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, 2002
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
incorporation or organization) (I.R.S. Employer Identification No.)
1800 West Loop South
Suite 500
Houston, Texas 77027-3290
(Address of principal executive offices) (zip code)
Registrant's telephone number, including area code: (713) 860-1500
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
The number of shares outstanding as of January 29, 2003 of the issuer's common
stock was 39,226,487 and of the issuer's restricted voting common stock was
2,605,709.
INTEGRATED ELECTRICAL SERVICES, INC. AND SUBSIDIARIES
INDEX
PART I. FINANCIAL INFORMATION
Page
----
Item 1. Financial Statements
Consolidated Balance Sheets as of September 30, 2002 and
December 31, 2002.................................................................... 2
Consolidated Statements of Operations for the three months ended
December 31, 2001 and 2002........................................................... 3
Consolidated Statements of Stockholders' Equity for the three months ended
December 31, 2002.................................................................... 4
Consolidated Statements of Cash Flows for the three months ended
December 31, 2001 and 2002........................................................... 5
Condensed Notes to Consolidated Financial Statements...................................... 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations.......................................... 12
Item 3. Quantitative and Qualitative Disclosures about Market Risk................... 22
Item 4. Controls and Procedures...................................................... 22
PART II. OTHER INFORMATION
Item 6. Exhibits..................................................................... 23
Signatures ............................................................................. 24
1
INTEGRATED ELECTRICAL SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE INFORMATION)
September 30, December 31,
2002 2002
------------- ------------
(Audited) (Unaudited)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents ........................................................... $ 32,779 $ 19,062
Accounts receivable:
Trade, net of allowance of $6,262 and $5,896 respectively ....................... 237,310 228,310
Retainage ....................................................................... 62,482 61,844
Related parties ................................................................. 153 144
Costs and estimated earnings in excess of billings on
uncompleted contracts ........................................................... 46,314 46,007
Inventories ......................................................................... 23,651 22,677
Prepaid expenses and other current assets ........................................... 35,041 35,066
------------ ------------
Total current assets ............................................................ 437,730 413,110
PROPERTY AND EQUIPMENT, net ......................................................... 61,577 58,899
GOODWILL, net ....................................................................... 198,220 198,005
OTHER NON-CURRENT ASSETS ............................................................ 24,112 23,683
------------ ------------
Total assets ................................................................. $ 721,639 $ 693,697
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Short-term debt and current maturities of long-term debt ............................ $ 570 $ 467
Accounts payable and accrued expenses ............................................... 141,398 115,505
Income taxes payable ................................................................ -- 167
Billings in excess of costs and estimated earnings on
uncompleted contracts ........................................................... 51,548 45,383
------------ ------------
Total current liabilities ....................................................... 193,516 161,522
OTHER LONG-TERM DEBT, net of current maturities ..................................... 504 381
SENIOR SUBORDINATED NOTES, net of $3,797 and $3,648
unamortized discount, respectively .............................................. 247,935 247,932
OTHER NON-CURRENT LIABILITIES ....................................................... 25,252 26,651
------------ ------------
Total liabilities ............................................................ 467,207 436,486
------------ ------------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Preferred stock, $.01 par value, 10,000,000 shares authorized,
none issued and outstanding .................................................. -- --
Common stock, $.01 par value, 100,000,000 shares authorized,
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, 1,421,068 and 1,681,545 shares, respectively ........... (9,774) (10,795)
Additional paid-in capital ...................................................... 428,427 428,420
Retained earnings (deficit) ..................................................... (164,632) (160,825)
------------ ------------
Total stockholders' equity ................................................... 254,432 257,211
------------ ------------
Total liabilities and stockholders' equity ................................... $ 721,639 $ 693,697
============ ============
The accompanying condensed notes to consolidated financial statements are an
integral part of these financial statements.
2
INTEGRATED ELECTRICAL SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE INFORMATION)
Three Months Ended December 31,
-------------------------------
2001 2002
------------ -------------
(Unaudited)
Revenues ............................................................................ $ 375,179 $ 348,577
Cost of services (including depreciation) ........................................... 317,950 297,221
------------ ------------
Gross profit ................................................................... 57,229 51,356
Selling, general and administrative expenses ........................................ 49,773 38,619
Restructuring charge ................................................................ 4,000 --
------------ ------------
Income from operations ......................................................... 3,456 12,737
------------ ------------
Other (income)/expense:
Interest expense ............................................................... 6,785 6,456
(Gain) loss on sale of assets .................................................. (71) 59
Other expense, net ............................................................. 178 31
------------ ------------
6,892 6,546
------------ ------------
Income (loss) before income taxes and cumulative effect of change in
accounting principle ........................................................... (3,436) 6,191
Provision (benefit) for income taxes ................................................ (1,623) 2,384
Cumulative effect of change in accounting principle, net
of tax ........................................................................ 283,284 --
------------ ------------
Net income (loss) ................................................................... $ (285,097) $ 3,807
============ ============
Basic earnings (loss) per share:
Basic earnings (loss) per share before cumulative effect
of change in accounting principle ............................................. $ (0.04) $ 0.10
============ ============
Cumulative effect of change in accounting principle ................................. $ (7.13) $ 0.00
============ ============
Basic earnings (loss) per share ..................................................... $ (7.17) $ 0.10
============ ============
Diluted earnings (loss) per share:
Diluted earnings (loss) per share before cumulative
effect of change in accounting principle ...................................... $ (0.04) $ 0.10
============ ============
Cumulative effect of change in accounting principle ................................. $ (7.13) $ 0.00
============ ============
Diluted earnings (loss) per share ................................................... $ (7.17) $ 0.10
============ ============
Shares used in the computation of earnings (loss) per share (Note 5):
Basic .......................................................................... 39,759,175 39,447,351
============ ============
Diluted ........................................................................ 39,759,175 39,472,309
============ ============
The accompanying condensed notes to consolidated financial statements are an
integral part of these financial statements.
3
INTEGRATED ELECTRICAL SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE INFORMATION)
Restricted Voting
Common Stock Common Stock Treasury Stock Additional
----------------------- ----------------------- ------------------------ Paid-In
Shares Amount Shares Amount Shares Amount Capital
---------- ---------- ---------- ---------- ---------- ---------- ----------
BALANCE, September 30,
2002 ..................... 38,439,984 $ 385 2,605,709 $ 26 (1,421,068) $ (9,774) $ 428,427
Issuance of stock
(unaudited) .............. -- -- -- -- 2,559 18 (7)
Purchase of treasury
stock (unaudited) ........ -- -- -- -- (192,706) (769) --
Receipt of treasury
stock (unaudited) ........ -- -- -- -- (70,330) (270) --
Net income (unaudited) ....... -- -- -- -- -- -- --
---------- ---------- ---------- ---------- ---------- ---------- ----------
BALANCE, December 31,
2002 (unaudited) ......... 38,439,984 $ 385 2,605,709 $ 26 (1,681,545) $ (10,795) $ 428,420
========== ========== ========== ========== ========== ========== ==========
Retained Total
Earnings Stockholders'
(Deficit) Equity
---------- -------------
BALANCE, September 30,
2002 ..................... $ (164,632) $ 254,432
Issuance of stock
(unaudited) .............. -- 11
Purchase of treasury
stock (unaudited) ........ -- (769)
Receipt of treasury
stock (unaudited) ........ -- (270)
Net income (unaudited) ....... 3,807 3,807
---------- ----------
BALANCE, December 31,
2002 (unaudited) ......... $ (160,825) $ 257,211
========== ==========
The accompanying condensed notes to consolidated financial statements are an
integral part of these financial statements.
4
INTEGRATED ELECTRICAL SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
Three Months Ended December 31,
--------------------------------
2001 2002
------------- -------------
(Unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) ......................................................... $ (285,097) $ 3,807
Adjustments to reconcile net income to net cash
provided by operating activities -
Cumulative effect of change in accounting principle .................. 283,284 --
Allowance for doubtful accounts ...................................... 705 379
Depreciation and amortization ........................................ 4,227 3,650
(Gain) loss on sale of property and equipment ........................ (71) 59
Non-cash compensation expense ........................................ 1,422 --
Gain on divestiture .................................................. -- (26)
Changes in operating assets and liabilities
(Increase) decrease in:
Accounts receivable, net ........................................ 6,637 8,401
Inventories ..................................................... (5,622) 873
Costs and estimated earnings in
excess of billings on uncompleted contracts ................ 11,745 105
Prepaid expenses and other current assets ....................... 3,541 (27)
Other noncurrent assets ......................................... (1,144) 429
Increase (decrease) in:
Accounts payable and accrued expenses ........................... (31,537) (10,075)
Billings in excess of costs and estimated
earnings on uncompleted contracts .......................... 6,904 (6,101)
Other current liabilities ....................................... (452) 167
Other noncurrent liabilities .................................... 1,219 1,612
------------- -------------
Net cash provided by (used in) operating activities ........ (4,239) 3,253
------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of property and equipment .............................. 170 1,056
Additions to property and equipment ....................................... (3,942) (2,529)
Sale of business .......................................................... -- 1,084
Additions to note receivable from affiliate ............................... (583) --
------------- -------------
Net cash used in investing activities ...................... (4,355) (389)
------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings ................................................................ 44,291 5
Repayments of debt ........................................................ (36,721) (15,835)
Purchase of treasury stock ................................................ -- (769)
Proceeds from exercise of stock options ................................... 4 --
Proceeds from issuance of stock ........................................... 1,712 18
------------- -------------
Net cash provided by (used in) financing activities ........ 9,286 (16,581)
------------- -------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS ........................... 692 (13,717)
CASH AND CASH EQUIVALENTS, beginning of period ................................. 3,475 32,779
------------- -------------
CASH AND CASH EQUIVALENTS, end of period ....................................... $ 4,167 $ 19,062
============= =============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for
Interest ............................................................. $ 475 $ 277
Income taxes ......................................................... $ 3,383 $ --
The accompanying condensed notes to consolidated financial statements are an
integral part of these financial statements.
5
INTEGRATED ELECTRICAL SERVICES, INC. AND SUBSIDIARIES
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. OVERVIEW
Integrated Electrical Services, Inc. (the "Company" or "IES"), a Delaware
corporation, was founded in June 1997 to create a leading national provider of
electrical services, focusing primarily on the commercial and industrial,
residential, communications and related service and maintenance markets.
The accompanying unaudited condensed historical financial statements of the
Company have been prepared in accordance with accounting principles generally
accepted in the United States and Article 10 of Regulation S-X. Accordingly,
they do not include all of the information and footnotes required for complete
financial statements, and therefore should be reviewed in conjunction with the
financial statements and related notes thereto contained in the Company's annual
report for the year ended September 30, 2002, filed on Form 10-K 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. Actual operating results for the three
months ended December 31, 2002, are not necessarily indicative of the results
that may be expected for the fiscal year ended September 30, 2003.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
For a description of these policies, refer to Note 2 of the Notes to
Consolidated Financial Statements included in the Company's Annual Report on
Form 10-K for the year ended September 30, 2002.
SUBSIDIARY GUARANTIES
All of the Company's operating income and cash flows are generated by its wholly
owned subsidiaries, which are the subsidiary guarantors of the Company's
outstanding 9 3/8% senior subordinated notes due 2009 (the "Senior Subordinated
Notes"). The Company is structured as a holding company and substantially all of
its assets and operations are held by its subsidiaries. There are currently no
significant restrictions on the Company's ability to obtain funds from its
subsidiaries by dividend or loan. The separate financial statements of the
subsidiary guarantors are not included herein because (i) the subsidiary
guarantors are all of the direct and indirect subsidiaries of the Company; (ii)
the subsidiary guarantors have fully and unconditionally, jointly and severally
guaranteed the Senior Subordinated Notes; and (iii) the aggregate assets,
liabilities, earnings, and equity of the subsidiary guarantors is substantially
equivalent to the assets, liabilities, earnings and equity of the Company on a
consolidated basis. As a result, the presentation of separate financial
statements and other disclosures concerning the subsidiary guarantors is not
deemed material.
6
USE OF ESTIMATES AND ASSUMPTIONS
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States requires the use of estimates and
assumptions by management in determining the reported amounts of assets and
liabilities, disclosures of contingent liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates. Estimates
are primarily used in the Company's revenue recognition of construction in
progress, fair value assumptions in analyzing goodwill impairment, allowance for
doubtful accounts receivable and self-insured claims liability.
NEW ACCOUNTING PRONOUNCEMENTS
Effective October 1, 2002, the Company adopted Statement of Financial Accounting
Standards (SFAS) No. 144, "Accounting for the Impairment or Disposal of
Long-Lived Assets." SFAS No. 144 supercedes SFAS No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of."
SFAS No. 144 establishes a single accounting model for long-lived assets to be
disposed of by sale and requires that those long-lived assets be measured at the
lower of carrying amount or fair value less cost to sell, whether reported in
continuing operations or in discontinued operations. The adoption had no impact
on the Company's financial position or results of operations.
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated
with Exit or Disposal Activities." SFAS No. 146 establishes requirements for
recognition of a liability for a cost associated with an exit or disposal
activity based with an objective of recording the initial liability at fair
value. The Company will adopt SFAS No 146 effective January 1, 2003. The Company
does not expect the adoption of SFAS NO. 146 to impact its financial position or
results of operations.
2. GOODWILL AND OTHER INTANGIBLE ASSETS
Effective October 1, 2001, the Company adopted 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 goodwill
amortization ceased effective October 1, 2001. Goodwill attributable to each of
the Company's reporting units is tested for impairment by 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. The
Company will perform its impairment tests annually during the first fiscal
quarter absent any impairment indicators requiring more frequent impairment
tests.
Based on the Company's impairment tests performed upon adoption of SFAS No. 142,
it recognized a charge of $283.3 million ($7.13 per share) in the first quarter
of 2002 to reduce the carrying value of goodwill of its reporting units to its
implied fair value. Under SFAS No. 142,
7
the impairment adjustment recognized at adoption of the new rules was reflected
as a cumulative effect of change in accounting principle in the statement of
operations for the year ended September 30, 2002. The Company performed its
annual impairment test on October 1, 2002 and determined that there was no
impairment of recorded goodwill.
The carrying amount of goodwill attributable to each reportable operating unit
with goodwill balances and changes therein follows (in thousands):
September 30, December 31,
2002 Divestiture 2002
------------- ------------- -------------
Commercial and Industrial $ 140,695 $ 215 $ 140,480
Residential 57,525 -- 57,525
------------- ------------- -------------
$ 198,220 $ 215 $ 198,005
============= ============= =============
3. RESTRUCTURING CHARGES
In October 2001, the Company 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, the Company recorded pre-tax restructuring charges of $4.0
million associated with 45 employees during the three months ended December 31,
2001. The charges were based on the costs of the workforce reduction program and
include severance and other special termination benefits. At December 31, 2002,
approximately $2.0 million of these charges have not been paid and are included
in accrued expenses.
4. DEBT
Credit Facility
The Company is party to a $150.0 million revolving credit facility with a
syndicate of lending institutions to be used for working capital, capital
expenditure, acquisitions and other corporate purposes that matures May 22,
2004, as amended (the "Credit Facility"). Amounts borrowed under the Credit
Facility bear interest at an annual rate equal to either (a) the London
interbank offered rate (LIBOR) plus 1.75 percent to 3.50 percent, as determined
by the ratio of the Company's total funded debt to EBITDA (as defined in the
Credit Facility) or (b) the higher of (i) the bank's prime rate or (ii) the
Federal funds rate plus 0.50 percent plus an additional 0.25 percent to 2.00
percent, as determined by the ratio of the Company's total funded debt to
EBITDA. Commitment fees of 0.50 percent are assessed on any unused borrowing
capacity under the Credit Facility. The Company's existing and future
subsidiaries guarantee the repayment of all amounts due under the facility, and
the facility is secured by the capital stock of those subsidiaries and the
accounts receivable of the Company and those subsidiaries. Borrowings under the
Credit Facility are limited to 66 2/3% of outstanding receivables (as defined in
the agreement). The Credit Facility requires the consent of the lenders for
acquisitions exceeding a certain level of cash consideration, prohibits the
payment of cash dividends on the common stock, restricts the ability of the
Company to repurchase shares of common stock, to incur other indebtedness and
requires the Company to comply with various affirmative and
8
negative covenants including certain financial covenants. Among other
restrictions, the financial covenants include minimum net worth requirements; a
maximum total consolidated funded debt to EBITDA ratio, a maximum senior
consolidated debt to EBITDA ratio, and a minimum interest coverage ratio. The
Company was in compliance with the financial covenants of its Credit Facility,
as amended, at December 31, 2002. As of December 31, 2002, the Company had no
borrowings outstanding under its Credit Facility, letters of credit outstanding
under its Credit Facility of $22.4 million, $0.8 million of other borrowings and
available borrowing capacity under its Credit Facility of $127.6 million.
Senior Subordinated Notes
On January 25, 1999 and May 29, 2001, the Company completed offerings of $150.0
million and $125.0 million Senior Subordinated Notes, respectively. The offering
completed on May 29, 2001 yielded $117.0 million in proceeds to the Company, net
of a $4.2 million discount and $3.9 million in offering costs. The proceeds from
the May 29, 2001, offering were used primarily to repay amounts outstanding
under the Credit Facility. The Senior Subordinated Notes bear interest at 9 3/8%
and mature on February 1, 2009. The Company pays interest on the Senior
Subordinated Notes on February 1 and August 1 of each year. The Senior
Subordinated Notes are unsecured obligations and are subordinated to all
existing and future senior indebtedness. The Senior Subordinated Notes are
guaranteed on a senior subordinated basis by all of the Company's subsidiaries.
Under the terms of the Senior Subordinated Notes, the Company is required to
comply with various affirmative and negative covenants including: (i)
restrictions on additional indebtedness, and (ii) restrictions on liens,
guarantees and dividends. During the fourth quarter of the year ended September
30, 2002, the Company retired approximately $27.1 million of these Senior
Subordinated Notes. At September 30, 2002, the cost basis of $15.6 million
notional amount of the retired Senior Subordinated Notes were classified as part
of accounts payable and accrued expenses as the settlement date occurred
subsequent to September 30, 2002 and during the three months ended December 31,
2002.
Debt consists of the following (in thousands):
September 30, December 31,
2002 2002
------------ ------------
Secured credit facility with a group of lending institutions, due
May 22, 2004 ........................................................ $ -- $ --
Senior subordinated notes, due February 1, 2009, bearing
interest at 9.375% with an effective interest rate of 9.50% ......... 137,885 137,885
Senior subordinated notes, due February 1, 2009, bearing
interest at 9.375% with an effective interest rate of 10.00% ........ 110,000 110,000
Other ..................................................................... 1,074 848
------------ ------------
Total debt .......................................................... 248,959 248,733
Less - short-term debt and current maturities of long-term debt ........... (570) (467)
Less - unamortized discount on senior subordinated notes .................. (3,797) (3,648)
Add - fair value of terminated interest rate hedge ........................ 3,847 3,695
------------ ------------
Total long-term debt ................................................ $ 248,439 $ 248,313
============ ============
9
5. EARNINGS PER SHARE
The following table reconciles the numerators and denominators of the basic and
diluted earnings per share for the three months ended December 31, 2001 and 2002
(in thousands, except share information):
Three Months Ended December 31,
--------------------------------
2001 2002
------------- -------------
Numerator:
Net income (loss) ........................................... $ (285,097) $ 3,807
============= =============
Denominator:
Weighted average shares outstanding - basic ................. 39,759,175 39,447,351
Effect of dilutive stock options ............................ -- 24,958
------------- -------------
Weighted average shares outstanding - diluted ............... 39,759,175 39,472,309
============= =============
Earnings (loss) per share:
Basic ....................................................... $ (7.17) $ 0.10
Diluted ..................................................... $ (7.17) $ 0.10
For the three months ended December 31, 2001 and 2002, stock options of 6.9
million and 5.4 million, respectively, were excluded from the computation of
diluted earnings per share because the options exercise prices were greater than
the average market price of the Company's common stock. For the three months
ended December 31, 2001, the weighted average diluted shares outstanding
excluded 25,830 shares related to employee stock options where the exercise
prices were less than the average market price of the Company's common stock.
These shares were excluded because the Company reported a loss during the
period, and including them would have had an antidilutive effect on loss per
share.
6. OPERATING SEGMENTS
The Company follows SFAS No. 131, "Disclosures about Segments of an Enterprise
and Related Information." Certain information is disclosed, per SFAS No. 131,
based on the way management organizes financial information for making operating
decisions and assessing performance.
The Company's reportable segments are strategic business units that offer
products and services to two distinct customer groups. They are managed
separately because each business requires different operating and marketing
strategies.
The accounting policies of the segments are the same as those described in the
summary of significant accounting policies. The Company evaluates performance
based on income from operations of the respective business units prior to
unallocated home office expenses. Management allocates costs between segments
for selling, general and administrative expenses,
10
goodwill impairment, depreciation expense, capital expenditures and total
assets. Those methods used for allocation may change in the future.
Segment information for the three months ended December 31, 2001 and 2002 is as
follows (in thousands):
THREE MONTHS ENDED DECEMBER 31, 2001
--------------------------------------------------------------------
COMMERCIAL/
INDUSTRIAL RESIDENTIAL OTHER TOTAL
------------- ------------- ------------- -------------
Revenues ...................................... $ 308,045 $ 67,134 $ -- $ 375,179
Cost of services (including depreciation) ..... 265,032 52,918 -- 317,950
------------- ------------- ------------- -------------
Gross profit .................................. 43,013 14,216 -- 57,229
Selling, general and administrative ........... 33,240 8,634 7,899 49,773
Restructuring charge .......................... -- -- 4,000 4,000
------------- ------------- ------------- -------------
Operating income .............................. $ 9,773 $ 5,582 $ (11,899) $ 3,456
============= ============= ============= =============
Other data:
Depreciation expense .......................... $ 3,421 $ 332 $ 474 $ 4,227
Capital expenditures .......................... 2,638 112 1,192 3,942
Total assets .................................. 559,573 99,831 70,979 730,383
THREE MONTHS ENDED DECEMBER 31, 2002
--------------------------------------------------------------------
COMMERCIAL/
INDUSTRIAL RESIDENTIAL OTHER TOTAL
------------- ------------- ------------- -------------
Revenues ...................................... $ 271,634 $ 76,943 $ -- $ 348,577
Cost of services (including depreciation) .... 237,277 59,944 -- 297,221
------------- ------------- ------------- -------------
Gross profit .................................. 34,357 16,999 -- 51,356
Selling, general and administrative ........... 25,258 8,699 4,662 38,619
------------- ------------- ------------- -------------
Operating income .............................. $ 9,099 $ 8,300 $ (4,662) $ 12,737
============= ============= ============= =============
Other data:
Depreciation expense .......................... $ 2,920 $ 260 $ 470 $ 3,650
Capital expenditures .......................... 1,280 252 997 2,529
Total assets .................................. 492,839 104,853 96,005 693,697
The Company does not have significant operations or long-lived assets in
countries outside of the United States.
7. 1999 INCENTIVE COMPENSATION PLAN
In November 1999, the Board of Directors adopted the 1999 Incentive Compensation
Plan (the "1999 Plan"). The 1999 Plan authorizes the Compensation Committee of
the Board of Directors or the Board of Directors to grant employees of the
Company awards in the form of options, stock appreciation rights, restricted
stock or other stock based awards. The Company has up to 5.5 million shares of
Common Stock authorized for issuance under the 1999 Plan.
11
The Company granted a restricted stock award of 400,000 shares under its 1999
Plan. The market value of the stock on the date of grant for this award was $2.3
million. The award became fully vested and was fully amortized during the three
months ended December 31, 2001. Accordingly, the Company had no amortization
expense related to this award during the three months ended December 31, 2002.
8. 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 and it is possible that the
results of legal proceedings may materially adversely affect us, in the opinion
of the Company, all such proceedings are either adequately covered by insurance
or, if not so covered, should not ultimately result in any liability which would
have a material adverse effect on the financial position, liquidity or results
of operations of the Company. The Company expenses routine legal costs related
to such proceedings as incurred.
The Company has committed to invest up to $5.0 million in EnerTech Capital
Partners II L.P. ("EnerTech"). EnerTech is a private equity firm specializing in
investment opportunities emerging from the deregulation and resulting
convergence of the energy, utility and telecommunications industries. Through
December 31, 2002, the Company had invested $1.8 million under its commitment to
EnerTech.
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. 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 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 related to estimating future results,
fluctuations in operating results because of downturns in levels of
construction, incorrect estimates used in entering into fixed price contracts,
difficulty in managing the operation and growth of existing and newly acquired
businesses, the high level of competition in the construction industry and the
effects of seasonality. The foregoing and other factors are discussed in our
filings with the SEC including our Annual Report on Form 10-K for the year ended
September 30, 2002.
In response to the SEC's Release No. 33-8040, "Cautionary Advice Regarding
Disclosure About Critical Accounting Policies," we have identified the
accounting principles which we believe are
12
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, our allowance for
doubtful accounts receivable and the recording of our self-insurance
liabilities. These accounting policies, as well as others, are described in the
Notes to the Consolidated Financial Statements of our Annual Report on Form 10-K
for the year ended September 30, 2002 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 in which we agree to do 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. The cost of labor and materials, however, may vary from the costs we
originally estimated. Variations from estimated contract costs along with other
risks inherent in performing fixed price and unit price contracts may result in
actual revenue and gross profit for a project differing from those we originally
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 fiscal quarter or 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 the southern part of the United States. Downturns in new
construction activity or in construction in the southern United States could
affect our results.
We complete most projects within one year, while 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 the 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 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.
13
We evaluate goodwill for potential impairment in accordance with Statement of
Financial Accounting Standards (SFAS) No. 142, "Goodwill and Other Intangible
Assets." Included in this evaluation are certain assumptions 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 receivable 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 receivable are certain judgments and estimates including, among others,
our customers' access to capital, our customers' willingness to pay, general
economic conditions and the ongoing relationships with our customers.
We are self-insured for workers' compensation, auto liability, general liability
and employee-related health care claims, subject to large deductibles. 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 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 than 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.
RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED DECEMBER 31, 2001 COMPARED TO
THE THREE MONTHS ENDED DECEMBER 31, 2002
The following table presents selected unaudited historical financial information
for the three months ended December 31, 2001 and 2002.
Three Months Ended December 31,
------------------------------------------------------------
2001 % 2002 %
------------ ------------ ------------ ------------
(dollars in millions)
Revenues ....................................................... $ 375.2 100% $ 348.6 100%
Cost of services (including depreciation) ...................... 318.0 85% 297.2 85%
------------ ------------ ------------ ------------
Gross profit ........................................... 57.2 15% 51.4 15%
Selling, general & administrative expenses ..................... 49.7 13% 38.6 11%
Restructuring charge ........................................... 4.0 1% -- 0%
------------ ------------ ------------ ------------
Income from operations ................................. 3.5 1% 12.8 4%
Interest and other expense, net ................................ 6.9 2% 6.6 2%
------------ ------------ ------------ ------------
Income (loss) before income taxes and cumulative effect of
change in accounting principle .......................... (3.4) (1)% 6.2 2%
------------ ------------ ------------ ------------
Provision for income taxes ..................................... (1.6) 0% 2.4 1%
Cumulative effect of change in accounting
principle, net of tax ................................... 283.3 75% -- 0%
------------ ------------ ------------ ------------
Net income ............................................. $ (285.1) (76)% $ 3.8 1%
============ ============ ============ ============
14
REVENUES
PERCENT OF TOTAL REVENUES
----------------------------------
THREE MONTHS ENDED DECEMBER 31,
----------------------------------
2001 2002
-------------- --------------
Commercial and Industrial 82% 78%
Residential 18% 22%
-------------- --------------
Total Company 100% 100%
============== ==============
Total revenues decreased $26.6 million, or 7%, from $375.2 million for the three
months ended December 31, 2001, to $348.6 million for the three months ended
December 31, 2002. This decrease in revenues is primarily the result of $14.2
million of non-recurring revenues on divested or closed companies that were
included in revenues for the three months ended December 31, 2001, but not
during the three months ended December 31, 2002. This decrease in revenues is
additionally impacted by increased competition across the country for available
work during the three months ended December 31, 2002, a decrease in revenues
from communications work and a decrease of non-residential revenues in the
Midwest .
Commercial and industrial revenues decreased $36.4 million, or 12%, from $308.0
million for the three months ended December 31, 2001, to $271.6 million for the
three months ended December 31, 2002. This decrease in revenues is primarily the
result of $14.2 million of non-recurring revenues on divested or closed
companies that were included in revenues for the three months ended December 31,
2001, but not during the three months ended December 31, 2002. This decrease in
revenues is additionally impacted by increased competition across the country
for available work during the three months ended December 31, 2002.
Residential revenues increased $9.8 million, or 15%, from $67.2 million for the
three months ended December 31, 2001, to $77.0 million for the three months
ended December 31, 2002, primarily as a result of increased awards of
construction contracts in markets we serve.
GROSS PROFIT
SEGMENT GROSS PROFIT MARGINS
AS A PERCENT OF SEGMENT REVENUES
--------------------------------
THREE MONTHS ENDED DECEMBER 31,
--------------------------------
2001 2002
------------- -------------
Commercial and Industrial 14% 13%
Residential 21% 22%
------------- -------------
Total Company 15% 15%
============= =============
15
Gross profit decreased $5.8 million, or 10%, from $57.2 million for the three
months ended December 31, 2001, to $51.4 million for the three months ended
December 31, 2002. Gross profit margin as a percentage of revenues remained the
same at 15% for the three months ended December 31, 2001 and 2002.
Commercial and industrial gross profit decreased $8.6 million, or 20%, from
$43.0 million for the three months ended December 31, 2001, to $34.4 million for
the three months ended December 31, 2002. Commercial and industrial gross profit
margin as a percentage of revenues decreased from 14% for the three months ended
December 31, 2001, to 13% for the three months ended December 31, 2002. This
decrease in gross profit margin as a percentage of revenues was primarily the
result of increased competition for available work and lower margins on work in
the communications market.
Residential gross profit increased $2.8 million, or 20%, from $14.2 million for
the three months ended December 31, 2001, to $17.0 million for the three months
ended December 31, 2002. Residential gross profit margin as a percentage of
revenues increased from 21% for the three months ended December 31, 2001 to 22%
for the three months ended December 31, 2002. This increase in gross profit
margin as a percentage of revenues was primarily the result of increased
available work and higher margins on awarded work in the residential market.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses decreased $11.1 million, or 22%,
from $49.7 million for the three months ended December 31, 2001, to $38.6
million for the three months ended December 31, 2002. Selling, general and
administrative expenses as a percentage of revenues decreased 2% from 13% for
the three months ended December 31, 2001 to 11% for the three months ended
December 31, 2002. This decrease results from the elimination of certain
administrative field and home office personnel expenses during the three months
ended December 31, 2001 as compared to the three months ended December 31, 2002.
RESTRUCTURING CHARGE
In October 2001, we began implementation of a workforce reduction program. The
purpose of this program was to reduce the number of administrative staff both in
the field and in the home office. As a result of the program implementation, we
recorded a pre-tax restructuring charge of $4.0 million during the quarter ended
December 31, 2001. The charge was based on the cost of the workforce reduction
program, including severance and other special termination benefits. At December
31, 2002, approximately $2.0 million of these charges have not been paid and are
included in accounts payable and accrued expenses.
INCOME FROM OPERATIONS
Income from operations increased $9.3 million, or 266%, from $3.5 million for
the three months ended December 31, 2001, to $12.8 million for the three months
ended December 31, 2002. This increase in income from operations was primarily
attributed to decreased selling, general and administrative expenses year over
year and a non-recurring restructuring charge of $4.0
16
million incurred during the three months ended December 31, 2001, offset by
decreased revenues year over year and decreased margins earned on those
revenues.
NET INTEREST AND OTHER EXPENSE
Interest and other expense, net decreased from $6.9 million for the three months
ended December 31, 2001, to $6.6 million for the three months ended December 31,
2002, primarily as a result of decreased interest expense attributable to
decreased average borrowings over the period.
PROVISION FOR INCOME TAXES
During the three months ended December 31, 2002, we recorded a tax provision of
38.5%. We recorded a tax benefit of 47.2% for the three months ended December
31, 2001. This benefit is the result of a loss before income taxes recorded
during the three months ended December 31, 2001 and includes the impact of the
projected utilization of certain net operating loss carryforwards.
LIQUIDITY AND CAPITAL RESOURCES
As of December 31, 2002, we had cash and cash equivalents of $19.1 million,
working capital of $251.6 million, no outstanding borrowings under our credit
facility, $22.4 million of letters of credit outstanding, and available capacity
under our credit facility of $127.6 million. The amount outstanding under our
senior subordinated notes was $247.9 million. All debt obligations are on our
balance sheet.
During the three months ended December 31, 2002, we generated $3.3 million of
net cash from operating activities. This net cash provided by operating
activities was comprised of net income of $3.8 million, increased by $4.1
million of non-cash charges related primarily to depreciation expense and
provision for allowance for doubtful accounts, and decreased by changes in
working capital. Working capital changes consisted of a $8.4 million decrease in
accounts receivable due to the timing of collections, offset by a $10.1 million
decrease in accounts payable and accrued expenses as a result of the timing of
payments made. Working capital changes also included a $6.1 million decrease in
billings in excess of costs and estimated earnings on uncompleted projects and a
$0.1 million increase in costs and estimated earnings in excess of billings on
uncompleted contracts, with the balance of the change due to other working
capital changes. Net cash used in investing activities was $0.4 million,
consisting primarily of $2.5 million used for capital expenditures, offset by
$1.1 million received from divestitures and $1.0 million in proceeds from the
sale of fixed assets. Net cash used in financing activities was $16.6 million,
resulting primarily from repurchases of the senior subordinated notes.
On May 22, 2001, we replaced our $175.0 million credit facility with a new
$150.0 million revolving credit facility with a syndicate of lending
institutions to be used for working capital, capital expenditure, acquisitions
and other corporate purposes that matures May 22, 2004. Amounts borrowed under
our credit facility bear interest at an annual rate equal to either (a) the
London interbank offered rate (LIBOR) plus 1.75 percent to 3.50 percent, as
determined by the
17
ratio of our total funded debt to EBITDA (as defined in our credit facility) or
(b) the higher of (i) the bank's prime rate or (ii) the Federal funds rate plus
0.50 percent plus an additional 0.25 percent to 2.00 percent, as determined by
the ratio of our total funded debt to EBITDA. Commitment fees of 0.50 percent
are assessed on any unused borrowing capacity under our credit facility. Our
existing and future subsidiaries guarantee the repayment of all amounts due
under our facility, and our facility is secured by the capital stock of those
subsidiaries, our accounts receivable and the accounts receivable of those
subsidiaries. Borrowings under our credit facility are limited to 66 2/3% of
outstanding receivables (as defined in the agreement). Our credit facility
requires the consent of the lenders for acquisitions exceeding a certain level
of cash consideration, prohibits the payment of cash dividends on our common
stock, restricts our ability to repurchase shares of common stock, to incur
other indebtedness and requires us to comply with various affirmative and
negative covenants including certain financial covenants. Among other
restrictions, the financial covenants include minimum net worth requirements, a
maximum total consolidated funded debt to EBITDA ratio, a maximum senior
consolidated debt to EBITDA ratio, and a minimum interest coverage ratio. We
were in compliance with the financial covenants of our credit facility, as
amended, at December 31, 2002. At January 29, 2003, we had no outstanding
borrowings on our credit facility.
On January 25, 1999 and May 29, 2001, we completed our offerings of $150.0
million and $125.0 million senior subordinated notes, respectively. The offering
completed on May 29, 2001 yielded $117.0 million in proceeds, net of a $4.2
million discount and $3.9 million in offering costs. The proceeds from the May
29, 2001 offering were used primarily to repay amounts outstanding under our
credit facility. 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 fourth quarter of the year ended
September 30, 2002, we retired approximately $27.1 million of these senior
subordinated notes. At December 31, 2002, we have $247.9 million in outstanding
senior subordinated notes.
Effective October 1, 2001, we adopted 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 goodwill
amortization ceased effective October 1, 2001. Goodwill attributable to each of
our reporting units is tested for impairment by 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. We will
perform our impairment tests annually during the first fiscal quarter absent any
impairment indicators requiring more frequent impairment tests.
Based on our impairment tests performed upon adoption of SFAS No. 142, we
recognized a charge of $283.3 million ($7.13 per share) in the first quarter of
2002 to reduce the carrying value of goodwill of our reporting units to its
implied fair value. Under SFAS No. 142, the
18
impairment adjustment recognized at adoption of the new rules was reflected as a
cumulative effect of change in accounting principle in the statement of
operations for the year ended September 30, 2002. We performed our annual
impairment test on October 1, 2002 and determined that there was no impairment
of recorded goodwill.
All of our operating income and cash flows are generated by our wholly owned
subsidiaries, which are the subsidiary guarantors of our outstanding senior
subordinated notes. The separate financial statements of the subsidiary
guarantors are not included herein because (i) the subsidiary guarantors are all
of the direct and indirect subsidiaries of the Company; (ii) the subsidiary
guarantors have fully and unconditionally, jointly and severally guaranteed the
senior subordinated notes; (iii) the aggregate assets, liabilities, earnings,
and equity of the subsidiary guarantors is substantially equivalent to the
assets, liabilities, earnings and equity of the Company on a consolidated basis;
and (iv) the presentation of separate financial statements and other disclosures
concerning the subsidiary guarantors is not deemed material.
Other Commitments. 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 liabilities 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 and the difference
between the then fair market value of the leased asset and the implied book
value of the leased asset as calculated in accordance with the lease agreement.
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.
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 surety is such that we will indemnify the surety for
any expenses it incurs in connection with any of the bonds it issues on our
behalf. To date, we have not incurred significant expenses to indemnify our
surety for expenses it incurred on our behalf.
We have committed to invest up to $5.0 million in EnerTech Capital Partners II,
L.P. ("EnerTech"). EnerTech is a private equity firm specializing in investment
opportunities
19
emerging from deregulation and resulting convergence of the energy, utility and
telecommunications industries. Through December 31, 2002, we had invested $1.8
million under our commitment to EnerTech.
Our future contractual obligations include (in thousands):
LESS THAN
ONE YEAR 2003 2004 2005 2006 THEREAFTER TOTAL
-------- -------- -------- -------- -------- ---------- --------
Debt and capital lease obligations .. $ 467 $ 246 $ 107 $ 25 $ 3 $247,885 $248,733
Operating lease obligations ......... $ 9,251 $ 10,146 $ 7,438 $ 4,118 $ 2,198 $ 2,771 $ 35,922
Our other commercial commitments expire as follows (in thousands):
LESS THAN
ONE YEAR 2003 2004 2005 2006 THEREAFTER TOTAL
-------- ------- --------- --------- ------ ---------- -------
Standby letters of credit ..... $ 11,302 $11,069 $ -- $ -- $ -- $ -- $22,371
Other commercial commitments .. $ -- $ -- $ -- $ -- $ -- $ 3,200(1) $ 3,200
(1) Balance of investment commitment in EnerTech.
Outlook. The following statements are based on current expectations. These
statements are forward-looking and actual results may differ materially.
Economic conditions across the country are challenging. We continue to focus on
collecting receivables and reducing days sales outstanding. To improve our
position for continued success, we continue to take steps to reduce costs. We
have made significant cuts in administrative overhead at the home office and in
the field. Although we have seen signs of improvement in our quarter ended
December 31, 2002, the economic outlook for the remainder of fiscal 2003 is
still somewhat uncertain. We expect earnings per share in the second quarter of
fiscal 2003 to range between $0.08 and $0.14 per share. For the year ended
September 30, 2003, we expect earnings to range between $0.53 and $0.60 per
share excluding any potential goodwill impairment charges.
We expect to generate cash flow from operations. 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 our cash flow
from operations will provide sufficient cash to enable us to meet our working
capital needs, debt service requirements and planned capital expenditures for
property and equipment through the next twelve months. Our ability to generate
cash flow from operations is dependent on many factors, including demand for our
products and services, the availability of work at margins acceptable to us and
the ultimate collectibility of our receivables.
SEASONALITY AND QUARTERLY FLUCTUATIONS
Our results of operations, particularly from residential construction, are
seasonal, depending on weather trends, with typically higher revenues generated
during the spring and summer and lower revenues during the fall and winter. The
commercial and industrial aspect of our business is less subject to seasonal
trends, as this work generally is performed inside structures protected from the
weather. Our service business is generally not affected by seasonality. In
addition, the
20
construction industry has historically been highly cyclical. Our volume of
business may be adversely affected by declines in construction projects
resulting from adverse regional or national economic conditions. Quarterly
results may also be materially affected by gross margins for both bid and
negotiated projects, the timing of new construction projects and any
acquisitions. Accordingly, operating results for any fiscal period are not
necessarily indicative of results that may be achieved for any subsequent fiscal
period.
NEW ACCOUNTING PRONOUNCEMENTS
Effective October 1, 2002, we adopted Statement of Financial Accounting
Standards (SFAS) No. 144, "Accounting for the Impairment or Disposal of
Long-Lived Assets." SFAS No. 144 supercedes SFAS No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of."
SFAS No. 144 establishes a single accounting model for long-lived assets to be
disposed of by sale and requires that those long-lived assets be measured at the
lower of carrying amount or fair value less cost to sell, whether reported in
continuing operations or in discontinued operations. The adoption had no impact
on our financial position or results of operations.
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated
with Exit or Disposal Activities." SFAS No. 146 establishes requirements for
recognition of a liability for a cost associated with an exit or disposal
activity based with an objective of recording the initial liability at fair
value. We will adopt SFAS No 146 effective January 1, 2003. We do not expect the
adoption of SFAS NO. 146 to impact our financial position or results of
operations.
21
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. We are
not exposed to any significant market risks from commodity price risk or foreign
currency exchange risk. Our exposure to significant market risks includes
outstanding borrowings under our floating rate credit facility. 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 year of maturity for our debt obligations and their
indicated fair market value at December 31, 2002:
2002 2003 2004 2005 2006 THEREAFTER TOTAL
------- ------- ------- -------- -------- ---------- ----------
Liabilities -Debt:
Fixed Rate (senior
subordinated notes) ... $ -- $ -- $ -- $ -- $ -- $ 247,885 $ 247,885
Interest Rate ........... 9.375% 9.375% 9.375% 9.375% 9.375% 9.375% 9.375%
Fair Value of Debt:
Fixed Rate .............. $ 225,575
ITEM 4. CONTROLS AND PROCEDURES
Within 90 days prior to the filing date of this report on Form 10-Q, the Company
carried out an evaluation, under the supervision and with the participation of
the Company's management, including the Company's principal executive officer
and principal financial officer, of the effectiveness of the design and
operation of the Company's disclosure controls and procedures. The Company's
principal executive officer and principal financial officer concluded, based on
this evaluation, that the Company's disclosure controls and procedures are
effective in alerting them timely to material information relating to the
Company required to be included in the Company's periodic SEC filings.
Since the date of the evaluation, there have been no significant changes in the
Company's internal controls or in other factors that could significantly affect
these controls.
22
INTEGRATED ELECTRICAL SERVICES, INC. AND SUBSIDIARIES
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS
A. EXHIBITS
10.1 Integrated Electrical Services, Inc. Executive
Savings Plan
99.1 Certification of Herbert R. Allen, Chief Executive
Officer, pursuant to 18 U.S.C. Section 1350, as
adopted to Section 906 of The Sarbanes-Oxley Act of
2002.
99.2 Certification of William W. Reynolds, Chief Financial
Officer, pursuant to 18 U.S.C. Section 1350, as
adopted to Section 906 of The Sarbanes-Oxley Act of
2002.
23
INTEGRATED ELECTRICAL SERVICES, INC. AND SUBSIDIARIES
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: January 30, 2003 By: /s/ William W. Reynolds
--------------------------------
William W. Reynolds
Executive Vice President and
Chief Financial Officer
24
CERTIFICATION
I, Herbert R. Allen, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Integrated
Electrical Services, Inc.;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in the Exchange Act Rules 13a-14 and 15d-14) for the
registrant and we have:
a) designed such disclosure controls and procedures to
ensure that material information relating to the
registrant, including its consolidated subsidiaries,
is made known to us by others within those entities,
particularly during the period in which this
quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's
disclosure controls and procedures as of a date
within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions
about the effectiveness of the disclosure controls
and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of the registrant's board of directors (or persons
performing the equivalent function):
a) all significant deficiencies in the design or
operation of internal controls which could adversely
affect the registrant's ability to record, process,
summarize and report financial data and have
identified for the registrant's auditors any material
weaknesses in internal controls; and
b) any fraud, whether or not material, that involves
management or other employees who have a significant
role in the registrant's internal controls; and
25
6. The registrant's other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent
evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
Date: January 29, 2003
/s/ Herbert R. Allen
----------------------------------
Herbert R. Allen
Chief Executive Officer
26
CERTIFICATION
I, William W. Reynolds, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Integrated
Electrical Services, Inc.;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect
to the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented
in this quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in the Exchange Act Rules 13a-14 and 15d-14) for the
registrant and we have:
a) designed such disclosure controls and procedures to
ensure that material information relating to the
registrant, including its consolidated subsidiaries,
is made known to us by others within those entities,
particularly during the period in which this
quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's
disclosure controls and procedures as of a date
within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions
about the effectiveness of the disclosure controls
and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officer and I have disclosed,
based on our most recent evaluation, to the registrant's auditors
and the audit committee of the registrant's board of directors (or
persons performing the equivalent function):
a) all significant deficiencies in the design or
operation of internal controls which could adversely
affect the registrant's ability to record, process,
summarize and report financial data and have
identified for the registrant's auditors any material
weaknesses in internal controls; and
b) any fraud, whether or not material, that involves
management or other employees who have a significant
role in the registrant's internal controls; and
27
6. The registrant's other certifying officer and I have indicated in
this quarterly report whether or not there were significant changes
in internal controls or in other factors that could significantly
affect internal controls subsequent to the date of our most recent
evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
Date: January 29, 2003
/s/ William W. Reynolds
-----------------------------
William W. Reynolds
Chief Financial Officer
28
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION
------- -----------
10.1 Integrated Electrical Services, Inc. Executive Savings Plan
99.1 Certification of Herbert R. Allen, Chief Executive Officer,
pursuant to 18 U.S.C. Section 1350, as adopted to Section 906
of The Sarbanes-Oxley Act of 2002.
99.2 Certification of William W. Reynolds, Chief Financial Officer,
pursuant to 18 U.S.C. Section 1350, as adopted to Section 906
of The Sarbanes-Oxley Act of 2002.
EXHIBIT 10.1
INTEGRATED ELECTRICAL SERVICES, INC.
EXECUTIVE SAVINGS PLAN
TABLE OF CONTENTS
Page
----
I. DEFINITIONS AND CONSTRUCTION ............................................................ 1
1.1 Definitions
1.2 Number and Gender .................................................................. 4
1.3 Headings ........................................................................... 4
1.4 Construction ....................................................................... 4
II. PARTICIPATION ........................................................................... 4
2.1 Participation ...................................................................... 4
2 2 Termination of Eligibility ......................................................... 5
III. EMPLOYER CONTRIBUTIONS .................................................................. 5
3.1 Before-Tax Contributions ........................................................... 5
3.2 Employer Matching Contributions .................................................... 6
3.3 Return of Contributions ............................................................ 6
IV. ALLOCATIONS. ............................................................................ 6
4.1 Allocation of Contributions ........................................................ 6
4.2 Allocation of Forfeitures .......................................................... 7
4.3 Allocation of Deemed Net Income or Loss and Chances in Account Value ............... 7
V. INVESTMENT OF ACCOUNTS .................................................................. 7
5.1 Deemed Investment of Accounts ...................................................... 7
VI. RETIREMENT BENEFITS ..................................................................... 8
6.1 Retirement Benefits ................................................................ 8
6.2 Account Balances ................................................................... 8
6.3 Determination of Vested Interest ................................................... 8
VII. DEATH BENEFITS .......................................................................... 9
7.1 Death Benefits ..................................................................... 9
7.2 Designation of Beneficiaries ....................................................... 9
VIII. TIME AND FORM OF PAYMENT OF BENEFITS .................................................... 9
8.1 Time of Payment .................................................................... 9
8.2 Forms of Benefit Payments .......................................................... 9
8.3 Cash-Out of Benefit ................................................................ 10
8.4 Claims Review ...................................................................... 10
IX. IN-SERVICE WITHDRAWALS .................................................................. 11
9.1 Emergency Withdrawals .............................................................. 11
9.2 Advance Notice Withdrawals ......................................................... 11
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9.3 Penalty Withdrawals ................................................................ 11
X. LOANS ................................................................................... 12
10.1 No Loans .......................................................................... 12
XI. ADMINISTRATION OF THE PLAN .............................................................. 12
11.1 Appointment of Committee .......................................................... 12
11.2 Term, Vacancies, Resignation, and Removal ......................................... 12
11.3 Officers, Records, and Procedures ................................................. 12
11.4 Committee Powers and Duties ....................................................... 12
11.5 Employer to Supply Information .................................................... 13
11.6 Indemnification of Employees Administering Plan ................................... 14
XII. UNFUNDED NATURE OF PLAN ................................................................. 14
12.1 Unfunded Nature of Plan ........................................................... 14
12.2 Discretionary Establishment of Rabbi Trust ........................................ 14
XIII. AMENDMENT OF PLAN ....................................................................... 14
13.1 Right to Amend Plan ............................................................... 14
XIV. TERMINATION OF PLAN ..................................................................... 15
14.1 Right to Terminate Plan ........................................................... 15
14.2 Procedure in the Event of Plan Termination ........................................ 15
XV. MISCELLANEOUS PROVISIONS ................................................................ 15
15.1 Not Contract of Employment ........................................................ 15
15.2 Alienation of Interest Forbidden .................................................. 15
15.3 Payments to Minors and Incompetents ............................................... 16
15.4 Severability ...................................................................... 16
15.5 Withholding of Taxes .............................................................. 16
15.6 Jurisdiction ...................................................................... 16
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INTEGRATED ELECTRICAL SERVICES, INC.
EXECUTIVE SAVINGS PLAN
WITNESSETH:
WHEREAS, INTEGRATED ELECTRICAL SERVICES, INC. (the "Company",
which term shall include its successors) desires to encourage and ensure the
continued service of key executives with the Company and its Subsidiaries by
helping them provide for their future through a nonqualified deferred
compensation plan;
NOW, THEREFORE, effective as of April 1, 2000, the Integrated
Electrical Services, Inc. Executive Savings Plan (the "Plan") is hereby
established as follows:
I.
DEFINITIONS AND CONSTRUCTION
1.1 DEFINITIONS. Where the following words and phrases appear
in the Plan, they shall have the respective meanings set forth below, unless
their context clearly indicates to the contrary.
(a) ACCOUNT: A Member's Employee Account and/or
Company Account.
(b) ACT: The Employee Retirement Income Security Act
of 1974, as amended.
(c) BASE COMPENSATION: The base salary payable to a
Member by an Employer with respect to that portion of the Plan Year in
which the Member is a Key Employee eligible to participate in the Plan.
(d) BENEFICIARY: The person(s) designated by the
Member, on a form provided by and filed with the Company's Human
Resources Department, to receive benefits from the Plan in the event of
his or her death. A Member may change his or her beneficiary
designation at any time. If no designated Beneficiary survives the
Member, the Beneficiary shall be the Member's surviving spouse or, if
none, his or her estate.
(e) BENEFIT PAYMENT DATE: With respect to each
Member, the date on which such Member's benefit is to be paid.
(f) BOARD: The Board of Directors of the Company.
(g) BONUS: The annual bonus payable to a Member by an
Employer with respect to a Plan Year.
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(h) CAUSE: A termination of the Member's employment
by the Company or a Subsidiary due to the Member's gross negligence or
willful misconduct in the performance or nonperformance of the Member's
duties, or any act of dishonesty or fraud that is intended to benefit
the Member at the expense of the Company or a Subsidiary or any act
that causes a material injury to the business or reputation of the
Company or a Subsidiary.
(i) COMMITTEE: The committee of Employees that
administer generally the various employee benefit plans of the Company
and its Subsidiaries, except to the extent a separate committee is
appointed by the Board to administer all or part of this Plan.
(j) COMPANY ACCOUNT. An individual notional account
for a Member, which is credited with the Employer Contributions
credited to the Plan on behalf of the Member, and also credited with or
debited for such Account's allocation of deemed Investment Fund net
income or loss, as the case may be.
(k) CONTRIBUTION PERIOD. The Plan Year, month, day or
other period(s) or date(s), as designated by the Committee, with
respect to which Base Compensation deferrals are credited to Accounts
under the Plan. Bonus deferrals shall be credited as of the date the
Bonus would otherwise be paid in cash.
(l) DISABILITY. The termination of employment with
the Company and its Subsidiaries by a Member that (i) entitles the
Member to receive long-term disability benefits under a long-term
disability plan of the Employer, (ii) entitles the Member to disability
benefits under the Federal Social Security Act, or (iii) in the
opinion of the Committee, based on the report of a physician approved
by the Committee, is due to a physical or mental impairment that
renders the Member unable to perform his duties with the Company or a
Subsidiary and is expected to result in death or continue for not less
than six months.
(m) ELIGIBLE EMPLOYEE: Each Key Employee who is
designated by the Committee as a Member in the Plan.
(n) EMPLOYEE: Each individual who is an employee of
an Employer.
(o) EMPLOYEE ACCOUNT: An individual notional account
for a Member, which is credited with the Employee Contributions
credited on such Member's behalf, and also credited with or debited for
such Account's allocation of deemed Investment Fund net income or net
loss, as the case may be.
(p) EMPLOYEE CONTRIBUTIONS: A Member's before-tax
deferrals credited to the Member's Account under the Plan pursuant to
Section 3.1(a).
-2-
(q) EMPLOYER: The Company and each Subsidiary, other
than any Subsidiary that has been designated by the Committee as being
ineligible to participate in the Plan.
(r) EMPLOYER CONTRIBUTIONS: Matching contributions
credited under the Plan by the Employer on behalf of a Member.
(s) INVESTMENT FUND: An investment vehicle for the
deemed investment of Members' Accounts.
(t) KEY EMPLOYEE: Each Employee who is within a
select group of management or highly compensated employees of the
Company and its Subsidiaries within the meaning of the Act.
(u) MEMBER: Each Eligible Employee or former Eligible
Employee who has an Account under the Plan. Only those Members who are
Eligible Employees shall be eligible to make deferrals under the Plan.
(v) PLAN YEAR: April 1, 2000 through December 31,
2000, and thereafter each calendar year.
(w) RETIREMENT: A Member's termination of employment
with the Company and its Subsidiaries on or after attaining the age of
65, or, if after age 55 and prior to age 65, with the consent of the
Committee.
(x) SUBSIDIARY: Each corporation that is a member of
a controlled group of corporations, within the meaning of section
414(b) of the Code, of which the Employer is a member, each trade or
business (whether or not Incorporated) with which the Employer is under
common control within the meaning of section 414(c) of the Code, and
each member of an affiliated service group, within the meaning of
section 414(m) of the Code, of which the Employer is a member.
(y) TRUST: The "rabbi trust," if any, established
under the Trust Agreement.
(z) TRUST AGREEMENT: The agreement, if any, entered
into between the Company and the Trustee.
(aa) TRUST FUND: The funds and properties, if any,
held pursuant to the provisions of the Trust Agreement, together with
all income, profits, and increments thereto.
(bb) TRUSTEE: The trustee or trustees qualified and
acting under the Trust Agreement at any time.
-3-
(cc) VALUATION DATES: Each business day on which the
principal securities markets are open.
(dd) VESTED INTEREST: The portion of a Member's
Account which is nonforfeitable.
(ee) VESTING SERVICE: The Member's Years of Service
credited under the Company's qualified 401(k) plan.
1.2 NUMBER AND GENDER. Wherever appropriate herein, words used
in the singular shall be considered to include the plural, and words used in the
plural shall be considered to include the singular. The masculine gender, where
appearing in the Plan, shall be deemed to include the feminine gender.
1.3 HEADINGS. The headings of Articles and Sections herein are
included solely for convenience, and if there is any conflict between such
headings and the text of the Plan, the text shall control.
1.4 CONSTRUCTION. It is intended that the Plan constitute an
unfunded, unsecured plan of deferred compensation for a select group of
management or highly compensated employees of the Employer within the meaning of
the Act and that the Plan be unfunded for purposes of the Internal Revenue Code
and Title I of the Act, and all provisions herein shall be construed in
accordance with such intent.
II.
PARTICIPATION
2.1 PARTICIPATION.
(a) Prior to the first day of each Plan Year, the
Committee, in its sole discretion, shall select and notify those
Eligible Employees who are newly eligible to become Members as of such
date. Each such Eligible Employee may become a Member on the first day
of the Plan Year next following such selection and notification, or the
first day of any subsequent Plan Year, by executing and filing with the
Company, prior to such date, the enrollment form prescribed by the
Company.
(b) Notwithstanding Paragraph (a) above, if an
Eligible Employee is selected by the Committee as newly eligible to
become a Member following the first day of a Plan Year, such Eligible
Employee may become a Member on the first day of the calendar month
coincident with or next succeeding such selection, or on the first day
of any subsequent Plan Year, by executing and filing with the Company,
prior to the first day of
-4-
such calendar month or such subsequent Plan Year, the enrollment form
prescribed by the Company.
(c) Subject to the provisions of Section 2.2. a
Member shall remain eligible to participate in the Plan each Plan Year
following his initial year of participation in the Plan.
2.2 TERMINATION OF ELIGIBILITY. Notwithstanding any provision
herein to the contrary, an Eligible Employee who has become a Member shall cease
to be an active Member, i.e., shall cease to be able to make additional
deferrals, effective as of the earliest of: (1) the date he or she is no longer
employed by an Employer, (2) the date he or she is no longer an Eligible
Employee, or (3) any date designated by the Committee.
III.
EMPLOYER CONTRIBUTIONS
3.1 BEFORE-TAX CONTRIBUTIONS.
(a) A Member may elect to defer an integral
percentage of his or her Base Compensation each Computation Period
and/or Bonus for a Plan Year subject to such limit (percentage or
dollar amount), if any, that the Committee may establish for a Plan
Year (which maximum limit may be different for Base Compensation
deferrals and Bonus deferrals). An election to defer Base Compensation
and/or Bonus shall be made by such Member by authorizing his Employer,
in the manner prescribed by the Committee, to reduce his or her Base
Compensation and/or Bonus in the elected amount, and the Employer, in
consideration thereof, agrees to credit an equal amount to the Member's
Employee Account under the Plan. A Member may make separate elections
with respect to his Base Compensation and Bonus. Base Compensation
and/or Bonus not so deferred for a Plan Year by such election(s) shall
be received by such Member in cash. The reduction in a Member's Base
Compensation for a Plan Year pursuant to his or her election hereunder
shall be effected by Base Compensation reductions as of each payroll
period within such Computation Periods following the effective date of
such election. A Bonus deferral shall be effected at the time the Bonus
would otherwise be paid to a Member. A Member's election to defer an
amount of Base Compensation for a Plan Year must be made prior to the
first day of such Plan Year and shall be effective as of the first day
of such Plan Year, while a Bonus deferral election must be made not
less than three months prior to the end of the Plan Year to be
effective for Bonuses paid with respect to such year. However, in the
case of an Eligible Employee who is selected by the Committee as newly
eligible to become a Member after the first day of the Plan Year, his
election to defer Base Compensation for the remainder of such Plan Year
must be made prior to the first day of the month next following his
selection and shall be effective as of the first day of such month, and
any Bonus deferral election must be made not less than three months
prior to the end of that Plan Year unless
-5-
the Eligible Employee first becomes a Member in the last three months
of the year in which event the Bonus deferral election must be made not
later than the time the Member is first eligible to defer his Base
Compensation. Except as provided below, a Member's Base Compensation
and/or Bonus deferral election shall be irrevocable for the Plan Year,
or remainder of the Plan Year, for which such election was made and
shall remain in force and effect for all periods following its
effective date until changed or canceled in accordance with Paragraph
(b), (c) or (d) below or until such Member's participation in the Plan
is terminated pursuant to Section 2.2.
(b) A Member who has elected to defer a portion of
his or her Base Compensation or Bonus may change his or her deferral
election percentage (within the limits set forth in Paragraph (a)
above), effective as of the first day of any subsequent Plan Year, by
electing a new Base Compensation or Bonus reduction percentage in the
manner and within the time period prescribed by the Committee.
(c) A Member may cancel his or her Base Compensation
or Bonus reduction election effective as of the first day of any
subsequent Plan Year, in the manner and within the time period
prescribed by the Committee. A Member who cancels his or her Base
Compensation or Bonus reduction election may resume Base Compensation
or Bonus deferrals, effective as of the first day of any subsequent
Plan Year, by making a new Base Compensation or Bonus reduction
election in the manner and within the time period prescribed by the
Committee.
3.2 EMPLOYER MATCHING CONTRIBUTIONS. The Employer, in its
discretion, may contribute for each Contribution Period a matching Company
Contribution in an amount that equals a designated percentage (selected by and
in the discretion of the Committee) of all or a designated part of the Member's
Base Compensation deferrals and/or Bonus deferrals made pursuant to Section 3.1.
In addition, the Committee may establish different levels of matching
contributions for different classes of Members.
3.3 RETURN OF CONTRIBUTIONS. Anything to the contrary herein
notwithstanding, if contributions are made under a mistake of fact, or, if it is
determined by the Committee that a Member was not an Eligible Employee for all
or any portion of the Contribution Period, the applicable portion of the
contributions made in error shall be returned to the Employer.
IV.
ALLOCATIONS
4.1 ALLOCATION OF CONTRIBUTIONS. Deferrals made for a
Contribution Period, if any, shall be credited as of the last day of such
Contribution Period to the Accounts of the Members who are Eligible Employees on
the last day of the Contribution Period or whose employment terminated during
the Contribution Period due to death, Disability or Retirement.
-6-
4.2 ALLOCATION OF FORFEITURES. Any amounts that are forfeited
under the Plan shall be applied to reduce future Employer Contributions
otherwise to be credited under the Plan.
4.3 ALLOCATION OF DEEMED NET INCOME OR LOSS AND CHANGES IN
ACCOUNT VALUE.
(a) As of each Valuation Date, the Committee shall
determine or cause to be determined the fair market value and the
deemed net income (or net loss) of each Investment Fund for the period
elapsed since the next preceding Valuation Date. The deemed net income
(or net loss) of each Investment Fund since the next preceding
Valuation Date shall be ascertained by the Committee in such manner as
it deems appropriate.
(b) For purposes of allocations of deemed net income
(or net loss), each Member's Account shall be divided into subaccounts
to reflect such Member's deemed investment designation in a particular
Investment Fund or Investment Funds pursuant to Article V. As of each
Valuation Date, the deemed net income (or net loss) of each Investment
Fund, separately and respectively, shall be allocated among the
corresponding subaccounts of the Members who had such corresponding
subaccounts on the next preceding Valuation Date, and each such
corresponding subaccount shall be credited with (or debited for) that
portion of such deemed net income (or net loss) that the value of
each such corresponding subaccount on such next preceding Valuation
Date was of the value of all such corresponding subaccounts on such
date; provided, however, that the value of such subaccounts as of the
next preceding Valuation Date shall be reduced by the amount of any
distributions made therefrom since the next preceding Valuation Date.
(c) Except as otherwise provided herein, so long as
there is any balance in any Account (including an Account payable to a
Beneficiary of a Member), such Account shall continue to receive
allocations pursuant to this Section 4.3.
V.
INVESTMENT OF ACCOUNTS
5.1 DEEMED INVESTMENT OF ACCOUNTS.
(a) Each Member shall designate, in accordance with
the procedures established from time to time by the Committee, the
Member's preference for the manner in which the amounts allocated to
his or her Accounts shall be deemed to be invested from among the
Investment Funds made available for such designation from time to time
by the Committee. With respect to a Member's Accounts, such Member may
designate one of such Investment Funds for all the amounts allocated to
such Accounts or he or she may split the investment of the amounts
allocated to such Accounts between such Investment Funds in such
increments as the Committee may prescribe. If a Member fails to make a
designation, then his or her Accounts shall be deemed to be invested in
the Investment Fund or
-7-
Investment Funds designated by the Committee from time to time for such
default in a uniform and nondiscriminatory manner. Unless the Committee
provides otherwise, an investment election shall be applicable to all
Accounts of the Member.
(b) A Member may change his or her deemed investment
designation for future contributions to be allocated to his or her
Accounts. Any such change shall be made in accordance with the
procedures established by the Committee, and the frequency of such
changes may be limited by the Committee.
(c) A Member may change his or her deemed investment
designation with respect to the amounts already allocated to his or her
Accounts. Any such change shall be made in accordance with the
procedures established by the Committee, and the frequency of such
changes may be limited by the Committee.
(d) Notwithstanding anything in the Plan seemingly to
the contrary, a Member's Accounts (and, thus, benefits payable by the
Employer pursuant to the Plan) shall be determined based solely on the
value of the Investment Fund(s) of the Members Account(s). The
Employers shall not be liable for any losses incurred by a Member under
the Plan due to Investment Fund losses and the Employers do not
guarantee the amount of any deferral or any Investment Fund.
VI.
RETIREMENT BENEFITS
6.1 RETIREMENT BENEFITS. Except as set forth in this Article
VI, a Member shall not possess any right to benefits from the Plan upon
termination of a Member's employment with the Employer and the Subsidiaries.
6.2 ACCOUNT BALANCES. Each Member whose employment is
terminated for any reason other than Cause shall be entitled to a benefit, which
shall be payable at the time and in the form provided below in Article VIII,
equal in value to the amount credited to his or her Account as of the applicable
Benefit Payment Date.
6.3 DETERMINATION OF VESTED INTEREST.
(a) Except as provided below, a Member shall have a
100% Vested Interest in all his Accounts.
(b) Notwithstanding the above, a Member who is
terminated for Cause shall forfeit his Company Account.
-8-
VII.
DEATH BENEFITS
7.1 DEATH BENEFITS. Upon the death of a Member, the Member's
Beneficiary shall be entitled to receive the Member's Account paid in the form
of quarterly installments for 10 years in the same manner as provided in Section
8.2(b) or, if designated by the Member prior to his death, in a lump sum or for
a shorter installment period. Notwithstanding the foregoing, the Committee, in
its discretion, may accelerate all or any part of any installment payments.
7.2 DESIGNATION OF BENEFICIARIES. Each Member shall have the
right to designate the Beneficiary or Beneficiaries to receive payment of his or
her benefit in the event of his or her death. Each such designation shall be
made by executing the beneficiary designation form prescribed by the Committee
and delivering such form to the Committee. Any such designation may be changed
at any time by such Member by execution of and delivery to the Committee a new
designation in accordance with this Section.
VIII.
TIME AND FORM OF PAYMENT OF BENEFITS
8.1 TIME OF PAYMENT. A Member's Account shall be paid, or
shall commence, as applicable, on or as soon as reasonably practical after the
date the Member terminates his employment with the Company and its Subsidiaries.
8.2 FORMS OF BENEFIT PAYMENTS.
(a) All benefits shall be paid in cash in one of the
following forms as elected by the Member:
(i) a single lump sum payment; or
(ii) if his termination is on or after age
55, in quarterly installment payments (e.g., 1/10, 1/9, etc.
of the Account balance on the installment date) for a term
certain not to exceed 10 years (as designated by the Member)
and, in the event of such Member's death prior to the end of
the designated term, any unpaid balance shall be paid in a
lump sum to his designated Beneficiary. If the Member
terminates prior to reaching age 55, distribution shall be in
a lump sum.
(b) A Member must elect, on the form prescribed by
the Committee, one of the above forms of payment on or before the
beginning of the Plan Year in which he first becomes a Member. Except
as provided in Paragraph (c) below, such election shall be irrevocable
by the Member and shall remain in effect for deferrals in all
subsequent Plan
-9-
Years. In the event a Member fails to elect the form in which his
benefit payments are to be made prior to the date he first becomes a
Member, such benefit payments shall be deemed to have been elected by
such Member to be in the form of a single lump sum.
(c) With the consent of the Committee, a Member may
change his elected form of benefit payment with respect to all of his
Accounts; provided, that, no such change shall be effective if within
12 months of the date of such change the Member's employment terminates
for any reason other than death or as a result of a total and permanent
disability that occurs after such change.
8.3 CASH-OUT OF BENEFIT. The Committee, in its sole
discretion, may accelerate the payment of a terminated Member's or a
Beneficiary's Accounts at any time, notwithstanding the form of benefit payment
elected by the Member.
8.4 CLAIMS REVIEW.
(a) In any case in which a claim for Plan benefits of
a Member or Beneficiary is denied or modified, the Committee shall
furnish written notice to the claimant within 90 days (or within 180
days if additional information requested by the Committee necessitates
an extension of the 90-day period and the claimant is so informed prior
to the expiration of the initial 90-day period), which notice shall:
(i) State the specific reason or reasons for
the denial or modification;
(ii) Provide specific reference to pertinent
Plan provisions on which the denial or modification is based;
(iii) Provide a description of any
additional material or information necessary for the Member,
his or her Beneficiary, or representative to perfect the claim
and an explanation of why such material or information is
necessary; and
(iv) Explain the Plan's claim review
procedure as provided in Paragraph (b) below.
(b) In the event a claim for Plan benefits is denied
or modified, if the Member, his or her Beneficiary, or a representative
of such Member or Beneficiary desires to have such denial or
modification reviewed, he must, within 60 days following receipt of the
notice of such denial or modification, submit a written request for
review by the Committee of its initial decision. In connection with
such request, the Member, his or her Beneficiary, or the representative
of such Member or Beneficiary may review any pertinent documents upon
which such denial or modification was based and may submit issues and
comments in writing. Within 60 days following such request for review,
the Committee
-10-
shall, after providing a full and fair review, render its final
decision in writing to the Member, his or her Beneficiary, or the
representative of such Member or Beneficiary stating specific reasons
for such decision and making specific references to pertinent Plan
provisions upon which the decision is based. If special circumstances
require an extension of such 60-day period, the Committee's decision
shall be rendered as soon as possible, but not later than 120 days
after receipt of the request for review. If an extension of time for
review is required, written notice of the extension shall be furnished
to the Member, Beneficiary, or the representative of such Member or
Beneficiary prior to the commencement of the extension period.
IX.
IN-SERVICE WITHDRAWALS
9.1 EMERGENCY WITHDRAWALS. A Member who has an unforeseeable
financial emergency, as determined by and in the discretion of the Committee,
may withdraw from his Accounts an amount not to exceed the lesser of (1) the
amount credited to such Accounts or (2) the amount determined by the Committee
as being necessary to meet the Member's unforeseeable financial emergency,
considering for such determination, any change in such Member's financial
condition that will result from a cancellation of his deferral election(s) for
the balance of that Plan Year. An "unforeseeable financial emergency" means an
unexpected need of a Member for cash, which (i) arises from an illness, casualty
loss, sudden financial reversal, or such other unforeseeable occurrence that is
caused by an event beyond the control of such Member, (ii) would result in
severe financial hardship to such Member if his deferral election was not
canceled and/or if a withdrawal pursuant to this Section was not permitted, and
(iii) is not reasonably satisfiable from other resources of such Member. Cash
needs arising from foreseeable events, such as the purchase of a house or
education expenses for a Member, his spouse, or his children, shall not be
considered to be the result of an unforeseeable financial emergency.
9.2 ADVANCE NOTICE WITHDRAWALS. A Member may, by giving
proper written notice to the Committee at least one full Plan Year in advance of
the designated date of withdrawal, withdraw all or a specified portion of his
Accounts as of such designated future date.
9.3 PENALTY WITHDRAWALS. A Member may, without one Plan Year
advance written notice, but only once in any Plan Year, withdraw all or a
portion of his Accounts by giving advance notice in the manner prescribed by the
Committee; provided, however, that upon any such withdrawal the Member shall
forfeit an amount of his Accounts equal to 10% of the amount then being
withdrawn. In addition, a Member who makes such a withdrawal shall be suspended
from making any further deferrals under the Plan beginning with the date of such
withdrawal and continuing through the end of the Plan Year following the Plan
Year of the withdrawal.
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X.
LOANS
10.1 NO LOANS. No loans to Members shall be made under the
Plan.
XI.
ADMINISTRATION OF THE PLAN
11.1 APPOINTMENT OF COMMITTEE. The general administration of
the Plan shall be vested in the Committee. The Committee shall be the Plan
"administrator" with respect to the general administration of the Plan.
11.2 TERM, VACANCIES, RESIGNATION, AND REMOVAL. Each member of
the Committee shall serve until he or she resigns, dies, or is removed by the
Board. At any time during his term of office, a member of the Committee may
resign by giving written notice to the Committee, such resignation to become
effective upon the appointment of a substitute member or, if earlier, the lapse
of 30 days after such notice is given as herein provided. At any time during his
term of office, and for any reason, a member of the Committee may be removed by
the Board with or without cause, and the Board may in its discretion fill any
vacancy that may result therefrom.
11.3 OFFICERS, RECORDS, AND PROCEDURES. The Committee may
select officers and may appoint a secretary who need not be a member of the
Committee. The Committee shall keep appropriate records of its proceedings and
the administration of the Plan and shall make available for examination during
business hours to any Member or Beneficiary such records as pertain to that
individual's interest in the Plan. The Committee shall designate the person or
persons who shall be authorized to sign for the Committee and, upon such
designation, the signature of such person or persons shall bind the Committee.
11.4 COMMITTEE POWERS AND DUTIES. The Committee shall
supervise the administration and enforcement of the Plan according to the terms
and provisions hereof and shall have all powers necessary to accomplish these
purposes, including, but not by way of limitation, the right, power, authority,
and duty:
(a) To make rules, regulations, and bylaws for the
administration of the Plan that are not inconsistent with the terms and
provisions hereof, provided such rules, regulations, and bylaws are
evidenced in writing and copies thereof are delivered to the Company,
and to enforce the terms of the Plan and the rules and regulations
promulgated thereunder by the Committee;
(b) To construe in its discretion all terms,
provisions, conditions, and limitations of the Plan. In all cases, the
construction necessary for the Plan to qualify as an
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unfunded plan of deferred compensation for a select group of management
or highly compensated employees under the applicable provisions of the
Act and the Internal Revenue Code shall control:
(c) To correct any defect or to supply any omission
or to reconcile any inconsistency that may appear in the Plan in such
manner and to such extent as it shall deem in its discretion expedient
to effectuate the purposes of the Plan;
(d) To employ and compensate such accountants,
attorneys, investment advisors, and other agents, employees, and
independent contractors as the Committee may deem necessary or
advisable for the proper and efficient administration of the Plan;
(e) To determine in its discretion all questions
relating to eligibility;
(f) To make a determination in its discretion as to
the right of any person to a benefit under the Plan and to prescribe
procedures to be followed by distributees in obtaining benefits
hereunder;
(g) To prepare, file, and distribute, in such manner
as the Committee determines to be appropriate, such information and
material as is required by the reporting and disclosure requirements of
the Act;
(h) To furnish the Employer any information necessary
for the preparation of such Employer's tax return or other information
that the Committee determines in its discretion is necessary for a
legitimate purpose;
(i) To require and obtain from the Employer and the
Members any information or data that the Committee determines is
necessary for the proper administration of the Plan;
(j) To receive and review reports from the Trustee,
if any, and from investment managers, if any, as to the financial
condition of the Trust Fund, if any, including its receipts and
disbursements; and
(k) To establish or designate Investment Funds as
deemed investment options as provided in Article V.
11.5 EMPLOYER TO SUPPLY INFORMATION. The Employer shall supply
full and timely information to the Committee, including, but not limited to,
information relating to each Member's compensation, age, retirement, death, or
other cause of termination of employment and such other pertinent facts as the
Committee may require. When making a determination in connection with the Plan,
the Committee shall be entitled to rely upon the aforesaid information furnished
by the Employer.
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11.6 INDEMNIFICATION OF EMPLOYEES ADMINISTERING PLAN. The
Company shall indemnify and hold harmless each member of the Committee who is an
Employee and each other Employee who is a delegate of the Committee against any
and all expenses and liabilities arising out of such individual's administrative
functions or fiduciary responsibilities, including any expenses and liabilities
that are caused by or result from an act or omission constituting the negligence
of such individual in the performance of such functions or responsibilities, but
excluding expenses and liabilities that are caused by or result from such
individual's own gross negligence or willful misconduct. Expenses against which
such individual shall be indemnified hereunder shall include, without
limitation, the amounts of any settlement or judgment, costs, counsel fees, and
related charges reasonably incurred in connection with a claim asserted or a
proceeding brought or settlement thereof.
XII.
UNFUNDED NATURE OF PLAN
12.1 UNFUNDED NATURE OF PLAN. The Plan is intended to
constitute an unfunded, unsecured plan of deferred compensation for a select
group of management or highly compensated employees of the Employer. Further, it
is the intention of the Employer that the Plan be unfunded for purposes of the
Internal Revenue Code and Title I of the Act. The Plan constitutes a mere
promise by the Employer to make benefit payments in the future. Plan benefits
herein provided are to be paid out of the Employer's general assets, and Members
(and their Beneficiaries) shall have the status of general unsecured creditors
of the Employer.
12.2 DISCRETIONARY ESTABLISHMENT OF RABBI TRUST.
(a) The Committee may cause the establishment of a
Trust and authorize the Company to enter into the Trust Agreement. The
Employer may transfer money or other property to the Trustee, and the
Trustee shall pay Plan benefits to Members and their Beneficiaries out
of the Trust Fund. In such event, the Employer shall remain the owner
of all assets in the Trust Fund and the assets shall be subject to the
claims of general creditors of the Employer if the Employer ever
becomes insolvent. No Member or Beneficiary shall have any preferred
claim to, or any beneficial ownership interest in, any assets of the
Trust Fund.
XIII.
AMENDMENT OF PLAN
13.1 RIGHT TO AMEND PLAN. The Company, by action of the Board
or the Committee, shall have the absolute and unconditional right to amend any
or all of the provisions of the Plan at any time, in whole or in part; provided,
however, that (i) no amendment shall be made that would materially impair the
rights of a Member with respect to the amounts allocated to such
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Member's Account as of the date of such amendment and (ii) no amendment made by
the Committee may materially increase the obligations of the Company under the
Plan. All such amendments shall be executed by an authorized officer of the
Company.
XIV.
TERMINATION OF PLAN
14.1 RIGHT TO TERMINATE PLAN. The Board shall have the
absolute and unconditional right to terminate the Plan at any time hereafter on
behalf of the Company and all Employers.
14.2 PROCEDURE IN THE EVENT OF PLAN TERMINATION.
(a) Unless the Plan is otherwise amended prior to
dissolution of the Company, the Plan shall terminate as of the date of
dissolution of the Company.
(b) Upon termination of the Plan, any previously
unallocated contributions and deemed net income (or net loss) shall be
allocated among the Accounts of the Members on such date of termination
according to the provisions of the Plan, as if such date of termination
were a Valuation Date. Thereafter, any deemed net income (or net loss)
shall continue to be allocated to the Accounts of the Members until the
balances of the Accounts are distributed.
(c) In the case of a termination of the Plan, the
balance of the Account of a Member shall be immediately paid to such
Member.
XV.
MISCELLANEOUS PROVISIONS
15.1 NOT CONTRACT OF EMPLOYMENT. The adoption and maintenance
of the Plan shall not be deemed to be a contract between the Employer and any
person or to be consideration for the employment of any person. Nothing herein
contained shall be deemed to give any person the right to be retained in the
employ of the Employer or to restrict the right of the Employer to discharge any
person at any time, nor shall the Plan be deemed to give the Employer the right
to require any person to remain in the employ of the Employer or to restrict any
person's right to terminate his employment at any time.
15.2 ALIENATION OF INTEREST FORBIDDEN. Except as may be
provided by any applicable law, no right or interest of any kind in any benefit
under the Plan shall be transferable or assignable by any Member or any
Beneficiary or be subject to anticipation, adjustment, alienation, encumbrance,
garnishment, attachment, execution, or levy of any kind.
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15.3 PAYMENTS TO MINORS AND INCOMPETENTS. If a Member or
Beneficiary entitled to receive a benefit under the Plan is a minor, is
determined by the Committee in its discretion to be incompetent, or is adjudged
by a court of competent jurisdiction to be legally incapable of giving valid
receipt and discharge for a benefit provided under the Plan, the Committee may
pay such benefit to the duly appointed guardian or conservator of such Member or
Beneficiary for the account of such Member or Beneficiary. If no guardian or
conservator has been appointed for such Member or Beneficiary, the Committee may
pay such benefit to any third party who is determined by the Committee, in its
sole discretion, to be authorized to receive such benefit for the account of
such Member or Beneficiary. Such payment shall operate as a full discharge of
all liabilities and obligations of the Committee, the Employer, and any
fiduciary of the Plan with respect to such benefit.
15.4 SEVERABILITY. If any provision of this Plan shall be held
illegal or invalid for any reason, said illegality or invalidity shall not
affect the remaining provisions hereof, but each provision shall be fully
severable and the Plan shall be construed and enforced as if said illegal or
invalid provision had never been included herein.
15.5 WITHHOLDING OF TAXES. The Company shall withhold or cause
to be withheld from a Member's current compensation and from all payments made
to Members and Beneficiaries pursuant to the Plan all applicable income, FICA
and any other taxes required to be withheld by the payor.
15.6 JURISDICTION. The situs of the Plan hereby created is
Texas. All provisions of the Plan shall be construed in accordance with the laws
of Texas except to the extent preempted by federal law.
EXECUTED for all purposes effective as provided above.
INTEGRATED ELECTRICAL SERVICES, INC.
By: /s/ KENT M. EDWARDS
-----------------------------------
Name: Kent M. Edwards
---------------------------------
Title: Vice President
--------------------------------
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EXHIBIT 99.1
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with this Quarterly Report of Integrated Electrical Services, Inc.
(the "Company") on Form 10-Q for the period ending December 31, 2002 (the
"Report"), I, Herbert R. Allen, Chief Executive Officer of the Company, certify,
pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002, that:
(1) The Report fully complies with the requirements of section 13(a) or
15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all
material respects, the financial condition and result of operations
of the Company.
/s/ Herbert R. Allen
- -------------------------------
Herbert R. Allen
Chief Executive Officer
January 29, 2003
EXHIBIT 99.2
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with this Quarterly Report of Integrated Electrical Services, Inc.
(the "Company") on Form 10-Q for the period ending December 31, 2002 (the
"Report"), I, William W. Reynolds, Chief Financial Officer of the Company,
certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906
of the Sarbanes-Oxley Act of 2002, that:
(1) The Report fully complies with the requirements of section 13(a) or
15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all
material respects, the financial condition and result of operations
of the Company.
/s/ William W. Reynolds
- --------------------------------
William W. Reynolds
Chief Financial Officer
January 29, 2003
