct beneficial owner of such shares.
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Ardsley Advisory, the Investment Advisor of AP II and Ardsley Institutional shares the power to vote and direct the disposition of the proceeds from the sale of the shares owned by AP II and Ardsley Institutional, and accordingly may be deemed the direct beneficial owner of such shares.
Ardsley Partners, the General Partner of AP II and Ardsley Institutional shares the power to vote and direct the disposition of the shares of common stock owned by AP II and Ardsley Institutional, and accordingly may be deemed the direct beneficial owner of such shares. This information is based solely on the Schedule 13G filed on February 11, 2005.
(15) | Fidelity Management & Research Company, whose address is 82 Devonshire Street, Boston, Massachusetts 02109, a wholly owned subsidiary of FMR Corp. and an investment advisor registered under Section 203 of the Investment Advisors Act of 1940, is the beneficial owner of 4,514,100 shares as a result of acting as an investment advisor to various investment companies registered under Section 8 of the Investment Company Act of 1940. The ownership of one investment company affiliated with FMR Corp., Fidelity Leveraged Co Stock Fund, whose address is 82 Devonshire Street, Boston, Massachusetts 02109, amounted to 3,147,000 shares. Edward C. Johnson 3rd, FMR Corp., through its control of Fidelity and the funds each has sole power to dispose of the 4,514,100 shares owned by the funds. Neither FMR Corp. nor Mr. Johnson, Chairman of FMR Corp., has the sole power to vote or direct the voting of the shares owned directly by the Fidelity Funds, which power resides with the Funds Board of Trustees. Fidelity carries out the voting of the shares under written guidelines established by the Funds Board of Trustees. |
Fidelity Management Trust Company, whose address is 82 Devonshire Street, Boston, Massachusetts 02109, a wholly owned subsidiary of FMR Corp and a bank as defined in Section 3(a)(6) of the Securities Exchange At of 1934, is the beneficial owner of 586,200 shares as a result of its serving as investment manager of the institutional account(s). Mr. Johnson and FMR Corp., through its control of Fidelity Management Trust Company each has sole dispositive power over 226,400 shares and sole power to vote or to direct the voting of 226,4000 shares owned by the institutional account(s) as reported above.
Members of Mr. Johnsons family and trusts for their benefit are the predominant owners of shares of class B common stock of FMR Corp., representing approximately 49% of the voting power of FMR Corp. Mr. Johnson owns 12% and Abigail Johnson owns 24.5% of the aggregate outstanding voting stock of FMR Corp. The Johnson family group and all other Class B stockholders have entered into a stockholders voting agreement under which all Class B shares will be voted in accordance with the majority vote of Class B shares. Accordingly, through their ownership of voting common stock and the execution of the stockholders voting agreement, members of the Johnson family may be deemed, under the Investment Company Act of 1940, to form a controlling group with respect to FMR Corp.
This information is based solely on Amendment No. 1 to Schedule 13G filed by FMR Corp. on April 11, 2005.
(16) | Artisan Partners Limited Partnership, a Delaware limited partnership, whose address is 875 East Wisconsin Avenue, Suite 800, Milwaukee, WI 53202 is an investment advisor registered under section 203 of the Investment Advisors Act of 1940. Artisan Investment Corporation, the general partner of Artisan Partners is a Wisconsin corporation and Andrew A. Ziegler and Carlene Murphy Ziegler are the principal stockholders of Artisan Corp. Artisan Corp. and Mr. and Mrs. Zieglers address is also 875 East Wisconsin Avenue, Suite 800, Milwaukee, WI 53202. The shares described above have been acquired on behalf of discretionary clients of Artisan Partners. Persons other than Artisan Partners are entitled to receive all dividends from, and proceeds from the sale of these shares. None of these persons, to the knowledge of Artisan Partners, Artisan Corp., Mr. Ziegler or Mrs. Ziegler has an economic interest in more than 5% of the shares outstanding. |
This information is based sole on the Schedule 13G filed on January 26, 2005.
(17) | Includes 7,692,307 shares of common stock issuable upon conversion of the 6.5% senior convertible convertible notes beneficially owned by Amulet Limited. Amulet Limiteds address is c/o Dundee Leeds Management Services (Cayman) Ltd., 28 N. Church StreetWaterfront Centre, George Town, Grand Cayman Islands, British West Indies. Amaranth Advisors L.L.C., the trading advisor for Amulet Limited, exercises dispositive power with respect to the convertible notes held by Amulet Limited and voting and dispositive power with respect to the shares of common stock issuable upon conversion of the convertible notes. Nicholas M. Maounis is the managing member of Amaranth Advisors L.L.C. |
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(18) | Includes 3,846,153 shares of common stock issuable upon conversion of the 6.5% senior convertible convertible notes beneficially owned by Marathon Global. Includes Marathon Global Convertible Master Fund Ltd.s address is 461 5th Avenue, 10th Floor, New York, New York 10017. Marathon Asset Management, LLC, the Investment Adviser for Marathon Global Convertible Master Fund, Ltd., exercises voting power and investment control over the shares issuable upon conversion of the convertible notes held by Marathon Global. Bruce Richards and Louis Hanover are the Managing Members of Marathon Asset Management, LLC. |
(19) | Includes 3,846,153 shares of common stock issuable upon conversion of the 6.5% senior convertible convertible notes beneficially owned by Marathon Special Opportunity. Marathon Special Opportunity Master Fund Ltd.s address is 461 5th Avenue, 10th Floor, New York, New York 10017. Marathon Asset Management, LLC, the Investment Adviser for Marathon Special Opportunity Master Fund, Ltd., exercises voting power and investment control over the shares issuable upon conversion of the convertible notes held by Marathon Special Opportunity. Bruce Richards and Louis Hanover are the Managing Members of Marathon Asset Management, LLC. |
(20) | Based solely upon information obtained from a Schedule 13G filed with the SEC on July 1, 2005 on behalf of Southpoint Capital Advisors LLC, a Delaware limited liability company (Southpoint CA LLC), Southpoint GP, LLC, a Delaware limited liability company (Southpoint GP LLC), Southpoint Capital Advisors LP, a Delaware limited partnership (Southpoint Advisors), Southpoint GP, LP (Southpoint GP), Robert W. Butts and John S. Clark II, Southpoint Advisors, Southpoint GP, Southpoint CA LLC, Southpoint GP LLC, Robert W. Butts and John S. Clark II have sole voting and dispositive power over 3,196,700 shares. Southpoint CA LLC is the general partner of Southpoint Advisors. Southpoint GP LLC is the general partner of Southpoint GP. Southpoint GP is the general partner of Southpoint Fund LP, a Delaware limited partnership (the Fund), Southpoint Qualified Fund LP, a Delaware limited partnership (the Qualified Fund), and Southpoint Offshore Operating Fund, LP, a Cayman Islands exempted limited partnership (the Offshore Operating Fund). Southpoint Offshore Fund, Ltd., a Cayman Island exempted company (the Offshore Fund), is also a general partner of the Offshore Operating Fund. |
The shares of common stock being offered by the selling stockholders are issuable upon the conversion or repurchase of our 6.5% senior convertible notes (including any common stock issued or issuable in connection with any make-whole premium to be paid in accordance with the terms of such convertible notes) issued to the selling stockholders in November 2004 and February 2005. For additional information regarding the issuance of our convertible notes, see Managements Discussion and AnalysisLiquidity and Capital Resources. We are registering the shares of common stock in order to permit the selling stockholders to offer such shares for resale from time to time after the date of this prospectus. Except for the ownership of the convertible notes, the selling stockholders have not had any material relationship with us within the past three years. The information below regarding the selling stockholders is based on information provided to us by the selling stockholders.
The second column in the table below sets forth the number of shares of common stock beneficially owned by each selling stockholder, based on its ownership of our convertible notes, as of September 1, 2005, assuming conversion of all convertible notes on that date, without regard to any limitations on conversions or exercise.
The third column lists the shares of common stock being offered by this prospectus by each selling stockholder.
In accordance with the terms of a registration rights agreement among IES and the selling stockholders, this prospectus generally covers the resale of the number of shares of common stock issuable upon conversion of the convertible notes. Because the conversion price of the convertible notes may be adjusted, the number of shares that will actually be issued may be more or less than the number of shares being offered by this prospectus. The fourth column assumes the sale of all of the shares offered by the selling stockholders pursuant to this prospectus.
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Under the terms of the convertible notes, a selling stockholder may not convert the convertible notes to the extent such conversion would cause such selling stockholder, together with its affiliates, to beneficially own a number of shares of common stock that would exceed 4.99% of our then-outstanding shares of common stock following such conversion or exercise, excluding for purposes of such determination shares of common stock issuable upon conversion of the convertible notes that have not been converted. The number of shares in the second column does not reflect this limitation. The selling stockholders may sell all, some or none of their shares in this offering. See Plan of Distribution.
Name of Selling Stockholder |
Shares Beneficially Owned Prior to this Offering |
Number of Shares Offered |
Shares Beneficially Owned After this Offering | ||||||||
Number |
Percent |
Number |
Percent | ||||||||
Amulet Limited (1) |
7,692,307 | 16.37 | % | 7,692,307 | | | |||||
Marathon Global Convertible Master Fund Ltd. (2) |
3,846,153 | 8.91 | % | 3,846,153 | | | |||||
Marathon Special Opportunity Master Fund, Ltd. (3) |
3,846,153 | 8.91 | % | 3,846,153 | | |
(1) | Includes 7,692,307 shares of common stock issuable upon conversion of the 6.5% senior convertible convertible notes beneficially owned by Amulet Limited. Amulet Limiteds address is c/o Dundee Leeds Management Services (Cayman) Ltd., 28 N. Church StreetWaterfront Centre, George Town, Grand Cayman Islands, British West Indies. Amaranth Advisors L.L.C., the trading advisor for Amulet Limited, exercises dispositive power with respect to the convertible notes held by Amulet Limited and voting and dispositive power with respect to the shares of common stock issuable upon conversion of the convertible notes. Nicholas M. Maounis is the managing member of Amaranth Advisors L.L.C. Amulet Limited is an affiliate of Amaranth Securities L.L.C. and Amaranth Global Securities Inc., each of whom is a broker-dealer registered pursuant to Section 15(b) of the Exchange Act and is a member of the National Association of Securities Dealers, Inc. Amulet Limited has represented to us that (1) it purchased the senior convertible notes in the ordinary course of its business and (2) at the time of purchase, it had no agreements or understandings directly or indirectly, with any person to distribute the securities. |
(2) | Includes 3,846,153 shares of common stock issuable upon conversion of the 6.5% senior convertible convertible notes beneficially owned by Marathon Global. Includes Marathon Global Convertible Master Fund Ltd.s address is 461 5th Avenue, 10th Floor, New York, New York 10017. Marathon Asset Management, LLC, the Investment Adviser for Marathon Global Convertible Master Fund, Ltd., exercises voting power and investment control over the shares issuable upon conversion of the convertible notes held by Marathon Global. Bruce Richards and Louis Hanover are the Managing Members of Marathon Asset Management, LLC. |
(3) | Includes 3,846,153 shares of common stock issuable upon conversion of the 6.5% senior convertible convertible notes beneficially owned by Marathon Special Opportunity. Marathon Special Opportunity Master Fund Ltd.s address is 461 5th Avenue, 10th Floor, New York, New York 10017. Marathon Asset Management, LLC, the Investment Adviser for Marathon Special Opportunity Master Fund, Ltd., exercises voting power and investment control over the shares issuable upon conversion of the convertible notes held by Marathon Special Opportunity. Bruce Richards and Louis Hanover are the Managing Members of Marathon Asset Management, LLC. |
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General
Our authorized capital stock consists of 100,000,000 shares of common stock, par value $0.01 per share, 2,605,709 shares of restricted common stock, par value $0.01 per share, and 10,000,000 shares of preferred stock, par value $0.01 per share. 39,302,640 shares of common stock and restricted common stock are issued and outstanding. The following summary of the terms and provisions of our capital stock does not purport to be complete and is qualified in its entirety by reference to our Amended and Restated Certificate of Incorporation and Bylaws and applicable law.
Common Stock and Restricted Common Stock
The holders of common stock are entitled to one vote for each share on all matters voted upon by stockholders, including the election of directors. Our common stockholders are not entitled to vote cumulatively for the election of directors. Holders of a majority of the shares of common stock entitled to vote in any election of directors may elect all of directors standing for election.
The holders of restricted common stock, voting as a separate class, are entitled to elect one member of our Board of Directors and to one-half of one vote for each share of restricted common stock held on all other matters on which they are entitled to vote. Holders of restricted common stock are not entitled to vote on the election of any other directors. Only the holder of restricted common stock may remove the director such holder is entitled to elect.
Subject to the rights of any then-outstanding shares of preferred stock, holders of common stock and restricted common stock are together entitled to participate pro rata in dividends declared in the discretion of the Board of Directors out of funds legally available therefor. Holders of common stock and restricted common stock together are entitled to share ratably in the net assets of IES upon liquidation after payment or provision for all liabilities and any preferential liquidation rights of any preferred stock then outstanding. Holders of common stock and holders of restricted common stock have no preemptive rights to purchase shares of stock of IES. Shares of common stock are not subject to any redemption provisions and are not convertible into any other securities of IES. Shares of restricted common stock are not subject to any redemption provisions and are convertible into common stock as described below. All outstanding shares of common stock and restricted common stock are fully paid and non-assessable.
Each share of restricted common stock will automatically convert to common stock on a share-for-share basis in the event of a disposition of such share of restricted common stock by the holder thereof (other than a distribution by a holder to its partners or beneficial owners, or a transfer to a related party of such holders (as defined in Sections 267, 707, 318 and/or 4946 of the Internal Revenue Code of 1986, as amended)).
The common stock is listed on the NYSE under the symbol IES. The restricted common stock is not listed on any exchange.
Preferred Stock
The preferred stock may be issued from time to time by the Board of Directors as shares of one or more classes or series. Subject to the provisions of our Amended and Restated Certificate of Incorporation and limitations prescribed by law, the Board of Directors is expressly authorized to adopt resolutions to issue the shares, to fix the number of shares and to change the number of shares constituting any series, and to provide for or change the voting powers, designations, preferences and relative, participating, optional or other special rights, qualifications, limitations or restrictions thereof, including dividend rights (including whether dividends are cumulative), dividend rates, terms of redemption (including sinking fund provisions), redemption prices,
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conversion rights and liquidation preferences of the shares constituting any class or series of the preferred stock, in each case without any further action or vote by the stockholders. We have no current plans to issue any shares of preferred stock of any class or series.
One of the effects of undesignated preferred stock may be to enable the Board of Directors to render more difficult or to discourage an attempt to obtain control of IES by means of a tender offer, proxy contest, merger or otherwise, and thereby to protect the continuity of our management. The issuance of shares of preferred stock pursuant to the Board of Directors authority described above may adversely affect the rights of the holders of common stock. For example, preferred stock we issue may rank prior to the common stock as to dividend rights, liquidation preference or both, may have full or limited voting rights and may be convertible into shares of Common stock. Accordingly, the issuance of shares of preferred stock may discourage bids for the common stock at a premium or may otherwise adversely affect the market price of the common stock.
Statutory Business Combination Provision
We are subject to the provisions of Section 203 of the Delaware General Corporation Law. Section 203 provides, with certain exceptions, that a Delaware corporation may not engage in any of a broad range of business combinations with a person or an affiliate, or associate of such person, who is an interested stockholder for a period of three years from the date that such person became an interested stockholder unless: (1) the transaction resulting in a person becoming an interested stockholder, or the business combination, is approved by the Board of Directors of the corporation before the person becomes an interested stockholder, (2) the interested stockholder acquired 85% or more of the outstanding voting stock of the corporation in the same transaction that makes such person an interested stockholder (excluding shares owned by persons who are both officers and directors of the corporation, and shares held by certain employee stock ownership plans) or (3) on or after the date the person becomes an interested stockholder, the business combination is approved by the corporations board of directors and by the holders of at least 66% of the corporations outstanding voting stock at an annual or special meeting, excluding shares owned by the interested stockholder. Under Section 203, an interested stockholder is defined as any person who is the owner of 15% or more of the outstanding voting stock of the corporation or an affiliate or associate of the corporation and who was the owner of 15% or more of the outstanding voting stock of the corporation at any time within the three-year period immediately prior to the date on which it is sought to be determined whether such person is an interested stockholder.
A corporation may, at its option, exclude itself from the coverage of Section 203 by including in its certificate of incorporation or bylaws by action of its stockholders to exempt itself from coverage. We have not adopted such an amendment to our Amended and Restated Certificate of Incorporation or Bylaws.
Limitation on Directors Liability
Pursuant to our Amended and Restated Certificate of Incorporation and Delaware law, our directors are not liable to IES or our stockholders for monetary damages for breach of fiduciary duty, except for liability in connection with a breach of the duty of loyalty, for acts or omissions not in good faith or that involve intentional misconduct or a knowing violation of law, for dividend payments or stock repurchases illegal under Delaware law or any transaction in which a director has derived an improper personal benefit. We have entered into indemnification agreements with our directors and executive officers that indemnify those persons to the fullest extent permitted by our Amended and Restated Certificate of Incorporation, our Bylaws and the Delaware General Corporation Law. We also intend to obtain directors and officers liability insurance. The foregoing provisions may extend to liabilities arising due to violations of the federal securities laws. It is the position of the SEC that indemnification for liabilities under the Securities Act is against public policy and is, therefore, unenforceable.
Amended and Restated Certificate of Incorporation and Bylaw Provisions
Our Amended and Restated Certificate of Incorporation and Bylaws include provisions that may have the effect of discouraging, delaying or preventing a change in control of IES or an unsolicited acquisition proposal
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that a stockholder might consider favorable, including a proposal that might result in the payment of a premium over the market price for the shares held by stockholders. These provisions are summarized in the following paragraphs.
Classified Board of Directors. Our Amended and Restated Certificate of Incorporation provides for the Board of Directors to be divided into three classes of directors serving staggered three-year terms. The classification of the Board of Directors has the effect of requiring at least two annual stockholder meetings, instead of one, to replace a majority of members of the Board of Directors.
Supermajority Voting. Our Amended and Restated Certificate of Incorporation requires the approval of the holders of at least 75% of the then-outstanding shares of our capital stock entitled to vote thereon and the approval of the holders of at least 75% of the then-outstanding shares of each class of stock voting separately as a class on, among other things, certain amendments to our Amended and Restated Certificate of Incorporation. Our Board of Directors may amend, alter, change or repeal any bylaws without the assent or vote of the stockholders, but any such bylaws may be altered, amended or repealed upon the affirmative vote of at least 66 2/3% of the stock entitled to vote thereon.
Authorized but Unissued or Undesignated Capital Stock. Our authorized capital stock will consist of 100,000,000 shares of common stock, 2,655,709 shares of restricted common stock, and 10,000,000 shares of preferred stock. After the issuance of the offered shares, we will have outstanding 54,584,262 shares of common stock and restricted common stock. The authorized but unissued (and in the case of preferred stock, undesignated) stock may be issued by the Board of Directors in one or more transactions. In this regard, our Amended and Restated Certificate of Incorporation grants our Board of Directors broad power to establish the rights and preferences of authorized and unissued preferred stock. The issuance of shares of preferred stock pursuant to our Board of Directors authority described above could decrease the amount of earnings and assets available for distribution to holders of common stock and adversely affect the rights and powers, including voting rights, of such holders and may also have the effect of delaying, deferring or preventing a change in control of IES. Our Board of Directors does not currently intend to seek stockholder approval prior to any issuance of preferred stock, unless otherwise required by law.
Special Meeting of Stockholders. Our Bylaws provide that special meetings of our stockholders may only be called by the Chairman of the Board of Directors upon the written request of the Board of Directors pursuant to a resolution approved by a majority of the Board of Directors.
Stockholder Action by Written Consent. Our Amended and Restated Certificate of Incorporation and Bylaws generally provide that any action required or permitted by our stockholders must be effected at a duly called annual or special meeting of the stockholders and may not be effected by any written consent of the stockholders.
Notice Procedures. Our Bylaws establish advance notice procedures with regard to stockholder proposals relating to the nomination of candidates for election as director, the removal of directors and amendments to our Amended and Restated Certificate of Incorporation or Bylaws to be brought before annual meetings of our stockholders. These procedures provide that notice of such stockholder proposals must be timely given in writing to our Secretary prior to the annual meeting. Generally, to be timely, notice must be received at our principal executive offices not less than 80 days prior to an annual meeting (or if fewer than 90 days notice or prior public disclosure of the date of the annual meeting is given or made by IES, not later than the tenth day following the date on which the notice of the date of the annual meeting was mailed or such public disclosure was made). The notice must contain certain information specified in the Bylaws, including a brief description of the business desired to be brought before the annual meeting and certain information concerning the stockholder submitting the proposal.
Charter provisions Relating to Rights Plan. Our Amended and Restated Certificate of Incorporation authorizes our Board of Directors to create and issue rights entitling the holders thereof to purchase from IES shares of capital stock or other securities. The times at which, and the terms upon which, these purchase rights
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are to be issued may be determined by the Board of Directors and set forth in the contracts or instruments that evidence the rights. The authority of the Board of Directors with respect to the purchase rights includes, but is not limited to, the determination of (1) the initial purchase price per share of our capital stock or other securities to be purchased upon exercise of the purchase rights, (2) provisions relating to the times at which and the circumstances under which the purchase rights may be exercised or sold or otherwise transferred, either together with or separately from, any other securities of IES, (3) antidilutive provisions which adjust the number or exercise price of the purchase rights or amount or nature of the securities or other property receivable upon exercise of the purchase rights, (4) provisions that deny the holder of a specified percentage of the outstanding securities of IES the right to exercise the purchase rights and/or cause the purchase rights held by such holder to become void, (5) provisions that permit us to redeem the purchase rights and (6) the appointment of a rights agent with respect to the purchase rights. If authorized by the Board of Directors, the purchase rights would be intended to protect our stockholders from certain non-negotiated takeover attempts which present the risk of a change of control on terms which may be less favorable to our stockholders than would be available in a transaction negotiated with and approved by the Board of Directors. The Board of Directors believes that the interests of the stockholders generally are best served if any acquisition of IES or a substantial percentage of our common stock results from arms-length negotiations and reflects the Board of Directors careful consideration of the proposed terms of a transaction. In particular, the purchase rights if issued would be intended to help (1) reduce the risk of coercive two-tiered, front-end loaded or partial offers that may not offer fair value to all of our stockholders, (2) deter market accumulators who through open market or private purchases may achieve a position of substantial influence or control without paying to stockholders a fair control premium and (3) deter market accumulators who are simply interested in putting us in play.
Transfer Agent and Registrar
The Transfer Agent and Registrar for our common stock is Wachovia Bank, N.A.
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UNITED STATES FEDERAL TAX CONSIDERATIONS FOR NON-UNITED STATES HOLDERS
The following is a general discussion of the principal United States federal income and estate tax consequences of the ownership and disposition of our common stock by a non-U.S. holder. As used in this discussion, the term non-U.S. holder means a beneficial owner of our common stock that is not, for U.S. federal income tax purposes:
| an individual who is a citizen or resident of the United States; |
| a corporation or partnership (including any entity treated as a corporation or partnership for U.S. federal income tax purposes) created or organized in or under the laws of the United States, or of any political subdivision of the United States; |
| an estate whose income is subject to U.S. federal income taxation regardless of its source; or |
| a trust, in general, if a U.S. court is able to exercise primary supervision over the administration of the trust and one or more U.S. persons have authority to control all substantial decisions of the trust, or if it has a valid election in effect under applicable U.S. Treasury regulations to be treated as a U.S. person. |
This discussion does not consider all aspects of U.S. federal income and estate taxes or specific facts and circumstances that may be relevant to a particular non-U.S. holders tax position, including the fact that in the case of a non-U.S. holder that is an entity treated as a partnership for U.S. federal income tax purposes, the U.S. tax consequences of holding and disposing of our common stock may be affected by certain determinations made at the partner level. If a partnership holds our common stock, the tax treatment of a partner of the partnership will generally depend on the status of the partner and the activities of the partnership.
In addition we do not address any U.S., state or local or non-U.S. tax consequences, the tax consequences for the stockholders, partners or beneficiaries of a non-U.S. holder, special tax rules that may apply to particular non-U.S. holders, such as financial institutions, regulated investment companies, insurance companies, tax-exempt organizations, U.S. expatriates, broker-dealers, and traders in securities, or special tax rules that may apply to a non-U.S. holder that holds our common stock as part of a straddle, hedge, conversion transaction, synthetic security or other integrated investment.
The following discussion is based on provisions of the U.S. Internal Revenue Code of 1986, as amended, existing and proposed Treasury regulations and administrative and judicial interpretations, all as of the date of this prospectus, and all of which are subject to change, retroactively or prospectively. This discussion assumes that a non-U.S. holder holds our common stock as a capital asset. Each non-U.S. holder is urged to consult its own tax advisor regarding the U.S. federal, state, local and non-U.S. income and other tax consequences of acquiring, holding and disposing of shares of our common stock.
Distributions on Common Stock
We do not currently anticipate making any distributions on our common stock in the foreseeable future. In the event that we make cash distributions on our common stock, these distributions generally will constitute dividends for U.S. federal income tax purposes to the extent paid from our current or accumulated earnings and profits, as determined under U.S. federal income tax principles. Dividends paid (or deemed paid) to non-U.S. holders of our common stock that are not effectively connected with the non-U.S. holders conduct of a U.S. trade or business will be subject to U.S. withholding tax at a 30% rate, or if a tax treaty applies, a lower rate specified by the treaty. Non-U.S. holders should consult their tax advisors regarding their entitlement to benefits under a relevant income tax treaty.
Dividends that are effectively connected with a non-U.S. holders conduct of a trade or business in the United States and, if an income tax treaty applies, are attributable to a permanent establishment in the United States, are taxed on a net income basis at the regular graduated federal income tax rates and in the manner applicable to U.S. persons. In that case, we will not have to withhold the U.S. federal withholding tax described
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above if the non-U.S. holder complies with applicable certification and disclosure requirements. In addition, a branch profits tax may be imposed at a 30% rate, or a lower rate under an applicable income tax treaty, on dividends received by a foreign corporation that are effectively connected with the conduct of a trade or business in the United States.
A non-U.S. holder who claims the benefit of an applicable income tax treaty generally will be required to satisfy applicable certification and other requirements. However,
| in the case of common stock held by a foreign partnership, the certification requirement will generally be applied to the partners of the partnership and the partnership will be required to provide certain information; |
| in the case of common stock held by a foreign trust, the certification requirement will generally be applied to the trust or the beneficial owners of the trust depending on whether the trust is a foreign complex trust, foreign simple trust or foreign grantor trust as defined in the U.S. Treasury regulations; and |
| look-through rules will apply for tiered partnerships, foreign simple trusts and foreign grantor trusts. |
A non-U.S. holder that is a foreign partnership or a foreign trust is urged to consult its own tax advisor regarding its status under these U.S. Treasury regulations and the certification requirements applicable to it.
A non-U.S. holder that is eligible for a reduced rate of U.S. federal withholding tax may obtain a refund or credit of any excess amounts withheld by filing an appropriate claim for a refund with the U.S. Internal Revenue Service.
Gain on Disposition of Common Stock
A non-U.S. holder generally will not be subject to U.S. federal income tax on gain recognized on a disposition of our common stock unless:
| the gain is effectively connected with the non-U.S. holders conduct of a trade or business in the United States and, if an income tax treaty applies, is attributable to a permanent establishment maintained by the non-U.S. holder in the United States; in these cases, the gain will be taxed on a net income basis at the regular graduated federal income tax rates and in the manner applicable to U.S. persons and, if the non-U.S. holder is a foreign corporation, the branch profits tax described above may also apply; |
| the non-U.S. holder is an individual who is present in the United States for 183 days or more in the taxable year of the disposition and meets other requirements; or |
| we are or have been a United States real property holding corporation for U.S. federal income tax purposes at any time during the shorter of the five-year period ending on the date of disposition of our common stock or the period that the non-U.S. holder held our common stock. |
Generally, a corporation is a United States real property holding corporation if the fair market value of its United States real property interests equals or exceeds 50% of the sum of the fair market value of its worldwide real property interests plus its other assets used or held for use in a trade or business. The tax relating to stock in a United States real property holding corporation generally will not apply to a non-U.S. holder whose holdings, direct and indirect, at all times during the applicable period, constituted 5% or less of our common stock, provided that our common stock was regularly traded on an established securities market. We believe that we are not currently, and we do not anticipate becoming in the future, a United States real property holding corporation for U.S. federal income tax purposes.
U.S. Federal Estate Tax
Common stock owned or treated as owned by an individual who is a non-U.S. holder for U.S. federal tax purposes at the time of death will be included in the individuals gross estate for U.S. federal estate tax purposes, unless an applicable estate tax or other treaty provides otherwise and, therefore, may be subject to U.S. federal estate tax.
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Information Reporting and Backup Withholding Tax
Dividends paid to you may be subject to information reporting and U.S. backup withholding. If you are a non-U.S. holder you will be exempt from this backup withholding tax if you provide a properly executed Form W-8BEN certifying that you are a non-U.S. holder or you otherwise meet documentary evidence requirements for establishing that you are a non-U.S. holder or otherwise establish an exemption.
The gross proceeds from the disposition of our common stock may be subject to information reporting and backup withholding. If you sell your common stock outside the United States through a non-U.S. office of a non-U.S. broker and the sales proceeds are paid to you outside the United States, then the U.S. backup withholding and information reporting requirements generally will not apply to that payment. However, U.S. information reporting, but not backup withholding, will generally apply to a payment of sales proceeds, even if that payment is made outside the United States, if you sell your common stock through a non-U.S. office of a broker that has certain enumerated connections with the U.S., unless the broker has documentary evidence in its files that you are a non-U.S. person and certain other conditions are met or you otherwise establish an exemption.
If you receive payments of the proceeds of a sale of our common stock to or through a U.S. office of a broker, the payment is subject to both U.S. backup withholding and information reporting unless you properly provide a Form W-8BEN certifying that you are a non-U.S. person or you otherwise establish an exemption.
Backup withholding is not an additional tax. You generally may obtain a refund of any amounts withheld under the backup withholding rules that exceed your U.S. federal income tax liability by timely filing a properly completed refund claim with the U.S. Internal Revenue Service.
We are registering the shares of common stock issuable upon conversion or repurchase of our 6.5% senior convertible notes due 2014 (including any common stock issued or issuable in connection with any make-whole premium to be paid in accordance with the terms of such convertible notes) to permit the resale of these shares of common stock by the holders of the convertible notes from time to time after the date of this prospectus. We will not receive any of the proceeds from the sale by the selling stockholders of the shares of common stock. We will bear all fees and expenses incident to our obligation to register the shares of common stock.
The selling stockholders may sell all or a portion of the shares of common stock beneficially owned by them and offered hereby from time to time directly to the purchaser or, alternatively, through underwriters, broker dealers or agents, including on a firm commitment or best efforts basis. If shares are sold through underwriters, broker dealers or agents, the selling stockholder will be responsible for underwriting discounts or commissions or agents commissions. Such shares may be sold in one or more transactions at fixed prices, at prevailing market prices at the time of sale, at varying prices determined at the time of sale or at negotiated prices. Such sales may be effected in transactions (which may involve crosses or block transactions, brokered transactions or privately negotiated transactions):
| on any national securities exchange or quotation service on which the shares may be listed or quoted at the time of sale; |
| in the over-the-counter market; |
| in private sales at negotiated prices directly or through one or more brokers, who may act as agent or principal; |
| effected through the writing of options, whether such options are listed on an options exchange or otherwise; |
| involving block trades in which the broker-dealer will attempt to sell the shares as agent but may position and resell a portion of the block as principal to facilitate the transaction; |
| involving an exchange distribution in accordance with the rules of the applicable exchange; |
67
| through short sales following the effectiveness of the registration statement, of which this prospectus forms a part; |
| in which broker-dealers may agree with the selling stockholders to sell a specified number of such shares at a stipulated price per share; |
| involving purchases by a broker dealer as principal and resale by the broker dealer for its account; |
| through the distribution of the shares by any selling stockholder to its partners, members or stockholders; |
| involving the transfer of shares by gift; |
| effected in accordance with any other method permitted pursuant to applicable law; or |
| that are a combination of any of the foregoing methods. |
If the selling stockholders effect such transactions by selling shares of common stock to or through underwriters, broker-dealers or agents, such underwriters, broker-dealers or agents may receive commissions in the form of discounts, concessions or commissions from the selling stockholders or commissions from purchasers of the shares of common stock for whom they may act as agent or to whom they may sell as principal (which discounts, concessions or commissions as to particular underwriters, broker-dealers or agents may be in excess of those customary in the types of transactions involved).
In connection with sales of the shares of common stock or otherwise, the selling stockholders may enter into hedging transactions with broker dealers, which may in turn engage in short sales of the shares in the course of hedging positions they assume. After the effective date of the registration statement of which this prospectus is a part, the selling stockholders may sell shares covered by this prospectus short and deliver shares of common stock to close out such short positions and to return borrowed shares in connection with such short sales. The selling stockholders may also loan or pledge shares of common stock to broker dealers that in turn may sell such shares.
The selling stockholders may pledge or grant a security interest in some or all of the convertible notes or shares of common stock owned by them and, if they default in the performance of their secured obligations, the pledgees or secured parties may offer and sell the shares of common stock from time to time pursuant to this prospectus or any amendment to this prospectus under Rule 424(b)(3) or other applicable provision of the Securities Act of 1933, as amended, amending, if necessary, the list of selling stockholders to include the pledgee, transferee or other successors in interest as selling stockholders under this prospectus. The selling stockholders also may transfer and donate the shares of common stock in other circumstances in which case the transferees, donees, pledgees or other successors in interest will be the selling beneficial owners for purposes of this prospectus.
There can be no assurance that any selling stockholder will sell any or all of the shares of common stock registered pursuant to the registration statement, of which this prospectus forms a part.
In addition, the selling security holders will be subject to applicable provisions, rules and regulations under the Exchange Act, including Regulation M, which may limit the timing of purchases and sales of shares of common stock by the selling security holders.
68
Under the securities laws of some states, the shares of common stock may be sold in such states only through registered or licensed brokers or dealers. In addition, in some states the shares of common stock may not be sold unless such shares have been registered or qualified for sale in such state or an exemption from registration or qualification is available and is complied with.
We will pay all expenses of the registration of the shares of common stock pursuant to the registration rights agreement; provided, however, that a selling stockholder will pay all underwriting discounts and selling commissions, if any. We will indemnify the selling stockholders against liabilities, including some liabilities under the Securities Act, in accordance with the registration rights agreements, or the selling stockholders will be entitled to contribution. We may be indemnified by the selling stockholders against liabilities, including liabilities under the Securities Act, that may arise from any written information furnished to us by the selling stockholder specifically for use in this prospectus, in accordance with the related registration rights agreement, or we may be entitled to contribution.
The selling stockholders may be deemed to be underwriters under the Securities Act.
Once sold under the registration statement, of which this prospectus forms a part, the shares of common stock will be freely tradable in the hands of persons other than our affiliates.
The validity of the shares of common stock offered by this prospectus will be passed upon for us by Andrews Kurth LLP, Houston, Texas.
The consolidated financial statements of Integrated Electrical Services, Inc. at September 30, 2004 and 2003, and for each of the three years in the period ended September 30, 2004, appearing in this Prospectus and Registration Statement have been audited by Ernst & Young LLP, independent registered public accounting firm, as set forth in their report thereon appearing elsewhere herein, and are included in reliance upon such report given on the authority of such firm as experts in accounting and auditing.
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WHERE YOU CAN FIND MORE INFORMATION
We have filed with the SEC a registration statement on Form S-1 regarding the common stock. This prospectus does not contain all of the information found in the registration statement. For further information regarding us and the common stock offered in this prospectus, you may desire to review the full registration statement, including its exhibits. The registration statement, including the exhibits, may be inspected and copied at the public reference facilities maintained by the SEC at Judiciary Plaza, 450 Fifth Street, N.W., Room 1024, Washington, D.C. 20549. Copies of this material can also be obtained upon written request from the Public Reference Section of the SEC at Judiciary Plaza, 450 Fifth Street, N.W., Room 1024, Washington, D.C. 20549, at prescribed rates or from the SECs website on the Internet at http://www.sec.gov. Please call the SEC at 1-800-SEC-0330 for further information on its public reference room. In addition, our future public filings can also be inspected and copied at the offices of the New York Stock Exchange, Inc., 20 Broad Street, New York, New York 10005.
You should rely only on the information contained in this prospectus. We have not, and the underwriters have not, authorized any other person to provide you with different information. If anyone provides you with different or inconsistent information, you should not rely on it. We are not, and the underwriters are not, making an offer to sell these securities in any jurisdiction where an offer or sale is not permitted. You should assume that the information appearing in this prospectus is accurate as of the date on the front cover of this prospectus only. Our business, financial condition, results of operations and prospects may have changed since that date.
We will file with or furnish to the SEC periodic reports and other information. These reports and other information may be inspected and copied at the public reference facilities maintained by the SEC or obtained from the SECs website as provided above. We make our periodic reports and other information filed with or furnished to the SEC available, free of charge, through our website, as soon as reasonably practicable after those reports and other information are electronically filed with or furnished to the SEC. Our website on the Internet is located at http://www.ies-co.com. Information on our website or any other website is not incorporated by reference into this prospectus and does not constitute a part of this prospectus. You may also request a copy of these filings at no cost, by writing or telephoning us at the following address: Integrated Electrical Services, Inc., Attention: Investor Relations, 1800 West Loop South, Suite 500, Houston, Texas 77027, (713) 860-1500.
We intend to furnish or make available to our stockholders annual reports containing our audited financial statements prepared in accordance with generally accepted accounting principles in the United States. We also intend to furnish or make available to our stockholders quarterly reports containing our unaudited interim financial information, including the information required by Form 10-Q, for the first three fiscal quarters of each fiscal year.
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I NDEX TO FINANCIAL STATEMENTS
Page | ||
Audited Consolidated Financial Statements |
||
F-2 | ||
Consolidated Balance Sheets as of September 30, 2003 and September 30, 2004 |
F-3 | |
Consolidated Statements of Operations for the years ended September 30, 2002, 2003 and 2004 |
F-4 | |
F-5 | ||
Consolidated Statements of Cash Flow for the years ended September 30, 2002, 2003 and 2004 |
F-6 | |
F-7 | ||
Unaudited Consolidated Financial Statements |
||
Consolidated Balance Sheets as of September 30, 2004 and March 31, 2005 |
F-43 | |
Consolidated Statements of Operations for the six months ended March 31, 2004 and 2005 |
F-44 | |
Consolidated Statements of Operations for the three months ended March 31, 2004 and 2005 |
F-45 | |
F-46 | ||
Consolidated Statements of Cash Flows for the six months ended March 31, 2004 and 2005 |
F-47 | |
F-49 |
F-1
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and Stockholders
Integrated Electrical Services, Inc.
We have audited the accompanying consolidated balance sheets of Integrated Electrical Services, Inc. and subsidiaries as of September 30, 2004 and 2003, and the related consolidated statements of operations, stockholders equity, and cash flows for each of the three years in the period ended September 30, 2004. These financial statements are the responsibility of the Companys management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Integrated Electrical Services, Inc. and subsidiaries at September 30, 2004 and 2003, and the consolidated results of their operations and their cash flows for each of the three years in the period ended September 30, 2004 in conformity with U.S. generally accepted accounting principles.
As discussed in Note 3 to the accompanying consolidated financial statements, the Company has restated its 2002 and 2003 financial statements.
ERNST & YOUNG LLP
Houston, Texas
December 8, 2004,
except for Notes 1 and 8,
as to which the date is
December 13, 2004 and
except for Notes 4 and 17,
as to which the date is April 11, 2005 and
except for Note 3
as to which the date is September 9, 2005
F-2
INTEGRATED ELECTRICAL SERVICES, INC., AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE INFORMATION)
SEPTEMBER 30, |
||||||||
2003 |
2004 |
|||||||
(restated) | ||||||||
ASSETS | ||||||||
CURRENT ASSETS: |
||||||||
Cash and cash equivalents |
$ | 40,201 | $ | 22,232 | ||||
Accounts receivable: |
||||||||
Trade, net of allowance of $4,707 and $3,988, respectively |
209,251 | 201,577 | ||||||
Retainage |
58,224 | 61,725 | ||||||
Related party |
40 | 31 | ||||||
Costs and estimated earnings in excess of billings on uncompleted contracts |
38,048 | 31,751 | ||||||
Inventories |
17,769 | 19,558 | ||||||
Prepaid expenses and other current assets |
13,413 | 12,926 | ||||||
Assets held for sale associated with discontinued operations |
93,228 | 90,106 | ||||||
Total current assets |
470,174 | 439,906 | ||||||
PROPERTY AND EQUIPMENT, net |
47,947 | 41,084 | ||||||
GOODWILL, net |
170,256 | 82,887 | ||||||
OTHER NONCURRENT ASSETS, net |
26,110 | 17,056 | ||||||
Total assets |
$ | 714,487 | $ | 580,933 | ||||
LIABILITIES AND STOCKHOLDERS EQUITY | ||||||||
CURRENT LIABILITIES: |
||||||||
Current maturities of long-term debt |
$ | 240 | $ | 42,993 | ||||
Accounts payable and accrued expenses |
122,354 | 133,384 | ||||||
Billings in excess of costs and estimated earnings on uncompleted contracts |
36,098 | 31,288 | ||||||
Liabilities related to assets held for sale associated with discontinued operations |
23,179 | 23,330 | ||||||
Total current liabilities |
181,871 | 230,995 | ||||||
LONG-TERM DEBT, net of current maturities |
115 | 15,039 | ||||||
SENIOR SUBORDINATED NOTES, net |
247,927 | 173,208 | ||||||
OTHER NONCURRENT LIABILITIES |
19,667 | 18,523 | ||||||
Total liabilities |
449,580 | 437,765 | ||||||
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, 38,439,984 shares issued |
385 | 385 | ||||||
Restricted voting common stock, $.01 par value, 2,605,709 shares issued, authorized and outstanding |
26 | 26 | ||||||
Treasury stock, at cost, 2,725,793 and 2,172,313 shares, respectively |
(16,361 | ) | (13,790 | ) | ||||
Unearned restricted stock |
| (1,113 | ) | |||||
Additional paid-in capital |
427,709 | 429,376 | ||||||
Retained deficit |
(146,852 | ) | (271,716 | ) | ||||
Total stockholders equity |
264,907 | 143,168 | ||||||
Total liabilities and stockholders equity |
$ | 714,487 | $ | 580,933 | ||||
The accompanying notes are an integral part of these consolidated financial statements.
F-3
INTEGRATED ELECTRICAL SERVICES, INC., AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE INFORMATION)
YEAR ENDED SEPTEMBER 30, |
||||||||||||
2002 |
2003 |
2004 |
||||||||||
(restated) | (restated) | |||||||||||
REVENUES |
$ | 1,252,613 | $ | 1,238,793 | $ | 1,202,707 | ||||||
COST OF SERVICES |
1,066,838 | 1,064,783 | 1,053,238 | |||||||||
Gross profit |
185,775 | 174,010 | 149,469 | |||||||||
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES |
157,043 | 136,624 | 142,054 | |||||||||
RESTRUCTURING CHARGES |
5,556 | | | |||||||||
GOODWILL IMPAIRMENT CHARGE |
| | 87,369 | |||||||||
Income (loss) from operations |
23,176 | 37,386 | (79,954 | ) | ||||||||
OTHER INCOME (EXPENSE): |
||||||||||||
Interest expense |
(26,694 | ) | (25,759 | ) | (23,198 | ) | ||||||
Other, net |
(760 | ) | (177 | ) | (5,854 | ) | ||||||
Interest and other expense, net |
(27,454 | ) | (25,936 | ) | (29,052 | ) | ||||||
INCOME (LOSS) FROM CONTINUING OPERATIONS |
(4,278 | ) | 11,450 | (109,006 | ) | |||||||
PROVISION FOR INCOME TAXES |
(1,832 | ) | 1,314 | 7,395 | ||||||||
Income (loss) from continuing operations |
(2,446 | ) | 10,136 | (116,401 | ) | |||||||
Discontinued operations: |
||||||||||||
Income (loss) from discontinued operations (net of tax $7,028, $6,263, $3,689) |
10,722 | 9,301 | (8,463 | ) | ||||||||
Income (loss) before cumulative effect of change in accounting principle |
8,276 | 19,437 | (124,864 | ) | ||||||||
CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE, NET OF TAX |
283,284 | | | |||||||||
NET INCOME (LOSS) |
$ | (275,008 | ) | $ | 19,437 | $ | (124,864 | ) | ||||
BASIC EARNINGS (LOSS) PER SHARE: |
||||||||||||
Basic earnings (loss) per share from continuing operations |
$ | (0.06 | ) | $ | 0.26 | $ | (3.01 | ) | ||||
Discontinued operations |
$ | 0.27 | 0.24 | (0.22 | ) | |||||||
Cumulative effect of change in accounting principle |
$ | (7.11 | ) | $ | | $ | | |||||
Basic earnings (loss) per share |
$ | (6.90 | ) | $ | 0.50 | $ | (3.23 | ) | ||||
DILUTED EARNINGS (LOSS) PER SHARE: |
||||||||||||
Diluted earnings (loss) per share from continuing operations |
$ | (0.06 | ) | $ | 0.26 | $ | (3.01 | ) | ||||
Discontinued operations |
$ | 0.27 | 0.24 | (0.22 | ) | |||||||
Cumulative effect of change in accounting principle |
$ | (7.11 | ) | $ | | $ | | |||||
Diluted earnings (loss) per share |
$ | (6.90 | ) | $ | 0.50 | $ | (3.23 | ) | ||||
SHARES USED IN THE COMPUTATION OF EARNINGS (LOSS) PER SHARE: |
||||||||||||
Basic |
39,847,591 | 39,062,776 | 38,610,326 | |||||||||
Diluted |
39,847,591 | 39,225,312 | 38,610,326 | |||||||||
The accompanying notes are an integral part of these consolidated financial statements.
F-4
INTEGRATED ELECTRICAL SERVICES, INC., AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY
(IN THOUSANDS, EXCEPT SHARE INFORMATION)
Common Stock |
Restricted Voting Common Stock |
Treasury Stock |
Unearned Stock |
Additional Paid-In Capital |
Retained Earnings (Deficit) |
Total Equity |
|||||||||||||||||||||||||||
Shares |
Amount |
Shares |
Amount |
Shares |
Amount |
||||||||||||||||||||||||||||
BALANCE, September 30, 2001 |
38,331,672 | $ | 383 | 2,605,709 | $ | 26 | (1,245,879 | ) | $ | (9,181 | ) | $ | | $ | 428,697 | $ | 108,719 | $ | 528,644 | ||||||||||||||
Issuance of stock |
7,306 | | | | 213,150 | 1,321 | | (349 | ) | | 972 | ||||||||||||||||||||||
Purchase of treasury stock |
| | | | (209,600 | ) | (984 | ) | | | | (984 | ) | ||||||||||||||||||||
Receipt of treasury stock |
| | | | (241,224 | ) | (1,392 | ) | | | | (1,392 | ) | ||||||||||||||||||||
Issuance of stock under employee stock purchase plan |
| | | | 55,742 | 411 | | (411 | ) | | | ||||||||||||||||||||||
Exercise of stock options |
101,006 | 2 | | | 6,743 | 51 | | 490 | | 543 | |||||||||||||||||||||||
Net loss (restated) |
| | | | | | | | (275,008 | ) | (275,008 | ) | |||||||||||||||||||||
BALANCE, September 30, 2002 (restated) |
38,439,984 | $ | 385 | 2,605,709 | $ | 26 | (1,421,068 | ) | $ | (9,774 | ) | $ | | $ | 428,427 | $ | (166,289 | ) | $ | 252,775 | |||||||||||||
Issuance of stock |
| | | | 14,750 | 90 | | (13 | ) | | 77 | ||||||||||||||||||||||
Purchase of treasury stock |
| | | | (1,890,400 | ) | (10,207 | ) | | | | (10,207 | ) | ||||||||||||||||||||
Receipt of treasury stock |
| | | | (70,330 | ) | (270 | ) | | | | (270 | ) | ||||||||||||||||||||
Issuance of stock under employee stock purchase plan |
| | | | 248,982 | 1,549 | | (728 | ) | | 821 | ||||||||||||||||||||||
Exercise of stock options |
| | | | 392,273 | 2,251 | | 23 | | 2,274 | |||||||||||||||||||||||
Net income (restated) |
| | | | | | | | 19,437 | 19,437 | |||||||||||||||||||||||
BALANCE, September 30, 2003 (restated) |
38,439,984 | $ | 385 | 2,605,709 | $ | 26 | (2,725,793 | ) | $ | (16,361 | ) | $ | | $ | 427,709 | $ | (146,852 | ) | $ | 264,907 | |||||||||||||
Issuance of stock |
| | | | 12,931 | 81 | | 32 | | 113 | |||||||||||||||||||||||
Issuance of restricted stock |
| | | | | (1,992 | ) | 1,992 | | | |||||||||||||||||||||||
Purchase of treasury stock |
| | | | (549,200 | ) | (4,340 | ) | | | | (4,340 | ) | ||||||||||||||||||||
Issuance of stock under employee stock purchase plan |
| | | | 247,081 |