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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the Quarterly Period Ended December 31, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from_____to_____.
Commission File No. 1-13783
INTEGRATED ELECTRICAL SERVICES, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 76-0542208
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
2301 Preston
Houston, Texas 77003
(Address of principal executive offices) (zip code)
Registrant's telephone number, including area code: (713) 222-1875
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [ ] No [X]
The number of shares outstanding as of February 23, 1998, of the issuer's common
stock was 21,759,627 and of the issuer's restricted voting common stock was
2,655,709.
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INTEGRATED ELECTRICAL SERVICES, INC.
INDEX
PART I. FINANCIAL INFORMATION
Page
----
Item 1. Financial Statements
Overview and Basis of Presentation of Financial Statements................. 3
Pro Forma Combined Balance Sheet as of December 31, 1997................... 5
Pro Forma Combined Statements of Operations
for the three months ended December 31, 1996 and 1997................. 7
Balance Sheets of Houston-Stafford Electric, Inc.
as of September 30, 1997 and December 31, 1997........................ 8
Statements of Operations for Houston-Stafford Electric, Inc.
for the three months ended December 31, 1996 and 1997................. 10
Statements of Cash Flows of Houston-Stafford Electric, Inc.
for the three months ended December 31, 1996 and 1997................. 11
Condensed Notes to Financial Statements.................................... 12
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations........................... 16
PART II. OTHER INFORMATION
Item 1. Legal Proceedings............................................. 22
Item 2. Changes in Securities and Use of Proceeds..................... 22
Item 6. Exhibits and Reports on Form 8-K.............................. 23
Signatures..................................................................... 24
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INTEGRATED ELECTRICAL SERVICES, INC.
OVERVIEW AND BASIS OF PRESENTATION
FOR FINANCIAL STATEMENTS
Integrated Electrical Services, Inc. ("IES" or the "Company"), a Delaware
corporation, was founded in June 1997 to create a leading national provider and
consolidator of electrical contracting and maintenance services, focusing
primarily on the residential, commercial and industrial markets. On January 30,
1998, concurrent with the closing of its initial public offering of stock, IES
acquired, in separate transactions (collectively, the "Acquisitions"), for
consideration including $53.4 million of cash and 12,313,025 shares of Common
Stock, the following 16 companies and related entities engaged in all facets of
electrical contracting and maintenance services: Houston-Stafford Electric, Inc.
and Stark Investments, Inc., (such two companies, collectively,
"Houston-Stafford"), Mills Electrical Contractors, Inc., BW Consolidated, Inc.,
including Bexar Electric Company, Ltd., and Calhoun Electric Company, Ltd.,
Pollock Electric Inc., Muth Electric, Inc., Daniel Electrical Contractors, Inc.
and Daniel Electrical of Treasure Coast Inc., Amber Electric, Inc., Charles P.
Bagby, Co., Inc. and General Partner, Inc., Summit Electric of Texas,
Incorporated, Thurman & O'Connell Corporation, Rodgers Electric Company, Inc.,
Hatfield Electric, Inc., Ace Electric, Inc., Reynolds Electric Corp. and Thomas
Popp & Company (the foregoing companies referred to herein as the "Founding
Companies").
Pursuant to the Securities and Exchange Commission's Staff Accounting Bulletin
No. 97 (SAB 97), the financial statements of IES for periods prior to January
30, 1997, are the consolidated financial statements of Houston-Stafford (the
"Accounting Acquirer"). The operations of the other Founding Companies and IES
acquired by the Accounting Acquirer will be included in the Company's historical
financial statements beginning February 1, 1998. IES had not conducted any
revenue generating activities of its own prior to such time. For the period from
inception through December 31, 1997, all of IES's activity has been related to
the completion of its initial public offering of common stock (the "Offering")
and the Acquisitions.
The unaudited pro forma combined financial information for the three months
ended December 31, 1996 and 1997, include the results of the Accounting Acquirer
combined with IES and the other Founding Companies as if the Acquisitions and
the Offering had occurred at the beginning of each respective period. The
unaudited pro forma combined financial information as of December 31, 1997,
includes the combined financial position of the Accounting Acquirer, IES and the
other Founding Companies as if the Acquisitions and the Offering had occurred on
that date. This pro forma combined financial information includes the effects at
the beginning of each period presented of (a) the Acquisitions, (b) the Offering
(including the underwriters exercise of their overallotment option), (c) certain
reductions in salaries and benefits to the former owners of the Founding
Companies which they agreed would take effect as of the effective date of the
Acquisitions, (d) amortization of goodwill resulting from the Acquisitions, (e)
reduction in interest income and (f) interest expense on borrowings of $6.4
million that would have been necessary to fund certain S corporation
distributions.
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4
The pro forma adjustments are based on estimates, available information and
certain assumptions which may be revised as additional information becomes
available. The pro forma financial data do not purport to represent what the
Company's combined financial position or results of operations would actually
have been if such transactions had in fact occurred on those dates and are not
necessarily representative of the Company's financial position or results of
operations for any future period. Since IES and the Founding Companies were not
under common control or management, historical combined results may not be
comparable to, or indicative of, future performance.
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INTEGRATED ELECTRICAL SERVICES, INC.
PRO FORMA COMBINED BALANCE SHEET
(IN THOUSANDS)
(UNAUDITED)
December 31,
1997
------------
ASSETS
Cash and cash equivalents.................................... $ 21,092
Accounts receivable, net..................................... 60,832
Inventory.................................................... 4,823
Costs and estimated earnings recognized in
excess of billings on uncompleted contracts.............. 4,072
Prepaid and other current assets............................. 758
Deferred income taxes........................................ 1,352
-----------
Total current assets...................................... 92,929
Goodwill and other intangibles............................... 153,937
Property and equipment, net.................................. 11,110
Other non-current assets..................................... 1,081
-----------
Total assets................................................. $ 259,057
===========
The accompanying condensed notes to financial statements are an integral
part of these financial statements.
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INTEGRATED ELECTRICAL SERVICES, INC.
PRO FORMA COMBINED BALANCE SHEET
(IN THOUSANDS)
(UNAUDITED)
December 31,
1997
------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current maturities of long-term debt............................... $ 85
Accounts payable and accrued expenses.............................. 31,121
Billings in excess of costs and estimated
earnings recognized on uncompleted contracts................ 11,504
Other current liabilities.......................................... 3,671
-----------
Total current liabilities....................................... 46,381
Long-term debt, net of current maturities.......................... 6,703
Deferred income taxes.............................................. 1,259
Other non-current liabilities...................................... 599
-----------
Total liabilities............................................... 54,942
-----------
Commitments and contingencies
Stockholders' equity:
Common stock.................................................... 217
Restricted common stock......................................... 27
Additional paid-in capital...................................... 217,740
Retained deficit................................................ (13,869)
-----------
Total stockholders' equity......................................... 204,115
-----------
Total liabilities and stockholders' equity......................... $ 259,057
===========
The accompanying condensed notes to financial statements are an integral
part of these financial statements.
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INTEGRATED ELECTRICAL SERVICES, INC.
PRO FORMA COMBINED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
Three Months Ended December 31,
------------------------------
1996 1997
----------- -----------
Revenues.................................................. $ 76,378 $ 86,342
Cost of services ......................................... 58,693 67,140
----------- -----------
Gross profit .......................................... 17,685 19,202
Selling, general & administrative expenses ............ 10,068 10,671
Goodwill amortization ................................. 962 962
----------- -----------
Operating income ...................................... 6,655 7,569
----------- -----------
Other (income)/expense:
Interest expense ...................................... 217 217
Other (income)/expense ................................ (166) 29
----------- -----------
51 246
----------- -----------
Income before income taxes ............................... 6,604 7,323
Income tax provision ..................................... 2,951 3,231
----------- -----------
Net income................................................ $ 3,653 $ 4,092
=========== ===========
Basic earnings per share.................................. $ 0.15 0.17
=========== ===========
Diluted earnings per share................................ $ 0.15 0.17
=========== ===========
Shares used in the pro forma computation
of earnings per share ---
Basic- .......................................... 24,415,336 24,415,336
=========== ===========
Diluted- ........................................ 24,535,336 24,535,336
=========== ===========
The accompanying condensed notes to financial statements are an integral
part of these financial statements.
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HOUSTON-STAFFORD ELECTRIC, INC.
BALANCE SHEETS
(IN THOUSANDS)
September 30, December 31,
1997 1997
------------- ------------
ASSETS (Unaudited)
Cash and cash equivalents................................. $ 2,492 $ 524
Accounts receivable, net.................................. 12,091 13,957
Inventory................................................. 2,878 2,465
Costs and estimated earnings recognized in
excess of billings on uncompleted contracts........ 934 52
Prepaid and other current assets.......................... 1,162 752
----------- ----------
Total current assets................................... 19,557 17,750
Goodwill.................................................. 958 878
Other intangible assets................................... 1,050 981
Property and equipment, net............................... 2,125 1,383
Other non-current assets.................................. 780 204
---------- ----------
Total assets.............................................. $ 24,470 $ 21,196
========== ==========
The accompanying condensed notes to financial statements are an integral
part of these financial statements.
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HOUSTON-STAFFORD ELECTRIC, INC.
BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
September 30, December 31,
1997 1997
------------- ------------
LIABILITIES AND STOCKHOLDER'S EQUITY (Unaudited)
Current maturities of long-term debt................................. $ 721 $ 1,393
Accounts payable and accrued expenses................................ 9,549 7,742
Billings in excess of costs and estimated
earnings recognized on uncompleted contracts.................. 2,417 3,150
Other current liabilities............................................ 1,456 927
------------ ------------
Total current liabilities......................................... 14,143 13,212
Long-term debt, net of current maturities......................... 968 687
Other non-current liabilities..................................... 1,151 1,139
------------ ------------
Total liabilities................................................. 16,262 15,038
------------ ------------
Commitments and contingencies
Stockholder's equity:
Common stock, $5 par value, 500,000 shares
authorized, 59,000 shares issued and
20,000 shares outstanding..................................... 295 295
Additional paid-in capital........................................ 112 112
Retained earnings................................................. 8,926 6,876
Treasury stock, 39,000 shares at cost............................. (1,125) (1,125)
------------ ------------
Total stockholder's equity........................................ 8,208 6,158
------------ ------------
Total liabilities and stockholder's equity........................... $ 24,470 $ 21,196
============ ============
The accompanying condensed notes to financial statements are an integral
part of these financial statements.
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HOUSTON-STAFFORD ELECTRIC, INC.
STATEMENTS OF OPERATIONS
(IN THOUSANDS)
(UNAUDITED)
Three Months Ended December 31,
----------------------------------
1996 1997
--------------- -----------
Revenues............................................................. $ 17,431 $ 23,851
Cost of services..................................................... 13,177 18,691
--------------- -----------
Gross profit...................................................... 4,254 5,160
Selling, general & administrative expenses........................... 3,406 7,124
--------------- -----------
Operating income (loss)........................................... 848 (1,964)
Other (income)/expense:
Interest expense.................................................. 44 47
Other income...................................................... (45) (29)
--------------- -----------
(1) 18
Income (loss) before income taxes.................................... 849 (1,982)
Income tax provision (benefit)....................................... 390 (820)
--------------- ----------
Net income (loss).................................................... $ 459 $ (1,162)
=============== ===========
The accompanying condensed notes to financial statements are an integral
part of these financial statements.
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HOUSTON-STAFFORD ELECTRIC, INC.
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
Three Months Ended December 31,
------------------------------
1996 1997
------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income ................................................... $ 459 $ (1,162)
Adjustments to reconcile net income to net cash
provided by operating activities --
Depreciation and amortization ............................ 79 192
Loss on sale of property and equipment ................... 2 15
Changes in operating assets and liabilities --
(Increase) decrease in --
Accounts receivable .................................... 450 (1,866)
Inventories ............................................ (9) 413
Costs and estimated earnings recognized in
excess of billings on uncompleted contacts ......... (301) 882
Prepaid expenses and other current assets .............. (134) 410
Increase (decrease) in --
Accounts payable and accrued expenses .................. (37) (1,807)
Billings in excess of costs and estimated earnings
recognized on uncompleted contracts ................ (693) 733
Other current liabilities .............................. (509) (529)
Other, net ............................................... (34) 158
------------ ------------
Net cash used in operating activities ........................ (727) (2,561)
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of property and equipment ................. 12 82
Additions to property and equipment .......................... (148) (223)
Collections of notes receivable .............................. -- 475
------------ ------------
Net cash provided by (used in) investing activities .......... (136) 334
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings of long-term debt ................................. 805 391
Payments of long-term debt ................................... (951) --
Distributions to stockholders ................................ -- (132)
------------ ------------
Net cash provided by (used in) financing activities .......... (146) 259
------------ ------------
NET DECREASE IN CASH AND CASH
EQUIVALENTS ........................................ (1,009) (1,968)
------------ ------------
CASH AND CASH EQUIVALENTS, beginning
of period .......................................... 3,691 2,492
CASH AND CASH EQUIVALENTS, end of period ........................ 2,682 524
============ ============
SUPPLEMENTAL DISCLOSURE OF CASH
FLOW INFORMATION:
Cash paid for ---
Interest ................................................. $ 23 $ 37
Income taxes ............................................. $ 1,150 $ --
Non-cash property distribution................................ $ -- $ 756
The accompanying condensed notes to financial statements are an integral
part of these financial statements.
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INTEGRATED ELECTRICAL SERVICES, INC.
CONDENSED NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
1. OVERVIEW
The accompanying unaudited condensed historical financial statements of the
Accounting Acquirer and the accompanying unaudited pro forma combined financial
statements have been prepared in accordance with generally accepted accounting
principles for interim financial information and Article 10 and Article 11 of
Regulation S-X, respectively. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting principles
for complete financial statements and therefore the financial statements
included herein should be reviewed in conjunction with the financial statements
and related notes thereto contained in the Registration Statement on Form S-1
(No. 333-38715) (the "Registration Statement"), as amended, filed by IES with
the Securities and Exchange Commission. In the opinion of management, all
adjustments (consisting of normal recurring accruals) considered necessary for a
fair presentation have been included. Historical operating results for the three
months ended December 31, 1997, are not necessarily indicative of the results
that may be expected for the year ended September 30, 1998.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
There were no significant changes in the accounting policies of the Company, the
Accounting Acquirer or the other Founding Companies during the periods
presented. For a description of these policies, refer to Note 2 of the Notes to
Financial Statements of IES, the Accounting Acquirer and each of the other
Founding Companies included in the Registration Statement.
USE OF ESTIMATES AND ASSUMPTIONS
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
2. INITIAL PUBLIC OFFERING
On January 30, 1998, the Company completed its initial public offering of its
stock, which involved the sale to the public of 7,000,000 shares of the
Company's common stock at $13.00 per share. The Company received net proceeds
from the Offering of approximately $78.8 million. Concurrent with the completion
of the Offering, IES acquired the Founding Companies for consideration
consisting of $53.4 million in cash and 12,313,025 shares of common stock.
Additionally, on February 5, 1998, the Company sold 1,050,000 shares of its
common stock pursuant to the overallotment option granted to the underwriters in
connection with the Offering
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for net proceeds of approximately $12.7 million. The Company used approximately
$8.3 million of the net proceeds from the Offering to retire outstanding third
party debt and approximately $15.6 million to pay indebtedness incurred by the
Founding Companies for distributions to the owners prior to the Acquisitions.
The Company will use the remaining net proceeds for working capital and general
corporate purposes, which are expected to include future acquisitions.
3. LONG-TERM DEBT
The Company entered into a $65.0 million credit facility with Nations Bank of
Texas, N.A. as agent, on January 30, 1997 (the "Credit Facility"). The Credit
Facility matures on January 31, 2001, bears interest at the bank's prime rate or
LIBOR, at the Company's option, plus an applicable margin based on the ratio of
debt to EBITDA (as defined). An annual commitment fee from 0.25% to 0.375% is
payable on any unused portion of the Credit Facility.
The Credit Facility will be used to fund acquisitions, capital expenditures and
working capital requirements. Under the terms of the Credit Facility the Company
is required to comply with various affirmative and negative covenants including:
(i) the maintenance of certain financial ratios, (ii) restrictions on additional
indebtedness, and (iii) restrictions on liens, guarantees and dividends.
4. PER SHARE INFORMATION
In October 1997, the Company adopted the provisions of the Financial Accounting
Standards Board Statement of Accounting Standards No. 128, "Earnings Per Share"
("SFAS No. 128"). SFAS No. 128 requires the calculation of basic and diluted
earnings per share. Basic earnings per share calculations are based on the
weighted average number of common shares outstanding. Diluted earnings per share
calculations are based on the weighted average number of common shares
outstanding and the 120,000 common equivalent shares from the assumed exercise
of the 300,000 stock options outstanding at December 31, 1997.
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Upon completion of the Acquisitions, the Offering, and the exercise of the
underwriters' overallotment option for 1,050,000 shares, the Company had
21,759,627 shares of its common stock and 2,655,709 shares of its restricted
voting common stock issued and outstanding. The shares used to calculate the pro
forma earnings per share for the periods presented are summarized as follows:
Shares
-----------
Actual shares outstanding at December 31, 1997................ 4,052,311
Shares issued in the Acquisitions............................. 12,313,025
Shares issued in the Offering, including
exercise of overallotment option...................... 8,050,000
-----------
Pro forma shares outstanding for pro
forma basic earnings per share........................ 24,415,336
===========
Plus: Common equivalent shares from
assumed exercise of stock options..................... 120,000
-----------
Pro forma shares outstanding for pro
forma diluted earnings per share...................... 24,535,336
===========
As of the closing of the Offering, the Company had outstanding options to
purchase up to a total of (i) approximately 2,746,000 shares of Common Stock
(which includes options to purchase 300,000 shares of Common Stock at a price
lower than the Company's initial offering price to the public) issued pursuant
to the Company's 1997 Stock Plan, and (ii) 15,000 shares of Common Stock issued
pursuant to the Company's 1997 Directors Stock Plan.
5. INVENTORIES
Inventories of the Accounting Acquirer consist of parts and supplies held for
use in the ordinary course of business and are valued by Houston-Stafford at the
lower of cost or market using the first-in, first-out (FIFO) method.
6. COMMITMENTS AND CONTINGENCIES
Subsidiaries of the Company are involved in various legal proceedings that have
arisen in the ordinary course of business. While it is not possible to predict
the outcome of such proceedings with certainty, in the opinion of the Company's
management, all such proceedings are either adequately covered by insurance or,
if not so covered should not ultimately result in any liability which would have
a material adverse effect on the financial position, liquidity or results of
operations of the Company.
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7. SUBSEQUENT EVENT
As a result of the Acquisitions discussed in the Overview and Basis of
Presentation for Financial Statements, Houston-Stafford will recognize a
non-cash, non-recurring compensation charge of approximately $17.0 million
related to the exchange of cash and shares of IES Common Stock for a note
payable by Houston-Stafford to and rights held by an officer of
Houston-Stafford. Such non-recurring non-cash charge has not been included in
the accompanying pro forma combined statement of operations, but is included in
the accumulated deficit on the pro forma combined balance sheet.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
INTRODUCTION
The following should be read in conjunction with the response to Part I, Item 1
of this Report and the Registration Statement. Any capitalized terms used but
not defined in this Item have the same meaning given to them in Part I, Item 1.
This report on Form 10-Q includes certain statements that may be deemed to be
"forward-looking statements" within the meaning of Section 27A of the Securities
Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934,
as amended. These statements are based on the Company's expectations and involve
risks and uncertainties that could cause the Company's actual results to differ
materially from those set forth in the statements. Such risks and uncertainties
include, but are not limited to, risks associated with acquisitions,
fluctuations in operating results because of acquisitions and seasonality,
national and regional industry and economic conditions, competition and risks
entailed in the operation and growth of existing and newly acquired businesses.
The foregoing and other factors are discussed in the Registration Statement.
RESULTS OF OPERATIONS
The pro forma financial information for the three months ended December 31, 1996
and 1997, includes the results of Houston-Stafford combined with the results of
the other Founding Companies and IES as if the Acquisitions had occurred at the
beginning of each respective period. This pro forma combined financial
information includes the effects at the beginning of each period presented of
(a) the Acquisitions, (b) the Offering (including the underwriters exercise of
their overallotment option), (c) certain reductions in salaries and benefits to
the former owners of the Founding Companies which they agreed would take effect
as of the effective date of the Acquisitions, (d) amortization of goodwill
resulting from the Acquisitions, (e) reduction in interest income and (f)
interest expense on borrowings of $6.4 million that would have been necessary to
fund certain S corporation distributions.
The pro forma adjustments are based on estimates, available information and
certain assumptions which may be revised as additional information becomes
available. The pro forma financial data do not purport to represent what the
Company's combined financial position or results of operations would actually
have been if such transactions had in fact occurred on those dates and are not
necessarily representative of the Company's financial position or results of
operations for any future period. Since IES and the Founding Companies were not
under common control or management, historical combined results may not be
comparable to, or indicative of, future performance.
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PRO FORMA COMBINED RESULTS OF OPERATIONS FOR THE THREE MONTHS
ENDED DECEMBER 31, 1996 COMPARED TO THE THREE MONTHS ENDED
DECEMBER 31, 1997
The following table presents selected pro forma combined historical financial
information for the three months ended December 31, 1996 and 1997. The
information presented in the table is in thousands of dollars.
Three Months Ended December 31,
-----------------------------------------------------
1996 % 1997 %
------------- --------- ------------ ------
Revenues.................................... $ 76,378 100% $ 86,342 100%
Cost of services............................ 58,693 77% 67,140 78%
Selling, general & administrative
expenses............................... 10,068 13% 10,671 12%
Goodwill amortization....................... 962 1% 962 1%
------------- --------- ------------ ------
Operating income............................ $ 6,655 9% $ 7,569 9%
============= ========= ============ ======
REVENUES. Pro forma combined revenues increased $9.9 million, or 13%, from $76.4
million for the three months ended December 31, 1996, to $86.3 million for the
three months ended December 31, 1997. The increase in combined revenues was
principally due to higher demand for commercial services related to high rise
condominiums and retail establishments, higher demand for residential services
under contract with a national provider of multi-family apartments, increased
demand for single-family electrical installation, and the acquisition of an
electrical supply company in April 1997, which were partially offset by the
completion of several large commercial distribution facility projects and the
delayed start of several mid-sized commercial projects into January 1998.
COST OF SERVICES. Pro forma combined cost of services increased $8.4 million, or
14%, from $58.7 million for the three months ended December 31, 1996, to $67.1
million for the three months ended December 31, 1997. The increase in pro forma
combined cost of services was principally due to additional variable costs
associated with the overall increase in revenues and the acquisition of an
electrical supply company noted above. As a percentage of pro forma combined
revenues, pro forma combined cost of services increased from 77% for the three
months ended December 31, 1996, to 78% for the three months ended December 31,
1997.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Pro forma combined selling,
general and administrative expenses increased $0.6 million, or 6%, from $10.1
million for the three months ended December 31, 1996, to $10.7 million for the
three months ended December 31, 1997. This increase in pro forma combined
selling, general and administrative expenses was primarily attributable to the
additional infrastructure necessary to support the overall revenue growth as
well as additional selling and administrative expenses associated with the
acquisition of an electrical supply company in April 1997. As a percentage of
pro forma combined revenues,
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pro forma combined selling, general and administrative expenses decreased from
13% for the three months ended December 31, 1996, to 12% for the three months
ended December 31, 1997.
OPERATING INCOME. Pro forma combined operating income increased $0.9 million, or
14%, from $6.7 million for the three months ended December 31, 1996, to $7.6
million for the three months ended December 31, 1997. The increase in pro forma
combined operating income was attributable to the factors discussed above. As a
percentage of pro forma combined revenues, pro forma combined operating income
remained constant at 9% for the three months ended December 31, 1996, as
compared to the three months ended December 31, 1997.
HOUSTON-STAFFORD ELECTRIC, INC'S RESULTS OF OPERATIONS FOR THE THREE MONTHS
ENDED DECEMBER 31, 1996 COMPARED TO THE THREE MONTHS ENDED DECEMBER 31, 1997
The following table presents selected historical financial information for the
three months ended December 31, 1996 and 1997. The information presented in the
table is in thousands of dollars.
Three Months Ended December 31,
-------------------------------------------------
1996 % 1997 %
-------- -------- -------- --------
Revenues..................................... $ 17,431 100% $ 23,851 100%
Cost of services ............................ 13,177 75% 18,691 78%
Selling, general & administrative
expenses ............................... 3,406 20% 7,124 30%
-------- -------- -------- --------
Operating income (loss)...................... $ 848 5% $ (1,964) (8%)
======== ======== ======== ========
REVENUES. Revenues increased $6.5 million, or 37%, from $17.4 million for the
three months ended December 31, 1996, to $23.9 million for the three months
ended December 31, 1997. The increase in revenues was principally due to
approximately $2.0 million of revenue related to the acquisition of an
electrical supply company in April 1997, higher demand for residential services
under contract with a national provider of multi-family apartments, and
increased demand for single-family electrical installation services.
COST OF SERVICES. Cost of services increased $5.5 million, or 42%, from $13.2
million for the three months ended December 31, 1996, to $18.7 million for the
three months ended December 31, 1997. The increase in cost of services was
principally due to the acquisition of an electrical supply company in April
1997, and the additional variable costs associated with the increased revenues
noted above. As a percentage of revenues, cost of services increased from 75%
for the three months ended December 31, 1996, to 78% for the three months ended
December 31, 1997. This percentage increase was due to an agreed lower markup on
certain materials acquired under the contract for multi-family apartments noted
above and additional overtime associated with the overall increase in activity.
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SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased $3.7 million, or 109%, from $3.4 million for
the three months ended December 31, 1996, to $7.1 million for the three months
ended December 31, 1997. This increase in selling, general and administrative
expenses was primarily attributable to a $4.4 million bonus paid to the owners
of Houston-Stafford during the three months ended December 31, 1997, compared to
a $1.4 million bonus during the three months ended December 31, 1996. Excluding
such bonuses, selling, general and administrative expenses as a percentage of
revenues declined from 12% for the three months ended December 31, 1996, to 11%
for the three months ended December 31, 1997.
OPERATING INCOME (LOSS). Operating income (loss) decreased $2.8 million, or
332%, from $0.8 million for the three months ended December 31, 1996, to $(2.0)
million for the three months ended December 31, 1997. Excluding the owner
bonuses noted above, operating income increased $0.2 million, or 8%, from $2.2
million for the three months ended December 31, 1996, to $2.4 million for the
three months ended December 31, 1997. As a percentage of revenues, operating
income (excluding the owner bonuses noted above) declined from 13% for the three
months ended December 31, 1996, to 10% for the three months ended December 31,
1997, due to the increase in cost of services as a percentage of revenues noted
above.
FINANCIAL CONDITION, LIQUIDITY AND CASH FLOWS
As of December 31, 1997, the Company had, on a pro forma combined basis (after
the effect of the Acquisitions and the Offering), cash of $21.1 million and
available capacity under its Credit Facility of $65.0 million.
On a pro forma combined basis, the Founding Companies generated $2.1 million
(net of $8.8 million of cash bonuses to owners) of net cash from operating
activities during the three months ended December 31, 1997. Net cash used in
investing activities was $0.4 million on a pro forma combined basis for the
three months ended December 31, 1997, primarily for the purchase of fixed
assets. Net cash used in financing activities on a pro forma combined basis was
$2.4 million for the three months ended December 31, 1997, the most significant
component of which was cash distributions to stockholders of $2.3 million during
the three months ended December 31, 1997.
The Company has a three-year revolving credit facility of up to $65.0 million
(the "Credit Facility") to be used for working capital, capital expenditures,
other corporate purposes and acquisitions. The amounts borrowed under the Credit
Facility bear interest at an annual rate equal to either (a) the London
interbank offered rate ("LIBOR") plus 1.0% to 2.0%, as determined by the ratio
of the Company's total funded debt to EBITDA (as defined), or (b) the higher of
(i) the bank's prime rate and (ii) the Federal Funds rate plus 0.5%, plus up to
an additional 0.5% as determined by the ratio of the Company's total funded debt
to EBITDA. Commitment fees of 0.25% to 0.375%, as determined by the ratio of the
Company's total funded debt to EBITDA, are due on any unused borrowing capacity
under the Credit Facility. The Company's subsidiaries have guaranteed the
repayment of all amounts due under the facility, and the facility is secured by
the capital stock of the guarantors and the accounts receivable of the Company
and the guarantors. The Credit Facility requires the consent of the lenders for
acquisitions exceeding a certain level of cash consideration, prohibits the
payment of cash
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dividends on the Common Stock, restricts the ability of the Company to incur
other indebtedness and requires the Company to comply with certain financial
covenants. Availability of the Credit Facility is subject to customary drawing
conditions.
On January 30, 1998, the Company completed its Offering of 7,000,000 shares of
common stock for which it received net proceeds of approximately $78.8 million.
Concurrent with the completion of the Offering, IES acquired the Founding
Companies for consideration consisting of $53.4 million in cash and 12,313,025
shares of common stock. Additionally, on February 5, 1998, the Company sold an
additional 1,050,000 shares of its common stock pursuant to the overallotment
option granted to the underwriters in connection with the Offering for net
proceeds of $12.7 million. The Company used $8.3 million of the net proceeds
from the Offering to retire outstanding third party debt and $15.6 million to
pay indebtedness incurred by the Founding Companies for distributions to the
owners prior to the Acquisitions. The Company will use the net proceeds for
working capital and general corporate purposes, which are expected to include
future acquisitions.
The Company anticipates that its cash flow from operations and proceeds from the
Offering will provide sufficient cash to enable the Company to meet its working
capital needs, debt service requirements and planned capital expenditures for
property and equipment through 1998.
The Company intends to pursue acquisition opportunities. The timing, size or
success of any acquisition effort and the associated potential capital
commitments cannot be predicted. The Company expects to fund future acquisitions
primarily with a portion of the net proceeds of the Offering, working capital,
cash flow from operations and borrowings, including any unborrowed portion of
the Credit Facility, as well as issuances of additional equity. To the extent
the Company funds a significant portion of the consideration for future
acquisitions with cash, it may have to increase the amount of the Credit
Facility or obtain other sources of financing. Capital expenditures for
equipment and expansion of facilities are expected to be funded from cash flow
from operations and supplemented as necessary by borrowings from the Credit
Facility.
SEASONALITY AND QUARTERLY FLUCTUATIONS
The Company's results of operations from residential construction are seasonal,
depending on weather trends, with typically higher revenues generated during the
spring and summer and lower revenues during the fall and winter. The commercial
and industrial aspect of the Company's business is less subject to seasonal
trends, as this work is performed inside structures protected from the weather.
The Company's service business is not affected by seasonality. In addition, the
construction industry has historically been highly cyclical. The Company's
volume of business may be adversely affected by declines in construction
projects resulting from adverse regional or national economic conditions.
Quarterly results may also be materially affected by the timing of 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.
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RECENT ACCOUNTING PRONOUNCEMENTS
Statement of Financial Accounting Standards ("SFAS") No. 123, "Accounting for
Stock-Based Compensation," allows entities to choose between a new fair value
based method of accounting for employee stock options or similar equity
instruments and the current intrinsic, value-based method of accounting
prescribed by Accounting Principles Board Opinion No. 25 ("APB No. 25").
Entities electing to remain with the accounting in APB No. 25 must make
pro forma disclosures of net income and earnings per share as if the fair value
method of accounting had been applied. The Company will provide pro forma
disclosure of net income and earnings per share, as applicable, in the notes to
future consolidated annual financial statements.
In February 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 128, "Earnings Per Share" ("SFAS No. 128").
SFAS No. 128 simplifies the standards required under current accounting rules
for computing earnings per share and replaces the presentation of primary
earnings per share and fully diluted earnings per share with a presentation of
basic earnings per share ("basic EPS") and diluted earnings per share ("diluted
EPS"). Basic EPS excludes any dilution and is determined by dividing net income
by the weighted average number of common shares outstanding during the period.
Diluted EPS reflects the potential dilution that could occur if securities and
other contracts to issue common stock were exercised or converted into common
stock. The Company's pro forma earnings per share has been calculated in
accordance with SFAS No. 128.
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INTEGRATED ELECTRICAL SERVICES, INC.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Subsidiaries of the Company are involved in various legal proceedings that have
arisen in the ordinary course of business. While it is not possible to predict
the outcome of such proceedings with certainty, in the opinion of the Company's
management, all such proceedings are either adequately covered by insurance or,
if not so covered should not ultimately result in any liability which would have
a material adverse effect on the financial position, liquidity or results of
operations of the Company.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
(c) Recent Sales of Unregistered Securities
Set forth below is certain information concerning all sales of
securities by the Company during the three months ended December 31,
1997, that were not registered under the Securities Act of 1933, as
amended (the "Securities Act").
On October 17, 1997, the Company issued 50,000 shares of its Common
Stock to certain executive officers and key employees at an aggregate
cost of $21.
This transaction was completed without registration under the
Securities Act in reliance on the exemption provided by Section 4(2) of
the Securities Act.
(d) Use of Proceeds
On January 26, 1998, the Company commenced its initial public offering
of 7,000,000 shares of the Company's common stock, par value $0.01 per
share, at $13.00 per share pursuant to a Registration Statement on Form
S-1 (333-38715) with respect to 8,050,000 shares of common stock which
became effective on January 26, 1998. The managing underwriters of the
offering were Merrill Lynch & Co., Donaldson, Lufkin & Jenrette
Securities Corporation, SunTrust Equitable Securities Corporation and
Sanders Morris Mundy. The Offering, which closed on January 30, 1998,
yielded proceeds of $91.0 million. Additionally, on February 5, 1998,
the Company sold the entire 1,050,000 shares of its common stock
subject to the overallotment option granted to the underwriters in
connection with the Offering and yielded additional proceeds of $13.6
million. Of these total proceeds, $7.3 million was retained by the
underwriters as their discount and commission and approximately $5.8
million was used to repay expenses incurred in connection with the
Offering. Of the approximate $5.8 million in expenses, $3.2 million was
paid to a director of the Company in order to repay principal and
interest on funds advanced by such director with respect to expenses
incurred by the
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Company. A portion of the remaining net proceeds to the Company of
$91.5 million were used to pay approximately $53.4 million of partial
consideration to the owners of the Founding Companies (including
approximately $23.5 million to certain directors of the Company), to
retire approximately $8.3 million of outstanding third party debt and
pay approximately $15.6 million of indebtedness incurred by the
Founding Companies for distributions to the owners prior to the
Acquisitions. The Company will use the remaining net proceeds for
working capital and general corporate purposes, which are expected to
include future acquisitions.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
A. EXHIBITS:
27. Financial Data Schedule
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INTEGRATED ELECTRICAL SERVICES, INC.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized, who has signed this report on behalf of
the Registrant and as the principal financial officer of the Registrant.
INTEGRATED ELECTRICAL SERVICES, INC.
Date: February 23, 1998 By: /s/ JIM P. WISE
Jim P. Wise
Senior Vice President and
Chief Financial Officer
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INDEX TO EXHIBITS
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
27 Financial Data Schedule
5
1,000
3-MOS
SEP-30-1998
OCT-01-1997
DEC-31-1997
21,092
0
60,832
0
4,823
92,929
11,110
0
259,057
46,381
0
0
0
217
203,898
259,057
86,342
86,342
67,140
78,773
246
0
217
7,323
3,231
4,092
0
0
0
4,092
.17
.17
