e10vqza
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q/A
Amendment No. 2
(Mark One)
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þ |
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the Quarterly Period Ended December 31, 2005
OR
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o |
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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)
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Delaware
(State or other jurisdiction of
incorporation or organization)
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76-0542208
(I.R.S. Employer
Identification No.) |
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1800 West Loop South
Suite 500
Houston, Texas
(Address of principal executive offices)
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77027-3233
(zip code) |
Registrants 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 þ NO o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated
filer, or a non-accelerated filer. See definition of accelerated filer and large accelerated
filer in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer o Accelerated filer þ
Non-accelerated filer o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of
the Exchange Act). Yes o NO þ
The number of shares outstanding as of February 6, 2006 of the issuers common stock was
36,876,929 and of the issuers restricted voting common stock was 2,605,709. The number of shares
outstanding as of June 22, 2006 of the issuers common stock was 15,326,885.
INTEGRATED ELECTRICAL SERVICES, INC. AND SUBSIDIARIES
INDEX
Explanatory Note
On February 9, 2006, Integrated Electrical Services, Inc, (the Company) filed its Quarterly
Report on Form 10-Q for the quarter ended December 31, 2005 (the Original Quarterly Report). On
June 29, 2006, the Company filed Amendment No. 1 to its Original Quarterly Report to correct a
misstatement of insurance expense for the three months ended December 31, 2005 (Amendment No. 1).
The Company is filing this Amendment No. 2 to its Amendment No. 1 Quarterly Report to correct a
misstatement for inventory at one of the Companys subsidiaries for the three months ended
December 31, 2005.
The misstatement of inventory understated cost of services on the Consolidated Statement of
Operations by $0.2 million for the three months ended December 31, 2005. On the Consolidated
Statements of Operations, net loss from continuing operations and net loss increased by this amount
for the three months ended December 31, 2005. Accounts receivable and inventory on the Consolidated
Balance Sheet at December 31, 2005 were understated by $0.1 million and overstated by $0.3 million,
respectively. There was no effect on net cash flows from operating, investing or financing
activities. In addition, during the financial reporting process for
the restatement of these quarterly financial statements and
subsequent to the filing of the Companys Form 10-K for the
year ended September 30, 2006, the Company determined there were
items that required reclassification between continuing and
discontinued operations related to the three months ended
December 31, 2004 and 2005. There was no impact to the overall
financial results of the Company.
The Items of this Amendment No. 2 to the Amendment No. 1 Quarterly Report which are amended
and restated are as follows: Item 1 Financial Statements (including Note 2, Restatement of
Quarterly Financial Statements, Note 3, Business Divestitures, Note 5, Earnings Per Share, and Note
6, Operating Segments, to the Consolidated Financial Statements), Item 2 Managements Discussion
and Analysis of Financial Condition and Results of Operations, and Item 4 Controls and
Procedures. Further, this Form 10-Q/A Amendment No. 2 contains new Exhibits 31.1, 31.2, 32.1 and
32.2 dated the date of the filing of this Form 10-Q/A.
The remaining Items contained within this Form 10-Q/A consist of all other Items originally
contained in the Original Quarterly Report and Amendment No. 1 Quarterly Report. This Form 10-Q/A
does not reflect events occurring after the filing of the Original Quarterly Report, nor modifies
or updates those disclosures in any way other than as required to reflect the effects of the
restatement.
2
Unless the context otherwise indicates, all references in this report to IES, the Company,
we, us, or our are to Integrated Electrical Services, Inc. and its subsidiaries.
DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS
This quarterly report on Form 10-Q/A includes certain statements that may be deemed
forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and
Section 21E of the Securities Exchange Act of 1934, all of which are based upon various estimates
and assumptions that the Company believes to be reasonable as of the date hereof. These statements
involve risks and uncertainties that could cause the Companys actual future outcomes to differ
materially from those set forth in such statements. Such risks and uncertainties include, but are
not limited to:
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the Companys ability to continue as a going concern; |
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the Companys ability to meet debt service obligations and related financial and other
covenants, and the possible resulting material default under the Companys credit agreements
which is not waived or rectified; |
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limitations on the availability of sufficient credit to fund working capital; |
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limitations on the availability and the increased costs of surety bonds required for certain projects; |
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inability to reach agreements with the Companys surety companies to provide sufficient bonding capacity; |
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risk associated with failure to provide surety bonds on jobs where the Company has
commenced work or are otherwise contractually obligated to provide surety bonds; |
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the inherent uncertainties relating to estimating future operating results and the
Companys ability to generate sales, operating income, or cash flow; |
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potential difficulty in addressing a material weakness in the Companys accounting systems
that has been identified by the Company and its independent auditors; |
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fluctuations in operating results because of downturns in levels of construction,
seasonality and differing regional economic conditions; |
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general economic and capital markets conditions, including fluctuations in interest rates; |
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inaccurate estimates used in entering into and executing contracts; |
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difficulty in managing the operation of existing entities; |
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the high level of competition in the construction industry both from third parties and ex-employees; |
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increases in costs or limitations on availability of labor, especially qualified electricians, steel, copper and gasoline; |
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accidents resulting from the numerous physical hazards associated with the Companys work; |
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loss of key personnel; |
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business disruption and costs associated with the Securities and Exchange Commission
investigation or shareholder derivative action now pending; |
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litigation risks and uncertainties; |
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unexpected liabilities or losses associated with warranties or other liabilities
attributable to the retention of the legal structure or retained liabilities of business
units where the Company has sold substantially all of the assets; |
3
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the loss of productivity, either at the corporate office or operating level; |
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disruptions or inability to effectively manage internal growth or consolidations; |
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inability of subsidiaries to incorporate new accounting, control, and operating procedures; |
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inaccuracies in estimating revenues and percentage of completion on contracts; |
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recent adverse publicity about the Company, including its Chapter 11 filing and the receipt
by IES of repurchase notices sent by the holders of the senior convertible notes, purportedly
pursuant to the term of the senior convertible notes indenture, which IES believes were
wrongfully sent, but which IES was required to publicly disclose; and |
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lack of an established trading market for IES common stock. |
You should understand that the foregoing as well as other risk factors discussed in this
document, including those listed in Part II. Item 1A. of this report under the heading Risk
Factors, and in our annual report on Form 10-K for the year ended September 30, 2005, all of which
could cause future outcomes to differ materially from those expressed in such forward looking
statements. We undertake no obligation to publicly update or revise information concerning the
Companys restructuring efforts, borrowing availability, or its cash position or any
forward-looking statements to reflect events or circumstances that may arise after the date of this
report. Forward-looking statements are provided in this Form 10-Q/A pursuant to the safe harbor
established under the private Securities Litigation Reform Act of 1995 and should be evaluated in
the context of the estimates, assumptions, uncertainties, and risks described herein.
General information about us can be found at www.ies-co.com under Investor Relations. Our
annual report on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K, as well
as any amendments to those reports, are available free of charge through our website as soon as
reasonably practicable after we file them with, or furnish them to, the Securities and Exchange
Commission.
4
INTEGRATED ELECTRICAL SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE INFORMATION)
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September 30, |
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December 31, |
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2005 |
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2005 |
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(Audited) |
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(Unaudited) |
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(Restated) |
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ASSETS
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CURRENT ASSETS: |
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Cash and cash equivalents |
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$ |
28,349 |
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$ |
24,879 |
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Restricted cash |
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9,596 |
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19,090 |
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Accounts receivable: |
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Trade, net of allowance of $2,925 and $1,645 respectively |
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141,824 |
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141,534 |
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Retainage |
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33,878 |
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31,487 |
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Costs and estimated earnings in excess of billings on uncompleted contracts |
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17,699 |
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15,837 |
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Inventories |
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21,572 |
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21,972 |
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Prepaid expenses and other current assets |
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22,271 |
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23,856 |
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Assets held for sale associated with discontinued operations |
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75,233 |
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55,548 |
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Total current assets |
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350,422 |
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334,203 |
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PROPERTY AND EQUIPMENT, net |
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24,266 |
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23,510 |
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GOODWILL |
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24,343 |
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24,343 |
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OTHER NON-CURRENT ASSETS |
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13,823 |
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14,389 |
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Total assets |
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$ |
412,854 |
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$ |
396,445 |
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LIABILITIES AND STOCKHOLDERS EQUITY |
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CURRENT LIABILITIES: |
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Current maturities of long-term debt |
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$ |
32 |
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$ |
26 |
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Accounts payable and accrued expenses |
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100,570 |
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99,303 |
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Billings in excess of costs and estimated earnings on uncompleted contracts |
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26,868 |
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26,705 |
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Liabilities related to assets held for sale associated with discontinued operations |
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31,691 |
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18,268 |
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Senior convertible notes, net |
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50,691 |
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50,711 |
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Senior subordinated notes, net |
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173,134 |
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173,115 |
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Total current liabilities |
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382,986 |
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368,128 |
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LONG-TERM DEBT, net of current maturities |
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27 |
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139 |
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OTHER NON-CURRENT LIABILITIES |
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13,982 |
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14,273 |
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Total liabilities |
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396,995 |
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382,540 |
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COMMITMENTS AND CONTINGENCIES |
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STOCKHOLDERS EQUITY: |
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Preferred stock, $.01 par value, 10,000,000 shares authorized, none issued and outstanding |
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Common stock, $.01 par value, 100,000,000 shares authorized, 39,024,209 and 39,033,426
shares issued, respectively |
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390 |
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390 |
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Restricted voting common stock, $.01 par value, 2,605,709 shares issued, authorized and
outstanding |
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26 |
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26 |
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Treasury stock, at cost, 2,416,377 and 2,338,060 shares, respectively |
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(13,022 |
) |
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(12,544 |
) |
Unearned restricted stock |
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(1,183 |
) |
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Additional paid-in capital |
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430,996 |
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429,776 |
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Retained deficit |
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(401,348 |
) |
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(403,743 |
) |
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Total stockholders equity |
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15,859 |
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13,905 |
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Total liabilities and stockholders equity |
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$ |
412,854 |
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$ |
396,445 |
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The accompanying notes to condensed consolidated financial statements are an integral part of these financial statements.
5
INTEGRATED ELECTRICAL SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE INFORMATION)
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Three Months Ended |
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December 31, |
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2004 |
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2005 |
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(Unaudited) |
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(Restated) |
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Revenues |
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$ |
205,678 |
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$ |
226,666 |
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Cost of services |
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174,188 |
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192,172 |
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Gross profit |
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31,490 |
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34,494 |
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Selling, general and administrative expenses |
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29,522 |
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29,740 |
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Income from operations |
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1,968 |
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4,754 |
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Other (income) expense: |
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Interest expense, net |
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8,844 |
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5,882 |
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Other (income) expense, net |
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268 |
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(53 |
) |
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Interest and other expense, net |
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9,112 |
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5,829 |
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Loss from continuing operations before income taxes |
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(7,144 |
) |
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(1,075 |
) |
Provision for income taxes |
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1,681 |
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699 |
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Net loss from continuing operations |
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(8,825 |
) |
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(1,774 |
) |
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Discontinued operations (Note 3) |
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Loss from discontinued operations (including gain (loss) on disposal of $(86) and $454) |
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(10,160 |
) |
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(910 |
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Benefit for income taxes |
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(1,377 |
) |
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(289 |
) |
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Net loss from discontinued operations |
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(8,783 |
) |
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(621 |
) |
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Net loss |
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$ |
(17,608 |
) |
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$ |
(2,395 |
) |
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Basic loss per share: |
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Continuing operations |
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$ |
(0.59 |
) |
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$ |
(0.12 |
) |
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Discontinued operations |
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$ |
(0.59 |
) |
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$ |
(0.04 |
) |
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Total |
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$ |
(1.18 |
) |
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$ |
(0.16 |
) |
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Diluted loss per share: |
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Continuing operations |
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$ |
(0.59 |
) |
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$ |
(0.12 |
) |
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Discontinued operations |
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$ |
(0.59 |
) |
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$ |
(0.04 |
) |
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Total |
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$ |
(1.18 |
) |
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$ |
(0.16 |
) |
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Shares used in the computation of loss per share (Note 5): |
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Basic |
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14,970,502 |
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14,970,502 |
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Diluted |
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14,970,502 |
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14,970,502 |
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The accompanying notes to condensed consolidated financial statements are an integral part of these financial statements.
6
INTEGRATED ELECTRICAL SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS EQUITY
(IN THOUSANDS, EXCEPT SHARE INFORMATION)
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Restricted Voting |
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Unearned |
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Additional |
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Total |
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Common Stock |
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Common Stock |
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Treasury Stock |
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Restricted |
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Paid-In |
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Retained |
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Stockholders |
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Shares |
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Amount |
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Shares |
|
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Amount |
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Shares |
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Amount |
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|
Stock |
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Capital |
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(Deficit) |
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Equity |
|
BALANCE, September
30, 2005 |
|
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39,024,209 |
|
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$ |
390 |
|
|
|
2,605,709 |
|
|
$ |
26 |
|
|
|
(2,416,377 |
) |
|
$ |
(13,022 |
) |
|
$ |
(1,183 |
) |
|
$ |
430,996 |
|
|
$ |
(401,348 |
) |
|
$ |
15,859 |
|
Issuance of
restricted stock
(unaudited) |
|
|
9,217 |
|
|
|
|
|
|
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|
|
|
|
|
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23 |
|
|
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23 |
|
Vesting of
restricted stock
(unaudited) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
78,317 |
|
|
|
478 |
|
|
|
|
|
|
|
(478 |
) |
|
|
|
|
|
|
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Adoption of SFAS 123R |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,183 |
|
|
|
(1,183 |
) |
|
|
|
|
|
|
|
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Non-cash
compensation
(unaudited) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
418 |
|
|
|
|
|
|
|
418 |
|
Net loss (unaudited)
(restated) |
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(2,395 |
) |
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|
(2,395 |
) |
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BALANCE, December
31, 2005 (unaudited)
(restated) |
|
|
39,033,426 |
|
|
$ |
390 |
|
|
|
2,605,709 |
|
|
$ |
26 |
|
|
|
(2,338,060 |
) |
|
$ |
(12,544 |
) |
|
|
|
|
|
$ |
429,776 |
|
|
$ |
(403,743 |
) |
|
$ |
13,905 |
|
|
|
|
|
|
|
|
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|
|
|
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The accompanying notes to condensed consolidated financial statements are an integral part of these financial statements.
7
INTEGRATED ELECTRICAL SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
|
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|
|
|
|
|
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|
|
Three Months Ended |
|
|
|
December 31, |
|
|
|
2004 |
|
|
2005 |
|
|
|
(Unaudited) |
|
|
|
|
|
|
|
(Restated) |
|
CASH FLOWS FROM OPERATING ACTIVITIES: |
|
|
|
|
|
|
|
|
Net loss |
|
$ |
(17,608 |
) |
|
$ |
(2,395 |
) |
Adjustments to reconcile net income to net cash provided by operating activities: |
|
|
|
|
|
|
|
|
Net loss from discontinued operations |
|
|
8,783 |
|
|
|
621 |
|
Bad debt expense |
|
|
392 |
|
|
|
361 |
|
Deferred financing cost amortization |
|
|
807 |
|
|
|
608 |
|
Depreciation and amortization |
|
|
2,115 |
|
|
|
1,666 |
|
Impairment of long-lived assets |
|
|
70 |
|
|
|
|
|
Gain on sale of property and equipment |
|
|
(89 |
) |
|
|
(41 |
) |
Non-cash compensation expense |
|
|
210 |
|
|
|
441 |
|
Non-cash interest charge for embedded conversion option |
|
|
2,676 |
|
|
|
|
|
Equity in losses of investment |
|
|
264 |
|
|
|
|
|
Deferred income tax expense |
|
|
183 |
|
|
|
6 |
|
Changes in operating assets and liabilities, net of the effect of discontinued operations: |
|
|
|
|
|
|
|
|
Accounts receivable |
|
|
8,633 |
|
|
|
2,320 |
|
Inventories |
|
|
(1,447 |
) |
|
|
(400 |
) |
Costs and estimated earnings in excess of billings on uncompleted contracts |
|
|
(1,094 |
) |
|
|
1,862 |
|
Prepaid expenses and other current assets |
|
|
(9,782 |
) |
|
|
(1,585 |
) |
Other non-current assets |
|
|
(80 |
) |
|
|
(1,180 |
) |
Accounts payable and accrued expenses |
|
|
(15,084 |
) |
|
|
(1,267 |
) |
Billings in excess of costs and estimated earnings on uncompleted contracts |
|
|
5,061 |
|
|
|
(163 |
) |
Other current liabilities |
|
|
45 |
|
|
|
|
|
Other non-current liabilities |
|
|
(244 |
) |
|
|
291 |
|
|
|
|
|
|
|
|
Net cash provided by (used in) continuing operations |
|
|
(16,189 |
) |
|
|
1,145 |
|
Net cash provided by (used in) discontinued operations |
|
|
7,085 |
|
|
|
(50 |
) |
|
|
|
|
|
|
|
Net cash provided by (used in) operating activities |
|
|
(9,104 |
) |
|
|
1,095 |
|
|
|
|
|
|
|
|
CASH FLOWS FROM INVESTING ACTIVITIES: |
|
|
|
|
|
|
|
|
Proceeds from sales of property and equipment |
|
|
56 |
|
|
|
65 |
|
Purchases of property and equipment |
|
|
(893 |
) |
|
|
(823 |
) |
Changes in restricted cash |
|
|
|
|
|
|
(9,494 |
) |
|
|
|
|
|
|
|
Net cash used in investing activities of continuing operations |
|
|
(837 |
) |
|
|
(10,252 |
) |
Net cash provided by investing activities of discontinued operations |
|
|
11,489 |
|
|
|
5,691 |
|
|
|
|
|
|
|
|
Net cash provided by (used in) investing activities |
|
|
10,652 |
|
|
|
(4,561 |
) |
|
|
|
|
|
|
|
CASH FLOWS FROM FINANCING ACTIVITIES: |
|
|
|
|
|
|
|
|
Borrowings of debt |
|
|
10,000 |
|
|
|
|
|
Borrowings on Senior Convertible Notes |
|
|
36,000 |
|
|
|
|
|
Repayments of debt |
|
|
(35,698 |
) |
|
|
(4 |
) |
Proceeds from issuance of stock |
|
|
40 |
|
|
|
|
|
Payments for debt issuance costs |
|
|
(2,680 |
) |
|
|
|
|
Proceeds from exercise of stock options |
|
|
233 |
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) financing activities of continuing operations |
|
|
7,895 |
|
|
|
(4 |
) |
Net cash used in financing activities of discontinued operations |
|
|
(3 |
) |
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) financing activities |
|
|
7,892 |
|
|
|
(4 |
) |
|
|
|
|
|
|
|
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS |
|
|
9,440 |
|
|
|
(3,470 |
) |
CASH AND CASH EQUIVALENTS, beginning of period |
|
|
22,232 |
|
|
|
28,349 |
|
|
|
|
|
|
|
|
CASH AND CASH EQUIVALENTS, end of period |
|
$ |
31,672 |
|
|
$ |
24,879 |
|
|
|
|
|
|
|
|
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: |
|
|
|
|
|
|
|
|
Cash paid for |
|
|
|
|
|
|
|
|
Interest |
|
$ |
1,119 |
|
|
$ |
2,424 |
|
Income taxes |
|
|
277 |
|
|
|
452 |
|
Assets acquired under capital leases |
|
|
|
|
|
|
111 |
|
The accompanying notes to condensed consolidated financial statements are an integral part of these financial statements.
8
INTEGRATED ELECTRICAL SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2005
(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, low voltage and service and maintenance
markets.
The accompanying unaudited Condensed Consolidated Financial Statements (the 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 Companys annual report for the year ended September 30, 2005, filed on Form 10-K with the
Securities and Exchange Commission. In the opinion of management, all adjustments considered
necessary for a fair presentation have been included. Actual operating results for the three months
ended December 31, 2005 are not necessarily indicative of the results that may be expected for the
fiscal year ended September 30, 2006.
Update on Financial Restructuring
During 2005, the Company announced its intention to strengthen and de-lever its balance sheet
to improve its overall capital structure. As part of this initiative, the Company is seeking to
reduce its long term debt, which will result in an increase in free cash flow from a reduction in
cash interest expense. By strengthening the balance sheet in this manner, the Company expects to
improve its credit ratings and enhance its surety bonding capability. To facilitate these efforts,
on November 2, 2005, the Company announced that it had retained Gordian Group, LLC as a financial
advisor. Gordian Group, LLC is a New York based investment bank with expertise in developing
capital markets alternatives and providing financial advisory services.
As a result of the foregoing, the Company commenced discussions with an ad hoc committee of
holders of a substantial portion of its senior subordinated notes due 2009 regarding a consensual
restructuring of its debt obligations (the Restructuring). On December 14, 2005, the Company
announced that it had reached a non-binding agreement in principle with an ad hoc committee of
holders of approximately $101 million, or 58%, of its $172.9 million principal amount of senior
subordinated notes for a potential restructuring pursuant to which the senior subordinated
noteholders would receive in exchange for all of their notes shares representing approximately 82%
of the common stock of the reorganized company. Holders of outstanding common stock and management
would retain or receive shares representing approximately 15% and 3%, respectively, of the common
stock of the reorganized company.
The agreement in principle contemplates that customers, vendors and trade creditors would not
be impaired by the restructuring and would be paid in full in the ordinary course of business, and
that the senior convertible notes with a current aggregate principal amount outstanding of
approximately $50 million, would be reinstated or the holders otherwise provided the full value of
their note claims. It is also contemplated that our senior bank credit facility would be reinstated
or refinanced at the time of the restructuring.
If the Restructuring were to be consummated, the proposed plan currently contemplates the
filing of a pre-arranged Chapter 11 plan of reorganization in order to achieve the exchange of all
of the senior subordinated notes for common equity. Approval of a proposed plan in a pre-arranged
proceeding would likely require, among other things, the affirmative vote of the holders of at
least two-thirds in claim amount and one-half in number of the senior subordinated notes that vote
on the plan. The Company would seek to enter into a plan support agreement with the holders of a
majority of its senior subordinated notes and then formally solicit votes for a proposed joint plan
of reorganization to be filed upon or shortly after filing voluntary petitions for reorganization
under Chapter 11 of the Bankruptcy Code.
There is no assurance that the Company will successfully complete the Restructuring or any
other restructuring. At this time neither the agreement in principle nor any other proposed
restructuring terms have been agreed to by the requisite holders of the senior subordinated notes,
or any other creditor constituency. The agreement in principle is subject to the negotiation of
definitive documentation, approval by the requisite noteholders and a court in a Chapter 11
proceeding and customary closing conditions. Because the agreement in principle is not binding and
because there is no assurance it will be consummated, the Company continues to evaluate other
alternatives for restructuring its capital structure. In addition, the Company may be forced by its
creditors to seek the
9
protection of federal bankruptcy law. If the Company consummates any restructuring, it may do
so outside of bankruptcy, or in a pre-arranged Chapter 11 proceeding or in another proceeding under
federal bankruptcy law. Any restructuring could cause the holders of its outstanding securities,
including its common stock, senior subordinated notes and senior convertible notes, to lose some or
all of the value of their investment in our securities. Furthermore, such restructuring could
result in material changes in the nature of its business and material adverse changes to its
financial condition and results of operations. See Item 1A. Risk Factors.
Going Concern
Our independent registered public accounting firm, Ernst & Young LLP, included a going concern
modification in its audit opinion on our consolidated financial statements for the fiscal year
ended September 30, 2005 included in our Form 10-K as a result of our operating losses during
fiscal 2005 and our non-compliance with certain debt covenants subsequent to September 30, 2005.
The consolidated financial statements do not include any adjustments to reflect the possible future
effects on the recoverability and classification of assets or the amounts and classification of
liabilities that may result from the outcome of this uncertainty.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
For a description of these policies, refer to Note 2 of the Notes to the Consolidated
Financial Statements included in the Companys annual report on Form 10-K for the year ended
September 30, 2005.
REVENUE RECOGNITION
As of December 31, 2004 and 2005, costs and estimated earnings in excess of billings on
uncompleted contracts include unbilled revenues for certain significant claims totaling
approximately $2.1 million and $5.2 million, respectively. In addition, accounts receivable as of
December 31, 2004 and 2005 related to these claims is approximately $2.5 million and $1.3 million,
respectively. Included in the claims amount is approximately $ million and $2.8 million as of
December 31, 2004 and 2005, respectively, related to a single contract at one of our subsidiaries.
This claim relates to a dispute with the customer over defects in the customers design
specifications. The Company does not believe that we are required to remediate defects in the
customers design specifications. If it is later determined that we are required to remediate such
defects, we could incur additional costs. Some or all of the costs, if any, may not be recoverable.
SUBSIDIARY GUARANTIES
All of the Companys operating income and cash flows are generated by its 100% owned
subsidiaries, which are the subsidiary guarantors of the Companys 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 Companys ability to obtain funds from its
subsidiaries by dividend or loan. The parent holding companys independent assets, revenues, income
before taxes and operating cash flows are less than 3% of the consolidated total. 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.
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 Companys revenue recognition of construction in progress, fair value assumptions in
analyzing goodwill and long-lived asset impairments, allowance for doubtful accounts receivable,
realizability of deferred tax assets and self-insured claims liabilities.
10
SEASONALITY AND QUARTERLY FLUCTUATIONS
The results of the Companys operations, primarily from residential construction, are
seasonal, dependent upon weather trends, with higher revenues typically generated during the spring
and summer and lower revenues during the fall and winter. The commercial and industrial aspect of
its business is less subject to seasonal trends, as this work generally is performed inside
structures protected from the weather. The Companys service business is generally not affected by
seasonality. In addition, the construction industry has historically been highly cyclical. The
Companys 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.
STOCK-BASED COMPENSATION
On October 1, 2005, the Company adopted Statement of Financial Accounting Standards No. 123
(revised 2004), Share-Based Payment, (SFAS 123(R)) which requires the measurement and
recognition of compensation expense for all share-based payment awards made to employees and
directors including employee stock options and employee stock purchases related to the employee
stock purchase plan (employee stock purchases) based on estimated fair values. SFAS 123(R)
supersedes the Companys previous accounting under Accounting Principles Board Opinion No. 25,
Accounting for Stock Issued to Employees (APB 25) for periods beginning in fiscal 2006. In
March 2005, the Securities and Exchange Commission issued Staff Accounting Bulletin No. 107 (SAB
107) relating to SFAS 123(R). The Company has applied the provisions of SAB 107 in its adoption of
SFAS 123(R).
The Company adopted SFAS 123(R) using the modified prospective transition method, which
requires the application of the accounting standard as of October 1, 2005, the first day of the
Companys fiscal year 2006. The Companys consolidated financial statements as of and for the three
months ended December 31, 2005 reflect the impact of SFAS 123(R). In accordance with the modified
prospective transition method, the Companys consolidated financial statements for prior periods
have not been restated to reflect, and do not include, the impact of SFAS 123(R). Stock-based
compensation expense recognized under SFAS 123(R) for the three months ended December 31, 2005 was
$0.4 million, before tax, which consisted of stock-based compensation expense related to employee
stock options and restricted stock grants (see Note 6). There was no stock-based compensation
expense related to employee stock options recognized during the three months ended December 31,
2004. Additionally, the Company recorded no compensation expense associated with the Employee Stock
Purchase Plan which is defined as a non-compensatory plan pursuant to Financial Accounting
Standards Board Interpretation No. 44 (See Note 8).
SFAS 123(R) requires companies to estimate the fair value of share-based payment awards on the
date of grant using an option-pricing model. The value of the portion of the award that is
ultimately expected to vest is recognized as expense over the requisite service periods in the
Companys consolidated statement of operations. Prior to the adoption of SFAS 123(R), the Company
accounted for stock-based awards to employees and directors using the intrinsic value method in
accordance with APB 25 as allowed under Statement of Financial Accounting Standards No. 123,
Accounting for Stock-Based Compensation (SFAS 123). Under the intrinsic value method, no
stock-based compensation expense had been recognized in the Companys consolidated statement of
operations because the exercise price of the Companys stock options granted to employees and
directors equaled the fair market value of the underlying stock at the date of grant.
Stock-based compensation expense recognized during the period is based on the value of the
portion of share-based payment awards that is ultimately expected to vest during the period.
Stock-based compensation expense recognized in the Companys consolidated statement of operations
for the first quarter of fiscal 2006 included compensation expense for share-based payment awards
granted prior to, but not yet vested as of September 30, 2005 based on the grant date fair value
estimated in accordance with the pro forma provisions of SFAS 123 and compensation expense for the
share-based payment awards granted subsequent to September 30, 2005 based on the grant date fair
value estimated in accordance with the provisions of SFAS 123(R). In conjunction with the adoption
of SFAS 123(R), the Company changed its method of attributing the value of stock-based compensation
expense related to stock options from the accelerated multiple-option approach to the straight-line
single option method. Compensation expense for all share-based payment awards granted on or prior
to September 30, 2005 will continue to be recognized using the accelerated multiple-option approach
while compensation expense for all share-based payment awards granted subsequent to September 30,
2005 is recognized using the straight-line single-option method. As stock-based compensation
expense recognized in the consolidated statement of operations for the first quarter of fiscal 2006
is based on awards ultimately expected to vest, it has been reduced for estimated forfeitures. SFAS
123(R) requires forfeitures to be estimated at the time of grant and revised, if necessary, in
subsequent periods if actual forfeitures differ from those estimates. In the Companys pro forma
information required under SFAS 123 for the periods prior to fiscal 2006, the Company accounted for
forfeitures as they occurred. Furthermore, under the modified prospective transition method, SFAS
123 (R) requires that compensation costs recognized prior to adoption be reversed to the extent of
estimated forfeitures and recorded as a cumulative effect of a change in accounting principle. The
effect of this reversal was immaterial for the three months ended December 31, 2005.
11
The Companys determination of fair value of share-based payment awards on the date of grant
using an option-pricing model is affected by the Companys stock price as well as assumptions
regarding a number of highly complex and subjective variables. These variables include, but are not
limited to the Companys expected stock price volatility over the term of the awards, and actual
and projected employee stock option exercise behaviors. Option-pricing models were developed for
use in estimating the value of traded options that have no vesting or hedging restrictions and are
fully transferable. Because the Companys employee stock options have certain characteristics that
are significantly different from traded options, and because changes in the subjective assumptions
can materially affect the estimated value, in managements opinion, the existing valuation models
may not provide an accurate measure of the fair value of the Companys employee stock options.
Although the fair value of employee stock options is determined in accordance with SFAS 123(R) and
SAB 107 using an option-pricing model, that value may not be indicative of the fair value observed
in a willing buyer/willing seller market transaction.
On November 10, 2005, the Financial Accounting Standards Board (FASB) issued FASB Staff
Position No. FAS 123(R)-3 Transition Election Related to Accounting for Tax Effects of Share-Based
Payment Awards. The Company has elected to adopt the alternative transition method provided in the
FASB Staff Position for calculating the tax effects of stock-based compensation pursuant to SFAS
123(R). The alternative transition method includes simplified methods to establish the beginning
balance of the additional paid-in capital pool (APIC pool) related to the tax effects of employee
stock-based compensation, and to determine the subsequent impact on the APIC pool and Consolidated
Statements of Cash Flows of the tax effects of employee stock-based compensation awards that are
outstanding upon adoption of SFAS 123(R).
Pro Forma Information Under SFAS 123 for Periods Prior to Fiscal 2006
The following table illustrates the effect on net income and earnings per share assuming the
compensation costs for the Companys stock option and purchase plans had been determined using the
fair value method at the grant dates amortized on a pro rata basis over the vesting period as
required under Statement of Financial Accounting Standards (SFAS) No. 123, Accounting for
Stock-Based Compensation for the three months ended December 31, 2004 (in thousands, except for per
share data):
|
|
|
|
|
|
|
Three months |
|
|
|
ended |
|
|
|
December 31, |
|
|
|
2004 |
|
Net loss, as reported |
|
$ |
(17,608 |
) |
Add: Stock-based employee compensation expense included in reported net income, net of related tax effects |
|
|
216 |
|
Deduct: Total stock-based employee compensation expense determined under fair value based method for all
awards, net of related tax effects |
|
|
178 |
|
|
|
|
|
Pro forma net loss for SFAS No. 123 |
|
$ |
(17,570 |
) |
|
|
|
|
Earnings (loss) per share: |
|
|
|
|
Basic as reported |
|
$ |
(1.18 |
) |
Basic pro forma for SFAS No. 123 |
|
$ |
(1.18 |
) |
Earnings (loss) per share: |
|
|
|
|
Diluted as reported |
|
$ |
(1.18 |
) |
Diluted pro forma for SFAS No. 123 |
|
$ |
(1.18 |
) |
2. RESTATEMENT OF QUARTERLY FINANCIAL STATEMENTS
During the financial statement reporting process for the year ended September 30, 2006,
management determined that an error occurred, which warranted revision to the previously reported
results for the quarters ended December 31, 2005, March 31, 2006 and June 30, 2006. The error was
the result of a reconciling difference between the inventory general ledger account and inventory
sub-ledger at one of the Companys subsidiaries. This error resulted in an overstatement of
inventory, an understatement of vendor rebate receivable, an overstatement of selling, general and
administrative expenses and an understatement of cost of services. The previous reported results
have been revised for discontinued operations. In addition,
during the financial statement reporting process for
the restatement of these quarterly financial statements and subsequent to the filing of the
Companys Form 10-K for the year ended September 30, 2006, the Company determined there were items
that required reclassification between continuing and discontinued operations related to the three
months ended December 31, 2004 and 2005. Those adjustments have been
reflected in these financial statements.
There was no impact to the overall financial results of the Company. As a result, the Company has
reclassified these adjustments out of continuing operations and into discontinued operations.
The tables below show the effects of all revisions
to reported results on the Consolidated Balance Sheet as of
December 31, 2005 and the Consolidated Statement of Operations
for the three months ended December 31, 2005 (in thousands). The
restatement also impacted the Consolidated Statement of
Stockholders Equity (Deficit) and the Consolidated Statement
of Cash Flows.
12
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended December 31, 2005 (Unaudited) |
|
|
|
|
|
|
|
Inventory |
|
|
|
|
|
|
As Reported |
|
|
Adjustments |
|
|
As Restated |
|
Consolidated Statement of Operations Data: |
|
|
|
|
|
|
|
|
|
|
|
|
Revenues |
|
$ |
226,666 |
|
|
$ |
|
|
|
$ |
226,666 |
|
Cost of services |
|
|
191,932 |
|
|
|
240 |
|
|
|
192,172 |
|
|
|
|
|
|
|
|
|
|
|
Gross profit |
|
|
34,734 |
|
|
|
(240 |
) |
|
|
34,494 |
|
Selling, general and administrative expenses |
|
|
29,761 |
|
|
|
(21 |
) |
|
|
29,740 |
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from operations |
|
|
4,973 |
|
|
|
(219 |
) |
|
|
4,754 |
|
Interest and other expense, net |
|
|
5,829 |
|
|
|
|
|
|
|
5,829 |
|
|
|
|
|
|
|
|
|
|
|
Loss from continuing operations before income taxes |
|
|
(856 |
) |
|
|
(219 |
) |
|
|
(1,075 |
) |
Provision for income taxes |
|
|
699 |
|
|
|
|
|
|
|
699 |
|
|
|
|
|
|
|
|
|
|
|
Net loss from continuing operations |
|
|
(1,555 |
) |
|
|
(219 |
) |
|
|
(1,774 |
) |
|
|
|
|
|
|
|
|
|
|
Discontinued operations: |
|
|
|
|
|
|
|
|
|
|
|
|
Loss from discontinued operations |
|
|
(910 |
) |
|
|
|
|
|
|
(910 |
) |
Benefit for income taxes |
|
|
(289 |
) |
|
|
|
|
|
|
(289 |
) |
|
|
|
|
|
|
|
|
|
|
Net loss from discontinued operations |
|
|
(621 |
) |
|
|
|
|
|
|
(621 |
) |
|
|
|
|
|
|
|
|
|
|
Net loss |
|
$ |
(2,176 |
) |
|
$ |
(219 |
) |
|
$ |
(2,395 |
) |
|
|
|
|
|
|
|
|
|
|
Basic loss per share: |
|
|
|
|
|
|
|
|
|
|
|
|
Continuing operations |
|
$ |
(0.10 |
) |
|
$ |
(0.01 |
) |
|
$ |
(0.12 |
) |
Discontinued operations |
|
$ |
(0.04 |
) |
|
$ |
|
|
|
$ |
(0.04 |
) |
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
(0.15 |
) |
|
$ |
(0.01 |
) |
|
$ |
(0.16 |
) |
|
|
|
|
|
|
|
|
|
|
Diluted loss per share: |
|
|
|
|
|
|
|
|
|
|
|
|
Continuing operations |
|
$ |
(0.10 |
) |
|
$ |
(0.01 |
) |
|
$ |
(0.12 |
) |
Discontinued operations |
|
$ |
(0.04 |
) |
|
$ |
|
|
|
$ |
(0.04 |
) |
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
(0.15 |
) |
|
$ |
(0.01 |
) |
|
$ |
(0.16 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2005 (Unaudited) |
|
|
|
Inventory |
|
Consolidated Balance Sheet |
|
As Reported |
|
|
Adjustments |
|
|
As Restated |
|
Assets: |
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
24,879 |
|
|
$ |
|
|
|
$ |
24,879 |
|
Restricted cash |
|
|
19,090 |
|
|
|
|
|
|
|
19,090 |
|
Accounts receivable (net) |
|
|
141,432 |
|
|
|
102 |
|
|
|
141,534 |
|
Retainage |
|
|
31,487 |
|
|
|
|
|
|
|
31,487 |
|
Cost and estimated earnings in excess of billings
on uncompleted contracts |
|
|
15,837 |
|
|
|
|
|
|
|
15,837 |
|
Inventories |
|
|
22,314 |
|
|
|
(342 |
) |
|
|
21,972 |
|
Prepaid expenses and other current assets |
|
|
23,856 |
|
|
|
|
|
|
|
23,856 |
|
Assets held for sale discontinued operations |
|
|
55,548 |
|
|
|
|
|
|
|
55,548 |
|
|
|
|
|
|
|
|
|
|
|
Total current assets |
|
|
334,443 |
|
|
|
(240 |
) |
|
|
334,203 |
|
Property and equipment, net |
|
|
23,510 |
|
|
|
|
|
|
|
23,510 |
|
Goodwill |
|
|
24,343 |
|
|
|
|
|
|
|
24,343 |
|
Other non-current assets, net |
|
|
14,389 |
|
|
|
|
|
|
|
14,389 |
|
|
|
|
|
|
|
|
|
|
|
Total assets |
|
$ |
396,685 |
|
|
$ |
(240 |
) |
|
$ |
396,445 |
|
|
|
|
|
|
|
|
|
|
|
Liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
Current maturities of long-term debt |
|
$ |
26 |
|
|
$ |
|
|
|
$ |
26 |
|
Accounts payable and accrued expenses |
|
|
99,324 |
|
|
|
(21 |
) |
|
|
99,303 |
|
Billings in excess of cost and estimated earnings
on uncompleted contracts |
|
|
26,705 |
|
|
|
|
|
|
|
26,705 |
|
Liabilities held for sale discontinued operations |
|
|
18,268 |
|
|
|
|
|
|
|
18,268 |
|
Senior convertible notes, net |
|
|
50,711 |
|
|
|
|
|
|
|
50,711 |
|
Senior subordinated notes, net |
|
|
173,115 |
|
|
|
|
|
|
|
173,115 |
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities |
|
|
368,149 |
|
|
|
(21 |
) |
|
|
368,128 |
|
Long-term debt, net of current maturities |
|
|
139 |
|
|
|
|
|
|
|
139 |
|
Other non-current liabilities |
|
|
14,273 |
|
|
|
|
|
|
|
14,273 |
|
|
|
|
|
|
|
|
|
|
|
Total liabilities |
|
|
382,561 |
|
|
|
(21 |
) |
|
|
382,540 |
|
Stockholders equity |
|
|
14,124 |
|
|
|
(219 |
) |
|
|
13,905 |
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders equity |
|
$ |
396,685 |
|
|
$ |
(240 |
) |
|
$ |
396,445 |
|
|
|
|
|
|
|
|
|
|
|
13
3. BUSINESS DIVESTITURES
Costs Associated with Exit or Disposal Activities
As a result of disappointing operating results, the Board of Directors directed us to develop
alternatives with respect to certain underperforming subsidiaries. These subsidiaries were included
in our commercial and industrial segment. On March 28, 2006, the Company committed to an exit plan
with respect to those underperforming subsidiaries. The exit plan committed to a shut-down or
consolidation of the operations of these subsidiaries or the sale or other disposition of the
subsidiaries, whichever came earlier.
Net working capital related to these subsidiaries was $25.7 million at December 31, 2005. As a
result of inherent uncertainty in the exit plan and in monetizing net working capital related to
these subsidiaries, the Company could experience additional losses of working capital. At December
31, 2005, the Company has recorded adequate reserves to reflect the net realizable value of the
working capital; however, subsequent events such as loss of specific customer knowledge may impact
our ability to collect.
The Company has included the results of operations related to these subsidiaries in
discontinued operations for the three months ended December 31, 2005 and all prior periods
presented have been reclassified accordingly. Revenue for these shutdown subsidiaries was $59.7
million and $32.4 million for the three months ended December 31, 2004 and 2005, respectively.
Operating losses for these subsidiaries were $2.4 million and $1.4 million for the three months
ended December 31, 2004 and 2005, respectively.
Divestitures
During October 2004, the Company announced plans to begin a strategic realignment including
the planned divestiture of certain subsidiaries within our commercial and industrial segment. As of
December 31, 2005, the planned divestitures had been completed.
During the year ended September 30, 2005, we completed the sale of all the net assets of
thirteen of our operating subsidiaries for $54.1 million in total consideration. During the three
months ended December 31, 2005, the Company completed the sale of one additional operating
subsidiary for $7.3 million in total consideration. Including goodwill impairments, if any, these
divestitures generated a pre-tax net loss of $7.7 million and a pre-tax net income of $0.5 million
for the three months ended December 31, 2004 and 2005, respectively, and have been recognized as
discontinued operations in the consolidated statements of operations for all periods presented.
The discontinued operations disclosures include only those identified subsidiaries qualifying
for discontinued operations treatment for the periods presented. Depreciation expense associated
with discontinued operations for the three months ended December 31, 2004 and 2005 was $0.9 million
and $ million, respectively.
Summarized financial data for discontinued operations are outlined below (in thousands):
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
December 31, |
|
|
2004 |
|
2005 |
Revenues |
|
$ |
117,856 |
|
|
$ |
37,852 |
|
Gross profit |
|
|
5,706 |
|
|
|
2,038 |
|
Pretax loss |
|
$ |
(10,160 |
) |
|
$ |
(910 |
) |
|
|
|
|
|
|
|
|
|
|
|
Balance as of |
|
|
|
September 30, |
|
|
December 31, |
|
|
|
2005 |
|
|
2005 |
|
Accounts receivable, net |
|
$ |
64,622 |
|
|
$ |
46,470 |
|
Inventory |
|
|
1,455 |
|
|
|
986 |
|
Costs and estimated earnings in excess of billings on uncompleted contracts |
|
|
7,879 |
|
|
|
7,645 |
|
Other current assets |
|
|
341 |
|
|
|
241 |
|
Property and equipment, net |
|
|
928 |
|
|
|
198 |
|
Other noncurrent assets |
|
|
8 |
|
|
|
8 |
|
|
|
|
|
|
|
|
Total assets |
|
$ |
75,233 |
|
|
$ |
55,548 |
|
|
|
|
|
|
|
|
Accounts payable and accrued liabilities |
|
$ |
21,384 |
|
|
$ |
12,920 |
|
Billings in excess of costs and estimated earnings on uncompleted contracts |
|
|
10,307 |
|
|
|
5,348 |
|
|
|
|
|
|
|
|
Total liabilities |
|
$ |
31,691 |
|
|
$ |
18,268 |
|
|
|
|
|
|
|
|
Net assets |
|
$ |
43,542 |
|
|
$ |
37,280 |
|
|
|
|
|
|
|
|
14
Goodwill Impairment Associated with Discontinued Operations
During the fiscal first quarter ended December 31, 2004, the Company recorded a goodwill
impairment charge of $5.6 million related to the identification of certain subsidiaries for
disposal by sale prior to the end of the fiscal second quarter ended March 31, 2005. This
impairment charge is included in the net loss from discontinued operations caption in the statement
of operations. The impairment charge was calculated based on the assessed fair value ascribed to
the subsidiaries identified for disposal less the net book value of the assets related to those
subsidiaries. The fair value utilized in this calculation was the same as that discussed in the
preceding paragraph addressing the impairment of discontinued operations. Where the fair value did
not exceed the net book value of a subsidiary including goodwill, the goodwill balance was impaired
as appropriate. This impairment of goodwill was determined prior to the disclosed calculation of
any additional impairment of the identified subsidiary disposal group as required pursuant to
Statement of Financial Accounting Standards No. 144, Accounting for the Impairment or Disposal of
Long-Lived Assets. There was no goodwill impairment during the quarter ended December 31, 2005
related to discontinued operations.
Impairment Associated with Discontinued Operations
In accordance with Statement of Financial Accounting Standards No. 144, Accounting for the
Impairment or Disposal of Long-Lived Assets, during the fiscal first quarter ended December 31,
2004, the Company recorded an impairment charge of $0.7 million related to the identification of
certain subsidiaries for disposal by sale prior to the end of the fiscal 2005. The impairment was
calculated as the difference between the fair values, less costs to sell, assessed at the date the
companies individually were selected for sale and their respective net book values after all other
adjustments had been recorded. In determining the fair value for the disposed assets and
liabilities, the Company evaluated past performance, expected future performance, management
issues, bonding requirements, market forecasts and the carrying value of such assets and
liabilities and received a fairness opinion from an independent consulting and investment banking
firm in support of this determination for certain of the subsidiaries included in the assessment.
The impairment charge was related to subsidiaries included in the commercial and industrial segment
of the Companys operations (see Note 6). There was no impairment charge for long-lived assets
during the quarter ended December 31, 2005 related to discontinued operations.
4. DEBT
Credit Facility
On August 1, 2005, the Company entered into a three-year $80 million asset-based revolving
credit facility (the Credit Facility) with Bank of America, N.A., as administrative agent
(BofA). The new Credit Facility replaced the Companys existing revolving credit facility with
JPMorgan Chase Bank, N.A., which was scheduled to mature on August 31, 2005. The Company and each
of its operating subsidiaries are co-borrowers and are jointly and severally liable for all
obligations under the Credit Facility. The Companys other subsidiaries have guaranteed all of the
obligations under the Credit Facility. The obligations of the borrowers and the guarantors are
secured by a pledge of substantially all of the assets of the Company and its subsidiaries,
excluding any assets pledged to secure surety bonds procured by the Company and its subsidiaries in
connection with their operations.
The Credit Facility allows the Company and the other borrowers to obtain revolving credit
loans and provides for the issuance of letters of credit. The amount available at any time under
the Credit Facility for revolving credit loans or the issuance of letters of credit is determined
by a borrowing base calculated as a percentage of accounts receivable, inventory and equipment. The
borrowing base is limited to $80 million, reduced by a fixed reserve which is currently $27.9
million. The Company has also deposited $19.1 million in an account pledged to Bank of America
destined to collateralize letters of credit. The amount in the collateral account can be used to
increase borrowing capacity.
The Company amended the Credit Facility to provide relief for the fixed charge covenant for
the months of August and September 2005, and eliminated the requirement for a fixed charge covenant
test to be performed in September and October 2005. The second amendment obtained limited
availability under the facility by requiring the Company to have at least $12.0 million in excess
funds availability at all times.
On January 3, 2006, the Company entered into a further amendment, effective December 30, 2005,
to the Credit Facility. The amendment eliminated the Fixed Charge Coverage Ratio test for the
period ended November 30, 2005 and provided that the test for
the period ended December 31, 2005
would not be made until the delivery on or before January 16, 2006 of financial statements covering
such period. The amendment further provided a limited waiver of any Event of Default that would
otherwise exist with
15
respect to the audited annual financial statements for the period ended September 30, 2005.
Subsequent amendments further extended the delivery date for financial statements covering the
periods ended December 31, 2005 to January 26, 2006. These amendments required the payments of
fees upon their execution. These fees are capitalized as deferred financing costs and amortized
over the life of the facility.
As of January 26, 2006, the Company failed to meet the Fixed Charge Coverage Ratio for the
period ended December 31, 2005, constituting an event of default under the Credit Facility.
Additionally, the Company was in default with respect to the pledge of its ownership interest in
EnerTech Capital Partners II L.P. to BofA as Collateral under the Credit Facility. By reason of the
existence of these defaults, BofA did not have any obligation to make additional extensions of
credit under the Credit Facility and had full legal right to exercise its rights and remedies under
the Credit Facility and related agreements.
On January 27, 2006, IES entered into a Forbearance Agreement (Forbearance Agreement) with
BofA in connection with the Credit Facility. The Forbearance Agreement provided for BofAs
forbearance from exercising its rights and remedies under the Credit Facility and related
agreements from January 27, 2006 through the earliest to occur of (i) 5:00 p.m. (Dallas, Texas
time) on February 28, 2006 or (ii) the date that any Forbearance Default (as defined in the
Forbearance Agreement) occurs. Notwithstanding the forbearance, on January 26, 2006, BofA sent a
blockage notice to the Senior Subordinated Notes indenture trustee preventing any payments from
being made on such notes. Lastly, under the Forbearance Agreement, BofA had no obligation to make
any loans or otherwise extend any credit to the Company under the Credit Facility. Any agreement by
BofA to make any loans or otherwise extend any further credit was in the sole discretion of BofA.
Capitalized terms used but not defined under this heading have the meaning set forth in the
Loan and Security Agreement, dated as of August 1, 2005, and filed as exhibit 10.1 to the Form 8-K
dated August 4, 2005.
Senior Convertible Notes
On November 24, 2004, the Company entered into a purchase agreement for a private placement of
$36.0 million aggregate principal amount of Senior Convertible Notes. Investors in the notes agreed
to a purchase price equal to 100% of the principal amount of the notes. The notes require payment
of interest semi-annually in arrears at an annual rate of 6.5%, have a stated maturity of November
1, 2014, constitute senior unsecured obligations, are guaranteed on a senior unsecured basis by our
significant domestic subsidiaries, and are convertible at the option of the holder under certain
circumstances into shares of our common stock at an initial conversion price of $3.25 per share,
subject to adjustment. On November 1, 2008, the Company has the option to redeem the Senior
Convertible Notes, subject to certain conditions. The net proceeds from the sale of the notes were
used to prepay a portion of our senior secured Credit Facility and for general corporate purposes.
The notes, the guarantees and the shares of common stock issuable upon conversion of the notes to
be offered have not been registered under the Securities Act of 1933, as amended, or any state
securities laws and, unless so registered, the securities may not be offered or sold in the United
States except pursuant to an exemption from, or in a transaction not subject to, the registration
requirements of the Securities Act and applicable state securities laws. A default under the Credit
Facility or the Senior Subordinated Notes resulting in acceleration that is not cured within 30
days is also a cross default under the Senior Convertible Notes. In addition, other events of
default under the Senior Convertible Notes indenture include, but are not limited to, a change of
control, the de-listing of the Companys stock from a national exchange or the commencement of a
bankruptcy proceeding.
On February 24, 2004 and following shareholder approval, the Company sold $14 million in
principal of its Series B 6.5% Senior Convertible Notes due 2014, pursuant to separate option
exercises by the holders of the aforementioned $36 million aggregate principal amount of Senior
Convertible Notes issued by the Company in an initial private placement on November 24, 2004. The
Senior Convertible Notes are a hybrid instrument comprised of two components: (1) a debt instrument
and (2) certain embedded derivatives. The embedded derivatives include a redemption premium and a
make-whole provision. In accordance with the guidance that Statement of Financial Accounting
Standards No. 133, as amended, Accounting for Derivative Instruments and Hedging Activities ,
(SFAS 133) and Emerging Issues Task Force Issue No. 00-19, Accounting for Derivative Financial
Instruments Indexed to, and Potentially Settled in, a Companys Own Stock (EITF 00-19) provide,
the embedded derivatives must be removed from the debt host and accounted for separately as a
derivative instrument. These derivative instruments will be marked-to-market each reporting period.
During the three months ended December 31, 2004, the Company was required to also value the
portion of the Senior Convertible Notes that would settle in cash because of shareholder approval
of the Senior Convertible Notes had not yet been obtained. The initial value of this derivative was
$1.4 million and the value at December 31, 2004 was $4.0 million, and consequently, a $2.6 million
mark to market loss was recorded. The value of this derivative immediately prior to the affirmative
shareholder vote was $2.0 million, and accordingly, the Company recorded a mark to market gain of
$2.0 million during the three months ended March 31, 2005. There was no mark to market gain or
loss during the three months ended June 30, 2005. During the quarter ended September 30, 2005,
there
16
was a mark to market loss of $0.1 million recorded. There was no mark to market gain or loss
during the three months ended December 31, 2005. The calculation of the fair value of the
conversion option was performed utilizing the Black-Scholes option pricing model with the following
assumptions effective at the three months ended December 31, 2005: expected dividend yield of
0.00%, expected stock price volatility of 40.00%, weighted average risk free interest rate ranging
from 3.67% to 4.15% for four to ten years, respectively, and an expected term of four to ten years.
The valuation of the other embedded derivatives was derived by other valuation methods, including
present value measures and binomial models. At December 31, 2005, the fair value of the two
remaining derivatives was $1.5 million. Additionally, at March 31, 2005 the Company recorded a net
discount of $0.8 million which is being amortized over the remaining term of the Senior Convertible
Notes. The Company did not cause a registration statement to become effective on or before November
23, 2005, to register the underlying shares for the notes and liquidated damages began to accrue at
the rate of 0.25% per annum.
On January 19, 2006, the holders of the outstanding Series A and Series B Senior Convertible
Notes, delivered written notice (the Notices) to the Company alleging that a Termination of
Trading constituting a Fundamental Change, each as defined under the Indenture dated as of
November 24, 2004 (the Indenture) by and among the Company, the guarantors party thereto and the
Bank of New York, as trustee, had occurred with respect to the Senior Convertible Notes and that,
as a result, the Company is required to repurchase the Senior Convertible Notes on the terms and
conditions specified in the Indenture. Pursuant to the Indenture, a Termination of Trading is
deemed to have occurred if the common stock of the Company into which the Senior Convertible Notes
are convertible is neither listed for trading on the New York Stock Exchange (the NYSE) or the
American Stock Exchange nor approved for listing on the NASDAQ National Market or the NASDAQ
SmallCap Market, and no American Depositary Shares or similar instruments for such common stock are
so listed or approved for listing in the United States. The Notices allege that a Termination of
Trading occurred with respect to the Senior Convertible Notes when the Company was orally notified
on December 15, 2005 that its common stock had been suspended from trading on the NYSE. As further
described below, the Company does not believe that a Termination of Trading has occurred and
disputes any assertion to the contrary.
As previously disclosed by the Company in Current Reports on Form 8-K filed with the
Securities and Exchange Commission (SEC), on December 15, 2005 the NYSE suspended trading of the
Companys common stock and informed the Company of the NYSEs intent to submit an application to
the SEC to de-list the Companys common stock after completion of applicable procedures, including
any appeal by IES of the NYSEs staffs decision. On December 30, 2005, in accordance with Rule
804.00 of the NYSE Listed Company Manual, the Company appealed the NYSEs staffs decision by
requesting a review by the designated committee of the Board of Directors of the NYSE (the
Committee) of the staffs determination to suspend the trading of the Companys common stock and
an oral presentation before the Committee. The Company believes that, until its common stock is
de-listed by the NYSE after application to the SEC, which is not expected to occur prior to
completion of the Companys appeal to the Committee, the Companys common stock has not ceased to
be listed on the NYSE for purposes of determining whether a Termination of Trading has occurred
under the Indenture. The Companys shares now trade over-the-counter on the pink sheets under the
symbol IESR.
The Notices state that the Company was required to provide the holders of the Notes with
notice of the occurrence of a Termination of Trading within 15 business days after December 15,
2005 and that the Company failed to do so. If a Termination of Trading occurred on December 15,
2005, the Companys failure to provide notice to the holders of the Senior Convertible Notes on or
about, or prior to, January 9, 2006 would constitute an Event of Default under the Indenture.
If a Termination of Trading occurred on December 15, 2005, then pursuant to the Notices, the
Company would have been required to repurchase the Senior Convertible Notes in cash at a purchase
price equal to 100% of the principal amount of the Senior Convertible Notes held by such holders
plus accrued and unpaid interest and Liquidated Damages (as defined in the Indenture) thereon on or
about, or prior to, February 7, 2006. If an Event of Default occurred as a result of the Companys
failure to deliver notice to the holders of the Senior Convertible Notes of the occurrence of a
Termination of Trading, the holders of at least 25% in aggregate principal amount of the Senior
Convertible Notes have the right to declare the principal amount plus accrued and unpaid interest
and Liquidated Damages thereon immediately due and payable in cash.
In either case, the amount due under the Senior Convertible Notes, including the principal
amount plus accrued and unpaid interest and Liquidated Damages thereon, would be approximately $51
million, and the Company would not be able to make such payment when due. Pursuant to the Notices,
the holders have elected to exercise their repurchase rights following a Termination of Trading and
have not accelerated the obligations under the Senior Convertible Notes pursuant to an Event of
Default; however, the Notices expressly reserve the holders rights to accelerate the Senior
Convertible Notes under the terms of the Indenture. Nevertheless, the Companys contemplated
restructuring provides that the Senior Convertible Notes would be reinstated or the holders
otherwise provided the full value of their Senior Convertible Note claims. See Part I, Item 2.
Managements Discussion and Analysis of Financial Condition and Results of Operations Update on
Financial Restructuring. The Company does not believe that the
17
delivery of the Notices is likely to have any impact upon the recovery of the holders of the
Senior Convertible Notes in a Chapter 11 proceeding. There is no assurance that the Company will
successfully complete their contemplated restructuring, or any other restructuring. See Item 1A.
Risk Factors.
Senior Subordinated Notes
The Company has outstanding two different series of senior subordinated notes with similar
terms. The notes bear interest at 9 3/8% and will mature on February 1, 2009. Interest is paid on
the notes on February 1 and August 1 of each year. The notes are unsecured senior subordinated
obligations and are subordinated to all other existing and future senior indebtedness. The notes
are guaranteed on a senior subordinated basis by all the Companys subsidiaries. Under the terms of
the notes, the Company is required to comply with various affirmative and negative covenants
including (1) restrictions on additional indebtedness, and (2) restrictions on liens, guarantees
and dividends. At December 31, 2005, the Company had $172.9 million in outstanding senior
subordinated notes. An interest payment of approximately $8.1 million on the Senior Subordinated
Notes was due on February 1, 2006. The Company did not make this interest payment. Under the
indenture for the Senior Subordinated Notes, this non-payment does not become an Event of Default
until 30 days after the due date for such payment.
Our debt instruments and agreements, including the Credit Facility, the Senior Subordinated
Notes, the Senior Convertible Notes and our agreement with our primary surety bonding company,
contain cross-default provisions whereby an uncured and unwaived event of default under one will
result in an event of default under each of the others. In accordance with Emerging Issues Task
Force (EITF) 86-30, Classifications of Obligations When a Violation is Waived by the Creditor,
the Company has classified the long-term portion of Senior Convertible Notes and Senior
Subordinated Notes as current liabilities on the balance sheet due to the defaults under the Credit
Facility and the potential for cross-defaults described above.
Debt consists of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
September 30, |
|
|
December 31, |
|
|
|
2005 |
|
|
2005 |
|
Senior Subordinated Notes, due February 1, 2009,
bearing interest at 9.375% with an effective interest rate
of 15.8% |
|
$ |
62,885 |
|
|
$ |
62,885 |
|
Senior Subordinated Notes, due February 1, 2009, bearing
interest at 9.375% with an effective interest rate of 15.8% |
|
|
110,000 |
|
|
|
110,000 |
|
Senior Convertible Notes, due November 1, 2014, bearing
interest at 6.5% with an effective interest rate of 6.5% |
|
|
50,000 |
|
|
|
50,000 |
|
Other |
|
|
59 |
|
|
|
165 |
|
|
|
|
|
|
|
|
Total debt |
|
|
222,944 |
|
|
|
223,050 |
|
LessShort-term debt and current maturities of long-term debt |
|
|
(32 |
) |
|
|
(26 |
) |
LessSenior Convertible Notes |
|
|
(50,000 |
) |
|
|
(50,000 |
) |
LessSenior Subordinated Notes |
|
|
(172,885 |
) |
|
|
(172,885 |
) |
|
|
|
|
|
|
|
Total long-term debt |
|
$ |
27 |
|
|
$ |
139 |
|
|
|
|
|
|
|
|
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, 2004 and 2005 (in thousands, except
share data):
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
December 31, |
|
|
|
2004 |
|
|
2005 |
|
|
|
|
|
|
|
(Restated) |
|
Numerator: |
|
|
|
|
|
|
|
|
Net loss |
|
$ |
(17,608 |
) |
|
$ |
(2,395 |
) |
|
|
|
|
|
|
|
Denominator: |
|
|
|
|
|
|
|
|
Weighted average shares outstandingbasic |
|
|
14,970,502 |
|
|
|
14,970,502 |
|
Effect of dilutive stock options |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstandingdiluted |
|
|
14,970,502 |
|
|
|
14,970,502 |
|
|
|
|
|
|
|
|
Earnings (loss) per share: |
|
|
|
|
|
|
|
|
Basic |
|
$ |
(1.18 |
) |
|
$ |
(0.16 |
) |
Diluted |
|
$ |
(1.18 |
) |
|
$ |
(0.16 |
) |
18
For the three months ended December 31, 2004 and 2005, stock options of 3.2 million and 3.2
million representing common stock shares, 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 Companys common stock.
6. OPERATING SEGMENTS
The Company follows SFAS No. 131, Disclosures about Segments of an Enterprise and Related
Information (SFAS 131). Certain information is disclosed, per SFAS 131, based on the way
management organizes financial information for making operating decisions and assessing
performance.
The Companys 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. These segments, which contain different
economic characteristics, are managed through geographical regions.
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 home office expenses. Management allocates costs between
segments for selling, general and administrative expenses, goodwill impairment, depreciation
expense, capital expenditures and total assets.
Segment information for continuing operations for the three months ended December 31, 2004 and
2005 is as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
December 31, 2004 |
|
|
|
Commercial |
|
|
|
|
|
|
|
|
|
|
|
|
and Industrial |
|
|
Residential |
|
|
Corporate |
|
|
Total |
|
Revenues |
|
$ |
132,273 |
|
|
$ |
73,405 |
|
|
$ |
|
|
|
$ |
205,678 |
|
Cost of services |
|
|
115,153 |
|
|
|
59,035 |
|
|
|
|
|
|
|
174,188 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit |
|
|
17,120 |
|
|
|
14,370 |
|
|
|
|
|
|
|
31,490 |
|
Selling, general and administrative |
|
|
11,567 |
|
|
|
9,929 |
|
|
|
8,026 |
|
|
|
29,522 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from operations |
|
$ |
5,553 |
|
|
$ |
4,441 |
|
|
$ |
(8,026 |
) |
|
$ |
1,968 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other data: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization expense |
|
$ |
1,212 |
|
|
$ |
264 |
|
|
$ |
639 |
|
|
$ |
2,115 |
|
Capital expenditures |
|
|
293 |
|
|
|
221 |
|
|
|
379 |
|
|
|
893 |
|
Total assets |
|
|
222,525 |
|
|
|
86,842 |
|
|
|
77,738 |
|
|
|
387,105 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
December 31, 2005 |
|
|
|
(Restated) |
|
|
|
Commercial |
|
|
|
|
|
|
|
|
|
|
|
|
and Industrial |
|
|
Residential |
|
|
Corporate |
|
|
Total |
|
Revenues |
|
$ |
136,394 |
|
|
$ |
90,272 |
|
|
$ |
|
|
|
$ |
226,666 |
|
Cost of services |
|
|
118,202 |
|
|
|
73,970 |
|
|
|
|
|
|
|
192,172 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit |
|
|
18,192 |
|
|
|
16,302 |
|
|
|
|
|
|
|
34,494 |
|
Selling, general and administrative |
|
|
11,616 |
|
|
|
9,944 |
|
|
|
8,180 |
|
|
|
29,740 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from operations |
|
$ |
6,576 |
|
|
$ |
6,358 |
|
|
$ |
(8,180 |
) |
|
$ |
4,754 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other data: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization expense |
|
$ |
876 |
|
|
$ |
276 |
|
|
$ |
514 |
|
|
$ |
1,666 |
|
Capital expenditures |
|
|
368 |
|
|
|
296 |
|
|
|
159 |
|
|
|
823 |
|
Total assets |
|
|
150,424 |
|
|
|
89,391 |
|
|
|
101,082 |
|
|
|
340,897 |
|
The Company does not have operations or long-lived assets in countries outside of the United
States.
Total assets as of December 31, 2004 and 2005 exclude assets held for sale and from
discontinued operations of $176,084 and $55,548, respectively.
During fiscal 2006, we modified our methodology for allocating selling, general and
administrative costs between operating segments. As a result, all periods presented have been
reclassified to conform to current year presentation.
19
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.
In December 2003, the Company granted a restricted stock award of 242,295 shares under its
1999 Plan to certain employees. This award vests in equal installments on December 1, 2004 and
2005, provided the recipient is still employed by the Company. The market value of the stock on the
date of grant for this award was $2.0 million, which is recognized as compensation expense over the
related two year vesting period. On December 1, 2004, 113,248 restricted shares vested under this
award. During the period December 1, 2003 through November 30, 2004, 15,746 shares of those
originally awarded were forfeited. From December 1, 2004 through December 31, 2005, an additional
34,984 shares have been forfeited. On December 1, 2005, the remaining 78,317 restricted shares
vested under this award.
In January 2005, the Company granted a restricted stock award of 365,564 shares under its 1999
Plan to certain employees. This award vests in equal installments on January 3, 2006 and 2007,
provided the recipient is still employed by the Company. The market value of the stock on the date
of grant for this award was $1.7 million, which is recognized as compensation expense over the
related two year vesting period. Through December 31, 2005, 20,437 shares were forfeited under this
grant.
During the three months ended December 31, 2004, the Company amortized $0.2 million to expense
in connection with these awards. Effective October 1, 2005, the Company adopted Statement of
Financial Accounting Standards 123 (revised 2004), Stock Based Payments (SFAS 123(R) (See Note
2). During the three months ended December 31, 2005, the Company recognized $0.3 million in
compensation expense related to these awards in accordance with the provisions of SFAS 123 (R).
8. EMPLOYEE STOCK PURCHASE PLAN
The Company has an Employee Stock Purchase Plan (the ESPP), which provides for the sale of
common stock to participants as defined at a price equal to the lower of 85% of the Companys
closing stock price at the beginning or end of the option period, as defined. The ESPP is intended
to qualify as an Employee Stock Purchase Plan under Section 423 of the Internal Revenue Code of
1986, as amended. In the three months ended December 31, 2004 and 2005, no shares were issued under
the ESPP, respectively. The Company suspended contributions to the Plan for the period January 1,
2005 through December 31, 2005 and may elect to do so in the future.
9. COMMITMENTS AND CONTINGENCIES
Legal Matters
The Company and its subsidiaries are involved in various legal proceedings that have arisen in
the ordinary course of business. While it is not possible to predict the outcome of such
proceedings with certainty 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 following is a discussion of certain significant legal matters the Company is currently
involved in:
A. In re Integrated Electrical Services, Inc. Securities Litigation, No. 4:04-CV-3342; in the
United States District Court for the Southern District of Texas, Houston Division: Between August
20 and October 4, 2004, five putative securities fraud class actions were filed against IES and
certain of its officers and directors in the United States District Court for the Southern District
of Texas. The five lawsuits were consolidated under the caption In re Integrated Electrical
Services, Inc. Securities Litigation, No. 4:04-CV-3342. On March 23, 2005, the Court appointed
Central Laborer Pension Fund as lead plaintiff and appointed lead counsel. Pursuant to the
parties agreed scheduling order, lead plaintiff filed its amended complaint on June 6, 2005. The
amended complaint alleges that defendants violated Section 10(b) and 20(a) of the Securities
Exchange Act of 1934 by making materially false and misleading statements during the proposed class
period of November 10, 2003 to August 13, 2004. Specifically, the amended complaint alleges that
defendants misrepresented the Companys financial condition in 2003 and 2004 as evidenced by the
restatement, violated generally accepted accounting principles, and misrepresented the sufficiency
of the Companys internal controls so that they could
20
engage in insider trading at artificially-inflated prices, retain their positions at the
Company, and obtain a $175 million credit facility for the Company.
On August 5, 2005, the defendants moved to dismiss the amended complaint for failure to state
a claim. The defendants argued, among other things, that the amended complaint fails to allege
fraud with particularity as required by Rule 9(b) of the Federal Rules of Civil Procedure and fails
to satisfy the heightened pleading requirements for securities fraud class actions under the
Private Securities Litigation Reform Act of 1995. Specifically, defendants argue that the amended
complaint does not allege fraud with particularity as to numerous GAAP violations and opinion
statements about internal controls, fails to raise a strong inference that defendants acted
knowingly or with severe recklessness, and includes vague and conclusory allegations from
confidential witnesses without a proper factual basis. Lead plaintiff filed its opposition to the
motion to dismiss on September 28, 2005, and defendants filed their reply in support of the motion
to dismiss on November 14, 2005.
On December 21, 2005, the Court held a telephonic hearing relating to the motion to dismiss.
On January 10, the Court issued a memorandum and order dismissing with prejudice all claims filed
against the Defendants. The Plaintiff in the securities class action filed its notice of appeal on
February 2, 2006. No dates for briefing the appeal have been set or determined.
B. SEC Investigation On August 31, 2004, the Fort Worth Regional Office of the SEC sent a
request for information concerning IESs inability to file its 10-Q in a timely fashion, the
internal investigation conducted by counsel to the Audit Committee of the companys Board of
Directors, and the material weaknesses identified by IESs auditors in August 2004. In December
2004, the Commission issued a formal order authorizing the staff to conduct a private investigation
into these and related matters. The investigation is still ongoing, and the Company is cooperating
with the SEC. An adverse outcome in this matter could have a material adverse effect on our
business, consolidated financial condition, results of operations or cash flows.
C. Radek v. Allen, et al., No. 2004-48577; in the 113th Judicial District Court, Harris
County, Texas: On September 3, 2004, Chris Radek filed a shareholder derivative action in the
District Court of Harris County, Texas naming Herbert R. Allen, Richard L. China, William W.
Reynolds, Britt Rice, David A. Miller, Ronald P. Badie, Donald P. Hodel, Alan R. Sielbeck, C. Byron
Snyder, Donald C. Trauscht, and James D. Woods as individual defendants and IES as nominal
defendant. On July 15, 2005, plaintiff filed an amended shareholder derivative petition alleging
substantially similar factual claims to those made in the putative class action, and making common
law claims against the individual defendants for breach of fiduciary duties, misappropriation of
information, abuse of control, gross mismanagement, waste of corporate assets, and unjust
enrichment. On September 16, 2005, defendants filed special exceptions or, alternatively, a motion
to stay the derivative action. On November 11, 2005, Plaintiff filed a response to defendants
special exceptions and motion to stay. A hearing on defendants special exceptions and motion to
stay took place on January 9, 2006. Following that hearing, the parties submitted supplemental
briefing relating to the standard for finding director self-interest in a derivative case.
Defendants also advised the Court that the class action had been dismissed with prejudice. The
Court has not yet ruled on the special exceptions.
D. Cynthia People v. Primo Electric Company, Inc., Robert Wilson, Ray Hopkins, and Darcia
Perini; In the United States District Court for the District of Maryland; C.A. No. 24-C-05-002152:
On March 10, 2005, one of IES wholly-owned subsidiaries was served with a lawsuit filed by an
ex-employee alleging thirteen causes of action including employment, race and sex discrimination as
well as claims for fraud, intentional infliction of emotional distress, negligence and conversion.
On each claim plaintiff is demanding $5-10 million in compensatory and $10-20 million in punitive
damages; attorneys fees and costs. This action was filed after the local office of the EEOC
terminated their process and issued plaintiff a right-to -sue letter per her request. IES will
vigorously contest any claim of wrongdoing in this matter and does not believe the claimed damages
bear any likelihood of being found in this case. However, if such damages were to be found, it
would have a material adverse effect on consolidated financial condition and cash flows. The
Company intends to vigorously contest these actions. An adverse outcome in these actions could have
a material adverse effect on our business, consolidated financial condition, results of operations
or cash flows.
E. Florida Power & Light Company vs. Qualified Contractors, Davis Electrical Contractors,
Inc., et al. Case No. 04-80505, United States District Court for the Southern District of Florida,
Miami Division: This is a property damage claim arising out of installation of electrical and pipe
fitting work performed on a turbine construction project at a power plant. After the Company
subsidiary completed the project there was a failure at one of the turbines resulting in damage to
the turbines alleged to be approximately $9.2 million. A bench trial began on January 19 and is
expected to conclude early February. The company does not believe it is liable for any of the
damages and that even if held liable is insured for amounts in excess of any potential verdict.
The Company intends to vigorously contest all of these actions. An adverse outcome in any of
these actions could have a material adverse effect on our business, consolidated financial
condition, results of operations or cash flows.
21
We are involved in various other legal proceedings that have arisen in the ordinary course of
business. While it is not possible to predict the outcome of any of these proceedings with
certainty and it is possible that the results of legal proceedings may materially adversely affect
us, in our opinion, these proceedings are either adequately covered by insurance or, if not so
covered, should not ultimately result in any liability which would have a material adverse effect
on our financial position, liquidity or results of operations. The Company intends to vigorously
contest these actions. An adverse outcome in these actions could have a material adverse effect on
our business, consolidated financial condition, results of operations or cash flows.
Other Commitments and Contingencies
Some of the Companys customers and vendors require the Company to post letters of credit as a
means of guaranteeing performance under its contracts and ensuring payment by the Company to
subcontractors and vendors. If the customer has reasonable cause to effect payment under a letter
of credit, the Company would be required to reimburse its creditor for the letter of credit.
Depending on the circumstances surrounding a reimbursement to its creditor, the Company may have a
charge to earnings in that period. To date the Company has not had a situation where a customer or
vendor has had reasonable cause to effect payment under a letter of credit. At December 31, 2005,
$2.6 million of the Companys outstanding letters of credit were to collateralize its customers and
vendors.
Some of the underwriters of the Companys casualty insurance program require it to post
letters of credit as collateral. This is common in the insurance industry. To date the Company has
not had a situation where an underwriter has had reasonable cause to effect payment under a letter
of credit. At December 31, 2005, $34.0 million of the Companys outstanding letters of credit were
to collateralize its insurance program.
Many of the Companys customers require us to post performance and payment bonds issued by a
surety. Those bonds guarantee the customer that the Company will perform under the terms of a
contract and that it will pay its subcontractors and vendors. In the event that the Company fails
to perform under a contract or pay subcontractors and vendors, the customer may demand the surety
to pay or perform under the Companys bond. The Companys relationship with its sureties is such
that it will indemnify the sureties for any expenses they incur in connection with any of the bonds
they issue on the Companys behalf. To date, the Company has not incurred significant expenses to
indemnify its sureties for expenses they incurred on the Companys behalf. As of December 31, 2005,
the Companys cost to complete projects covered by surety bonds was approximately $59.6 million and
utilized a combination of cash and letters of credit totaling $30.9 million to collateralize the
Companys bonding program.
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, 2005, the Company had invested $4.3 million under its commitment
to EnerTech.
On September 30, 2005, we and Bank of America entered into a letter agreement whereby we would
make ratable monthly payments to increase the amount of cash collateral held by the lender as
security for our obligations under the credit facility to $17.6 million by January 31, 2006. The
balance in the account as of December 31, 2005 was $19.1 million and is recorded as restricted cash
on the balance sheet.
The recently completed asset divestiture program involved the sale of substantially all of the
assets and liabilities of certain wholly owned subsidiary business units. As part of these sales,
the purchasers assumed all liabilities except those specifically retained by the Company. These
transactions do not include the sale of the legal entity or Company subsidiary and as such the
Company retained certain legal liabilities. In addition to specifically retained liabilities,
contingent liabilities exist in the event the purchasers are unable or unwilling to perform under
their assumed liabilities. These contingent liabilities may include items such as:
|
|
Joint responsibility for any liability to the surety bonding company if the purchaser fails to perform the work |
|
|
|
Liability for contracts for work not finished if the contract has not been assigned and a release obtained from the customer |
|
|
|
Liability on ongoing contractual arrangements such as real property and equipment leases where no assignment and release
has been obtained |
22
10. SUBSEQUENT EVENTS
Amendments to Credit Facility
On January 3, 2006, we entered into an amendment, effective as of December 30, 2005, to the
Credit Facility. The amendment eliminates the Fixed Charge Coverage Ratio test for the period
ended November 30, 2005 and provides that the test for the
period ended December 31, 2005 will
not be made until the delivery on or before January 16, 2006 of financial statements covering such
period. The amendment further provides a limited waiver of any Event of Default that would
otherwise exist with respect to the audited annual financial statements for the period ended
September 30, 2005. Subsequent amendments further extended the delivery date for financial
statements covering the period ended December 31, 2005 to January 26, 2006.
As of January 26, 2006, the Company failed to meet the Fixed Charge Coverage Ratio for the
period ended December 31, 2005, constituting an event of default under the Credit Facility.
Additionally, the Company was in default with respect to the pledge of its ownership interest in
EnerTech Capital Partners II L.P. to BofA as Collateral under the Credit Facility. By reason of the
existence of these defaults, BofA did not have any obligation to make additional extensions of
credit under the Credit Facility and, absent a forbearance, had full legal right to exercise its
rights and remedies under the Credit Facility and related agreements.
On January 27, 2006, IES entered into the Forbearance Agreement with BofA in connection with
the Credit Facility. The Forbearance Agreement provided for BofAs forbearance from exercising its
rights and remedies under the Credit Facility and related agreements from January 27, 2006 through
the earliest to occur of (i) 5:00 p.m. (Dallas, Texas time) on February 28, 2006 or (ii) the date
that any Forbearance Default (as defined in the Forbearance Agreement) occurs. Notwithstanding the
forbearance, on January 26, 2006 BofA sent a blockage notice to the Senior Subordinated Notes
indenture trustee preventing any payments from being made on such notes. Lastly, under the
Forbearance Agreement, BofA had no obligation to make any loans or otherwise extend any credit to
the Company under the Credit Facility. Any agreement by BofA to make any loans or otherwise extend
any further credit was in the sole discretion of BofA.
Capitalized terms used but not defined under this heading have the meaning set forth in the
Loan and Security Agreement, dated as of August 1, 2005, and filed as exhibit 10.1 to the Form 8-K
dated August 4, 2005.
Senior Convertible Notes
On January 19, 2006, the holders of the outstanding Series A and Series B Senior Convertible
Notes, delivered Notices to the Company alleging that a Termination of Trading constituting a
Fundamental Change, each as defined under the Indenture had occurred with respect to the Senior
Convertible Notes and that, as a result, the Company is required to repurchase the Senior
Convertible Notes on the terms and conditions specified in the Indenture. Pursuant to the
Indenture, a Termination of Trading is deemed to have occurred if the common stock of the Company
into which the Senior Convertible Notes are convertible is neither listed for trading on the NYSE
or the American Stock Exchange nor approved for listing on the Nasdaq National Market or the Nasdaq
SmallCap Market, and no American Depositary Shares or similar instruments for such common stock are
so listed or approved for listing in the United States. The Notices allege that a Termination of
Trading occurred with respect to the Notes when the Company was orally notified on December 15,
2005 that its common stock had been suspended from trading on the NYSE. As further described below,
the Company does not believe that a Termination of Trading has occurred and disputes any assertion
to the contrary.
As previously disclosed by the Company in Current Reports on Form 8-K filed with the SEC, on
December 15, 2005 the NYSE suspended trading of the Companys common stock and informed the Company
of the NYSEs intent to submit an application to the SEC to de-list the Companys common stock
after completion of applicable procedures, including any appeal by IES of the NYSEs staffs
decision. On December 30, 2005, in accordance with Rule 804.00 of the NYSE Listed Company Manual,
the Company appealed the NYSEs staffs decision by requesting a review by the Committee of the
staffs determination to suspend the trading of the Companys common stock and an oral presentation
before the Committee. The Company believes that, until its common stock is de-listed by the NYSE
after application to the SEC, which is not expected to occur prior to completion of the Companys
appeal to the Committee, the Companys common stock has not ceased to be listed on the NYSE for
purposes of determining whether a Termination of Trading has occurred under the Indenture. The
Companys shares now trade over-the-counter on the pink sheets under the symbol IESR.
The Notices state that the Company was required to provide the holders of the Senior
Convertible Notes with notice of the occurrence of a Termination of Trading within 15 Business Days
after December 15, 2005 and that the Company failed to do so. If a Termination of Trading occurred
on December 15, 2005, the Companys failure to provide notice to the holders of the Senior
23
Convertible Notes on or about, or prior to, January 9, 2006 would constitute an Event of
Default under the Indenture.
If a Termination of Trading occurred on December 15, 2005, then pursuant to the Notices, the
Company would have been required to repurchase the Senior Convertible Notes in cash at a purchase
price equal to 100% of the principal amount of the Senior Convertible Notes held by such holders
plus accrued and unpaid interest and Liquidated Damages (as defined in the Indenture) thereon on or
about, or prior to, February 7, 2006. If an Event of Default occurred as a result of the Companys
failure to deliver notice to the holders of the Senior Convertible Notes of the occurrence of a
Termination of Trading, the holders of at least 25% in aggregate principal amount of the Senior
Convertible Notes have the right to declare the principal amount plus accrued and unpaid interest
and Liquidated Damages thereon immediately due and payable in cash.
In either case, the amount due under the Senior Convertible Notes, including the principal
amount plus accrued and unpaid interest and Liquidated Damages thereon, would be approximately $51
million, and the Company would not be able to make such payment when due. Pursuant to the Notices,
the holders have elected to exercise their repurchase rights following a Termination of Trading and
have not accelerated the obligations under the Senior Convertible Notes pursuant to an Event of
Default; however, the Notices expressly reserve the holders rights to accelerate the Senior
Convertible Notes under the terms of the Indenture. Nevertheless, the Companys contemplated
restructuring provides that the Senior Convertible Notes would be reinstated or the holders
otherwise provided the full value of their Senior Convertible Note claims. See Part I, Item 2.
Managements Discussion and Analysis of Financial Condition and Results of Operations Update on
Financial Restructuring. The Company does not believe that the delivery of the Notices is likely
to have any impact upon the recovery of the holders of the Senior Convertible Notes in a Chapter 11
proceeding. There is no assurance that the Company will successfully complete their contemplated
restructuring, or any other restructuring. See Item 1A. Risk Factors.
Senior Subordinated Notes
An interest payment of approximately $8.1 million on the Senior Subordinated Notes was due on
February 1, 2006. The Company did not make this interest payment. Under the indenture for the
Senior Subordinated Notes, this non-payment does not become an Event of Default until 30 days
after the due date for such payment.
Cross-Default Provisions
Our debt instruments and agreements, including the Credit Facility, the Senior Subordinated
Notes, the Senior Convertible Notes and our agreement with our primary surety bonding company,
contain cross-default provisions whereby an uncured and unwaived event of default under one will
result in an event of default under each of the others. In accordance with Emerging Issues Task
Force (EITF) 86-30, Classifications of Obligations When a Violation is Waived by the Creditor, we
have classified the long-term portion of senior convertible notes and senior subordinated notes as
current liabilities on the balance sheet due to the defaults under the Credit Facility and the
potential for cross-defaults described above.
Amendment to Surety Pledge Agreement
On January 17, 2006, the Company entered into an amendment to the Companys surety agreements
with Federal Insurance Company (Chubb), including (i) the Restated Pledge Agreement, dated
January 14, 2005, and (ii) the Underwriting, Continuing Indemnity and Security Agreement, dated
January 14, 2005. The amendment provides for Chubbs issuance of surety bonds to support the
Companys projects in an aggregate amount of up to $20 million between the date of the amendment
and the date of any petition for relief that the Company may file under the bankruptcy code.
Issuance of any surety bonds will be evaluated by Chubb on a case by case basis. No surety bond
will be issued unless the Company provides Chubb with collateral in the form of cash or a letter of
credit in an amount of not less than 50% of the penal sum of the bond to be issued.
Appointment of Chief Restructuring Officer
On January 26, 2006, effective as of January 23, 2006, the Company entered into an engagement
letter (the Engagement Letter) with Glass & Associates, Inc. (Glass), pursuant to which Glass
agreed to provide the Company with the services of Sanford Edlein, who will serve as the Companys
Chief Restructuring Officer in connection with the Companys proposed Restructuring. (See Part I,
Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
Update on Financial Restructuring. The services of Mr. Edlein and other Glass employees will
include working with the Company and its advisors to implement and manage the restructuring
process, with Mr. Edlein, as Chief Restructuring Officer, having responsibility and authority to
implement and manage all aspects of the Companys restructuring. Mr. Edlein will report to, and be
subject to the exclusive
24
supervision of, the Special Restructuring Committee of the Board of Directors, which consists
of four independent directors of the Board of Directors.
DIP Facility Commitment Letter
In connection with the Companys proposed restructuring (See Part I, Item 2. Managements
Discussion and Analysis of Financial Condition and Results of Operations Update on Financial
Restructuring), the Company has accepted a financing commitment letter, dated February 1, 2006
(the Commitment Letter), with BofA. The Commitment Letter contemplates that BofA and any other
lenders that choose to participate therein (collectively, the DIP Lenders) will provide a credit
facility (the DIP Facility) to the Company, as a debtor-in-possession, upon the satisfaction of
certain conditions described below. Capitalized terms used but not defined in this section, shall
have the meaning set forth in the Commitment Letter, a copy of which is submitted as Exhibit 10.1
to the Current Report on Form 8-K dated February 7, 2006.
The DIP Facility will provide for aggregate financing of $80 million during the pendency of
the Companys anticipated Chapter 11 case, consisting of a revolving credit facility of up to $80
million, with a $72 million sub-limit for letters of credit. The Company is currently party to a
Credit Facility with BofA. All letters of credit and other obligations outstanding under the Credit
Facility will constitute obligations and liabilities under the DIP Facility.
Loans under the DIP Facility will bear interest at LIBOR plus 3.5% or the Base Rate plus 1.5%
on the terms set forth in the Commitment Letter. In addition, the Company will be charged monthly
in arrears (i) an unused line fee of either 0.5% or .375% depending on the utilization of the
credit line, (ii) a letter of credit fee equal to the applicable per annum LIBOR margin times the
amount of all outstanding letters of credit and (iii) certain other fees and charges as specified
in the Commitment Letter.
The DIP Facility will mature on the earliest to occur of (i) the expiration of a period of 12
months from the closing date of the DIP Facility, (ii) 45 days after the commencement of the
Chapter 11 cases if a Final Order approving the DIP Facility has not been entered by the bankruptcy
court, (iii) the effective date of an approved Plan of Reorganization or (iv) termination of the
DIP Facility. The DIP Facility will be entitled to superpriority administrative expense status
pursuant to Section 364(c)(1) of Title 11 of the United States Bankruptcy Code and be secured by a
first priority security interest, subject to certain Permitted Liens, in the Collateral. The DIP
Facility contemplates customary affirmative, negative and financial covenants binding on the
Company as described in the Commitment Letter.
The Commitment Letter provides that the DIP Lenders are obligated to provide the DIP Facility
only upon the satisfaction of certain conditions, including, without limitation, completion of
definitive documentation and other ancillary documents as may be required by BofA; entry of orders
of a bankruptcy court authorizing the DIP Facility, use of cash collateral and related matters;
BofAs receipt of financial projections, financial statements and a satisfactory budget; BofAs
satisfaction with the relative rights of BofA and the Companys sureties; and the absence of a
material adverse change in the Companys business, assets, financial condition, liabilities,
business prospects or results of operations since November 30, 2005, other than as previously
disclosed.
The Chubb Surety Agreement
The Company is party to that certain Underwriting, Continuing Indemnity, and Security
Agreement, dated January 14, 2005 and related documents, as amended (the Surety Agreement), with
Chubb, which provides for the provision of surety bonds to support the Companys contracts with
certain of its customers.
In connection with the Companys proposed restructuring (See Part I, Item 2. Managements
Discussion and Analysis of Financial Condition and Results of Operations Update on Financial
Restructuring), the Company has entered into the Term Sheet for Surety Support, dated February 3,
2006 (the Chubb DIP Agreement). The Chubb DIP Agreement provides for Chubb, during the pendency
of the Companys Chapter 11 case, (i) in its sole and absolute discretion and upon the Companys
filing of a voluntary petition for bankruptcy, to issue up to an aggregate of $48 million in new
surety bonds, with not more than $12 million in new surety bonds to be issued in any given month,
and (ii) to give permission for the Companys use of cash collateral in the form of proceeds of all
contracts as to which Chubb has issued surety bonds. The Company will be charged a bond premium of
$25 per $1,000 of the contract price related to any new surety bond. The Company will provide $6
million in additional collateral in the form of cash or letters of credit in installments of $1.5
million per month, to support the new surety bonds. The Chubb DIP Agreement is subject to certain
conditions as set forth therein, including, without limitation, the Companys payment of due
diligence and facility fees of $500,000 each; the Companys assumption of the Surety Agreement and
bonded contracts in the bankruptcy proceeding; and the entry of bankruptcy court orders, in form
and substance satisfactory to Chubb in its sole discretion, authorizing the forgoing.
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ITEM 2. MANAGEMENTS 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.
Update on Financial Restructuring
During 2005, we announced our intention to strengthen and de-lever our balance sheet to
improve our overall capital structure. As part of this initiative, we are seeking to reduce our
long term debt, which will result in an increase in our free cash flow from a reduction in cash
interest expense. By strengthening the balance sheet in this manner, we expect to improve our
credit ratings and enhance our surety bonding capability. To facilitate these efforts, on November
2, 2005, we announced that we had retained Gordian Group, LLC as a financial advisor. Gordian
Group, LLC is a New York based investment bank with expertise in developing capital markets
alternatives and providing financial advisory services.
As a result of the foregoing, we commenced discussions with an ad hoc committee of holders of
a substantial portion of our senior subordinated notes due 2009 regarding a consensual
restructuring of our debt obligations (the Restructuring). On December 14, 2005, we announced
that we had reached a non-binding agreement in principle with an ad hoc committee of holders of
approximately $101 million, or 58%, of our $172.9 million principal amount of our senior
subordinated notes for a potential restructuring pursuant to which the senior subordinated
noteholders would receive in exchange for all of their notes shares representing approximately 82%
of the common stock of the reorganized company. Holders of our outstanding common stock and
management would retain or receive shares representing approximately 15% and 3%, respectively, of
the common stock of the reorganized company.
The agreement in principle contemplates that our customers, vendors and trade creditors would
not be impaired by the restructuring and would be paid in full in the ordinary course of business,
and that our senior convertible notes with a current aggregate principal amount outstanding of
approximately $50 million, would be reinstated or the holders otherwise provided the full value of
their note claims. It is also contemplated that our senior bank credit facility would be reinstated
or refinanced at the time of the restructuring.
If the Restructuring were to be consummated, the proposed plan currently contemplates the
filing of a pre-arranged Chapter 11 plan of reorganization in order to achieve the exchange of all
of the senior subordinated notes for common equity. Approval of a proposed plan in a pre-arranged
proceeding would likely require, among other things, the affirmative vote of the holders of at
least two-thirds in claim amount and one-half in number of the senior subordinated notes that vote
on the plan. We would seek to enter into a plan support agreement with the holders of a majority of
our senior subordinated notes and then formally solicit votes for a proposed joint plan of
reorganization to be filed upon or shortly after filing voluntary petitions for reorganization
under Chapter 11 of the Bankruptcy Code.
There is no assurance that we will successfully complete the Restructuring or any other
restructuring. At this time neither the agreement in principle nor any other proposed restructuring
terms have been agreed to by the requisite holders of the senior subordinated notes, or any other
creditor constituency. The agreement in principle is subject to the negotiation of definitive
documentation, approval by the requisite noteholders and a court in a Chapter 11 proceeding and
customary closing conditions. Because the agreement in principle is not binding and because there
is no assurance it will be consummated, we continue to evaluate other alternatives for
restructuring our capital structure. In addition, we may be forced by our creditors to seek the
protection of federal bankruptcy law. If we consummate any restructuring, we may do so outside of
bankruptcy, or in a pre-arranged Chapter 11 proceeding or in another proceeding under federal
bankruptcy law. Any restructuring could cause the holders of our outstanding securities, including
our common stock, senior subordinated notes and senior convertible notes, to lose some or all of
the value of their investment in our securities. Furthermore, such restructuring could result in
material changes in the nature of our business and material adverse changes to our financial
condition and results of operations. See Item 1A. Risk Factors.
Going Concern
Our independent registered public accounting firm, Ernst & Young LLP, included a going concern
modification in its audit opinion on our consolidated financial statements for the fiscal year
ended September 30, 2005 included in our Form 10-K as a result
26
of our operating losses during fiscal 2005 and our non-compliance with certain debt covenants
subsequent to September 30, 2005.
Suspension of Trading on NYSE
As previously disclosed in our Current Reports on Form 8-K filed with the Securities and
Exchange Commission (SEC), on December 15, 2005 the NYSE suspended trading of our common stock
and informed us of the NYSEs intent to submit an application to the SEC to de-list our common
stock after completion of applicable procedures, including any appeal by IES of the NYSEs staffs
decision. On December 30, 2005, in accordance with Rule 804.00 of the NYSE Listed Company Manual,
we appealed the NYSEs staffs decision by requesting a review by the designated committee of the
Board of Directors of the NYSE (the Committee) of the staffs determination to suspend the
trading of our common stock and an oral presentation before the Committee. Our shares now trade
over-the-counter on the pink sheets under the symbol IESR.
Repayment Notice from Senior Convertible Notes
On January 19, 2006, the holders of the outstanding Series A and Series B 6.5% Senior
Convertible Notes, delivered written notice (the Notices) to us alleging that a Termination of
Trading constituting a Fundamental Change, each as defined under the Indenture dated as of
November 24, 2004 (the Indenture) by and among the Company, the guarantors party thereto and the
Bank of New York, as trustee, had occurred with respect to the Senior Convertible Notes and that,
as a result, we are required to repurchase the Senior Convertible Notes on the terms and conditions
specified in the Indenture. Pursuant to the Indenture, a Termination of Trading is deemed to have
occurred if our common stock into which the Senior Convertible Notes are convertible is neither
listed for trading on the New York Stock Exchange (the NYSE) or the American Stock Exchange nor
approved for listing on the Nasdaq National Market or the Nasdaq SmallCap Market, and no American
Depositary Shares or similar instruments for such common stock are so listed or approved for
listing in the United States. The Notices allege that a Termination of Trading occurred with
respect to the Senior Convertible Notes when we were orally notified on December 15, 2005 that our
common stock had been suspended from trading on the NYSE. We believe that, until our common stock
is de-listed by the NYSE after application to the SEC, which is not expected to occur prior to
completion of our appeal to the Committee, our common stock has not ceased to be listed on the NYSE
for purposes of determining whether a Termination of Trading has occurred under the Indenture.
The Notices state that we were required to provide the holders of the Senior Convertible Notes
with notice of the occurrence of a Termination of Trading within 15 Business Days after December
15, 2005 and that we failed to do so. If a Termination of Trading occurred on December 15, 2005,
our failure to provide notice to the holders of the Senior Convertible Notes on or about, or prior
to, January 9, 2006 would constitute an Event of Default under the Indenture.
If a Termination of Trading occurred on December 15, 2005, then pursuant to the Notices, we
would be required to repurchase the Senior Convertible Notes in cash at a purchase price equal to
100% of the principal amount of the Notes held by such holders plus accrued and unpaid interest and
Liquidated Damages (as defined in the Indenture) thereon on or about, or prior to, February 7,
2006. If an Event of Default occurred as a result of our failure to deliver notice to the holders
of the Senior Convertible Notes of the occurrence of a Termination of Trading, the holders of at
least 25% in aggregate principal amount of the Senior Convertible Notes have the right to declare
the principal amount plus accrued and unpaid interest and Liquidated Damages thereon immediately
due and payable in cash.
In either case, the amount due under the Senior Convertible Notes, including the principal
amount plus accrued and unpaid interest and Liquidated Damages thereon, would be approximately $51
million, and we would not be able to make such payment when due. Pursuant to the Notices, the
holders have elected to exercise their repurchase rights following a Termination of Trading and
have not accelerated the obligations under the Senior Convertible Notes pursuant to an Event of
Default; however, the Notices expressly reserve the holders rights to accelerate the Senior
Convertible Notes under the terms of the Indenture. Nevertheless, our contemplated restructuring
provides that the Senior Convertible Notes would be reinstated or the holders otherwise provided
the full value of their Senior Convertible Note claims. See Part I, Item 2. Managements
Discussion and Analysis of Financial Condition and Results of Operations Update on Financial
Restructuring. We do not believe that the delivery of the Notices is likely to have any impact
upon the recovery of the holders of the Senior Convertible Notes in a Chapter 11 proceeding. There
is no assurance that we will successfully complete their contemplated restructuring, or any other
restructuring. See Item 1A. Risk Factors.
Amendments to the Credit Agreement
It has been necessary for us to seek amendments to the Credit Agreement in order to avoid
non-compliance with the Fixed Charge Coverage Ratio test set forth in the Credit Agreement.
27
On January 3, 2006, we entered into an amendment, effective December 30, 2005, to the Credit
Agreement with Bank of America, N.A. (BofA). The amendment eliminated the Fixed Charge Coverage
Ratio test for the period ended November 30, 2005 and provided that the test for the period ended
December 31, 2005 would not be made until the delivery on or before January 16, 2006 of financial
statements covering such period. The amendment further provided a limited waiver of any Event of
Default that would otherwise exist with respect to the audited annual financial statements for the
period ended September 30, 2005. Subsequent amendments further extended the delivery date for
financial statements covering the period ended December 31, 2005 to January 26, 2006.
As of January 26, 2006, we failed to meet the Fixed Charge Coverage Ratio for the period
ended December 31, 2005, constituting an event of default under the Credit Agreement.
Additionally, under the Credit Agreement, we were in default with respect to the pledge of
ownership interest in EnerTech Capital Partners II L.P. (EnerTech) to BofA as Collateral. By reason
of the existence of these defaults, BofA did not have any obligation to make additional extensions
of credit under the Credit Agreement and had full legal right to exercise its rights and remedies
under the Credit Agreement and related agreements.
On January 27, 2006, IES entered into a Forbearance Agreement (Forbearance Agreement) with
BofA in connection with the Credit Agreement. The Forbearance Agreement provided for BofAs
forbearance from exercising its rights and remedies under the Credit Agreement and related
agreements from January 27, 2006 through the earliest to occur of (i) 5:00 p.m. (Dallas, Texas
time) on February 28, 2006 or (ii) the date that any Forbearance Default (as defined in the
Forbearance Agreement) occurs. On January 26, 2006, BofA sent a blockage notice to the Senior
Subordinated Notes Indenture Trustee preventing any payments from being made on those notes. Under
the Forbearance Agreement, BofA had no obligation to make any loans or otherwise extend any credit
to us under the Credit Agreement. Any agreement by BofA to make any loans or otherwise extend any
further credit was in the sole discretion of BofA.
Capitalized terms used but not defined under this heading have the meaning set forth in the
Loan and Security Agreement dated as of August 1, 2005, and filed as exhibit 10.1 to the Form 8-K
dated August 4, 2005.
Our debt instruments and agreements, including the Credit Agreement, the Senior Subordinated
Notes, the Senior Convertible Notes and our agreement with our primary surety bonding company,
contain cross-default provisions whereby an uncured and unwaived event of default under one will
result in an event of default under each of the others. In accordance with Emerging Issues Task
Force (EITF) 86-30, Classifications of Obligations When a Violation is Waived by the Creditor, we
have classified the long-term portion of Senior Subordinated Notes and Senior Convertible Notes as
current liabilities on the balance sheet. This is as a result of the defaults under the Credit
Agreement and the potential for cross-defaults described herein.
Amendment to Surety Pledge Agreement
On January 17, 2006, we entered into an amendment to the surety agreements with Chubb,
including (i) the Restated Pledge Agreement, dated January 14, 2005, and (ii) the Underwriting,
Continuing Indemnity and Security Agreement, dated January 14, 2005. The amendment provides for
Chubbs issuance of surety bonds to support the projects in an aggregate amount of up to $20
million between the date of the amendment and the date we file a voluntary petitions for relief
under the Bankruptcy Code.
Appointment of Chief Restructuring Officer
On January 26, 2006, effective as of January 23, 2006, we entered into an engagement letter
(the engagement letter) with Glass and Associates, Inc. (Glass). Glass has agreed to provide us
with the services of Sanford Edlein, who will serve as the Companys Chief Restructuring Officer in
connection with the Restructuring. The services of Mr. Edlein and other Glass employees will
include working with us and our advisors to implement and manage the restructuring process, with
Mr. Edlein, as Chief Restructuring Officer, having responsibility and authority to implement and
manage all aspects of our restructuring. Mr. Edlein will report to, and be subject to the exclusive
supervision of, the Special Restructuring Committee of the Board of Directors, which consists of
four independent directors of the Board of Directors.
DIP Facility Commitment Letter
In connection with the previously announced intention of IES and certain of subsidiaries to
effectuate a restructuring through a Chapter 11 plan of reorganization, we have accepted a
financing commitment letter, dated February 1, 2006 (the Commitment Letter), with BofA. The
Commitment Letter contemplates that BofA and any other lenders that choose to participate therein
28
(collectively, the DIP Lenders) will provide a credit facility (the DIP Facility) to us,
as a debtor-in-possession, upon the satisfaction of certain conditions described below.
The DIP Facility will provide for aggregate financing of $80 million during the pendency of
our anticipated Chapter 11 case, consisting of a revolving credit facility of up to $80 million,
with a $72 million sub-limit for letters of credit. We are currently party to a Loan and Security
Agreement, dated August 1, 2005 with BofA (the Prepetition Loan Agreement). All letters of credit
and other obligations outstanding under the Prepetition Loan Agreement will constitute obligations
and liabilities under the DIP Facility.
Loans under the DIP Facility will bear interest at LIBOR plus 3.5% or the Base Rate plus 1.5%
on the terms in the Commitment Letter. In addition, we will be charged monthly in arrears on any
unused line fee of either 0.5% or 0.375% (depending on the utilization of the credit line), a
letter of credit fee equal to the applicable LIBOR margin times the amount of all outstanding
letters of credit and certain other fees and charges as specified in the Commitment Letter.
The DIP Facility will mature on the earliest to occur of 12 months from the closing date of
the DIP Facility, 45 days after the commencement of the Chapter 11 cases if a Final Order approving
the DIP Facility has not been entered by the bankruptcy court, the effective date of an approved
Plan of Reorganization or termination of the DIP Facility. The DIP Facility will be entitled to
superpriority administrative expense status pursuant to Section 364(c)(1) of Title 11 of the United
States Bankruptcy Code (the Bankruptcy Code) and be secured by a first priority security
interest, subject to certain Permitted Liens, in the Collateral. The DIP Facility contemplates
customary affirmative, negative and financial covenants binding on the Company as described in the
Commitment Letter.
The Commitment Letter provides that the DIP Lenders are obligated to provide the DIP Facility
only upon the satisfaction of certain conditions, including, completion of definitive documentation
and other ancillary documents as may be required by BofA,; entry of orders of a bankruptcy court
authorizing the DIP Facility, use of cash collateral and related matters; BofAs receipt of
financial projections, financial statements and a satisfactory budget; BofAs satisfaction with the
relative rights of BofA and the Companys sureties; and the absence of a material adverse change in
our business, assets, financial condition, liabilities, business prospects or results of operations
since November 30, 2005, other than as previously disclosed.
The Commitment Letter is filed as Exhibit 10.1 and the foregoing summary of certain terms and
conditions of the DIP Facility is qualified in its entirety by reference to this exhibit.
Capitalized terms used but not defined here shall have the meaning described in the Commitment
Letter.
The Chubb Surety Agreement
We are party to that certain Underwriting, Continuing Indemnity, and Security Agreement, dated
January 14, 2005 and related documents, as amended (the Surety Agreement), with Chubb, which
provides for the provision of surety bonds to support our contracts with certain of its customers.
In connection with our proposed restructuring (See Part I, Item 2. Managements Discussion
and Analysis of Financial Condition and Results of Operations Update Financial Restructuring),
we have entered into the Term Sheet for Surety Support dated February 3, 2006 (the Chubb DIP
Agreement). The Chubb DIP Agreement provides Chubb, during the pendency of the Companys Chapter
11 case, (i) in its sole and absolute discretion and upon our filing of a voluntary petition for
bankruptcy, to issue up to an aggregate of $48 million in new surety bonds, with not more than $12
million in new surety bonds to be issued in any given month, and (ii) to give permission for our
use of cash collateral in the form of proceeds of all contracts as to which Chubb has issued surety
bonds. We will be charged a bond premium of $25 per $1,000 of the contract price related to any new
surety bond. We will provide $6 million in additional collateral in the form of cash or letters of
credit in installments of $1.5 million per month, to support the new surety bonds. The Chubb DIP
Agreement is subject to certain conditions as set forth therein, including, without limitation, our
payment of due diligence and facility fees of $500,000 each; our assumption of the Surety Agreement
and bonded contracts in the bankruptcy proceeding; and the entry of bankruptcy court orders, in
form and substance satisfactory to Chubb in its sole discretion, authorizing the forgoing.
Critical Accounting Policies
In response to the SECs Release No. 33-8040, Cautionary Advice Regarding Disclosure About
Critical Accounting Policies, we have identified the accounting principles, which we believe are
most critical to our reported financial status by considering accounting policies that involve the
most complex or subjective decisions or assessments. We identified our most critical accounting
policies to be
29
those related to revenue recognition, the assessment of goodwill impairment, our allowance for
doubtful accounts receivable, the recording of our self-insurance liabilities and our estimation of
the valuation allowance for deferred tax assets. These accounting policies, as well as others, are
described in the Note 2 of Notes to Consolidated Financial Statements of our annual report on
Form 10-K for the year ended September 30, 2005 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. Our most significant cost drivers are the cost of labor, the cost of
materials and the cost of casualty and health insurance. These costs may vary from the costs we
originally estimated. Variations from estimated contract costs along with other risks inherent in
performing fixed price and unit price contracts may result in actual revenue and gross profits or
interim projected revenue and gross profits for a project differing from those we 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 in the
southern part of the United States could negatively affect our results.
We complete most projects within one year. We frequently provide service and maintenance work
under open-ended, unit price master service agreements which are renewable annually. We recognize
revenue on service and time and material work when services are performed. Work performed under a
construction contract generally provides that 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 (SOP) 81-1 Accounting for Performance of Construction-Type and
Certain Production-Type Contracts. Percentage-of-completion for construction contracts is measured
principally by the percentage of costs incurred and accrued to date for each contract to the
estimated total costs for each contract at completion. 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.
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.
In accordance with SFAS No. 144, Accounting for the Impairment or Disposal of Long-lived
Assets, we periodically assess whether any impairment indicators exist. If we determine impairment
indicators exist, we conduct an evaluation to determine whether any impairment has occurred. This
evaluation includes certain assumptions and estimates to determine fair value of asset groups
including estimates about future cash flows, discount rates, among others. 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 projections.
We provide an allowance for doubtful accounts for unknown collection issues in addition to
reserves for specific accounts receivable where collection is considered doubtful. Inherent in the
assessment of the allowance for doubtful accounts are certain judgments and estimates including,
among others, our customers access to capital, our customers willingness to pay, general economic
conditions and the ongoing relationships with our customers.
In addition to these factors, our business and the method of accounting for construction
contracts requires the review and analysis of not only the net receivables, but also the amount of
billings in excess of costs and costs in excess of billings integral to the overall review of
collectibility associated with our billings in total. The analysis management utilizes to assess
collectibility of our receivables include detailed review of older balances, analysis of days sales
outstanding where we include in the calculation, in addition to
30
accounts receivable balances net of any allowance for doubtful accounts, the level of costs in
excess of billings netted against billings in excess of costs, and the ratio of accounts
receivable, net of any allowance for doubtful accounts plus the level of costs in excess of
billings, to revenues. These analyses provide an indication of those amounts billed ahead or behind
the recognition of revenue on our construction contracts and are important to consider in
understanding the operational cash flows related to our revenue cycle.
We are insured for workers compensation, automobile liability, general liability, employment
practices and employee-related health care claims, subject to large deductibles. Our general
liability program provides coverage for bodily injury and property damage that is neither expected
nor intended. Losses up to the deductible amounts are accrued based upon our estimates of the
liability for claims incurred and an estimate of claims incurred but not reported. The accruals are
derived from actuarial studies, known facts, historical trends and industry averages utilizing the
assistance of an actuary to determine the best estimate of the ultimate expected loss. We believe
such accruals to be adequate. However, self-insurance liabilities are difficult to assess and
estimate due to unknown factors, including the severity of an injury, the determination of our
liability in proportion to other parties, the number of incidents not reported and the
effectiveness of our safety program. Therefore, if actual experience differs from the assumptions
used in the actuarial valuation, adjustments to the reserve may be required and would be recorded
in the period that the experience becomes known.
We regularly evaluate valuation allowances established for deferred tax assets for which
future realization is uncertain. We perform this evaluation at least annually at the end of each
fiscal year. The estimation of required valuation allowances includes estimates of future taxable
income. In assessing the realizability of deferred tax assets at December 31, 2005, we considered
that it was more likely than not that some or all of the deferred tax assets would be realized. The
ultimate realization of deferred tax assets is dependent upon the generation of future taxable
income during the periods in which those temporary differences become deductible. We consider the
scheduled reversal of deferred tax liabilities, projected future taxable income and tax planning
strategies in making this assessment.
RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED DECEMBER 31, 2004 COMPARED TO THE THREE MONTHS
ENDED DECEMBER 31, 2005
The following table presents selected unaudited historical financial information for the three
months ended December 31, 2004 and 2005.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
December 31, |
|
|
|
2004 |
|
|
% |
|
|
2005 |
|
|
% |
|
|
|
|
|
|
|
|
|
|
|
(Restated) |
|
|
(Restated) |
|
|
|
(dollars in millions) |
|
Revenues |
|
$ |
205.7 |
|
|
|
100 |
% |
|
$ |
226.7 |
|
|
|
100 |
% |
Cost of services (including depreciation) |
|
|
174.2 |
|
|
|
85 |
% |
|
|
192.2 |
|
|
|
85 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit |
|
|
31.5 |
|
|
|
15 |
% |
|
|
34.5 |
|
|
|
15 |
% |
Selling, general & administrative expenses |
|
|
29.5 |
|
|
|
14 |
% |
|
|
29.7 |
|
|
|
13 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from operations |
|
|
2.0 |
|
|
|
1 |
% |
|
|
4.8 |
|
|
|
2 |
% |
Interest and other expense, net |
|
|
9.1 |
|
|
|
4 |
% |
|
|
5.9 |
|
|
|
3 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss before income taxes |
|
|
(7.1 |
) |
|
|
(3 |
)% |
|
|
(1.1 |
) |
|
|
(1 |
)% |
Provision for income taxes |
|
|
1.7 |
|
|
|
1 |
% |
|
|
0.7 |
|
|
|
0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from continuing operations |
|
|
(8.8 |
) |
|
|
(4 |
)% |
|
|
(1.8 |
) |
|
|
(1 |
)% |
Net loss from discontinued operations |
|
|
(8.8 |
) |
|
|
(4 |
)% |
|
|
(0.6 |
) |
|
|
0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss |
|
$ |
(17.6 |
) |
|
|
(8 |
)% |
|
$ |
(2.4 |
) |
|
|
(1 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
REVENUES
|
|
|
|
|
|
|
|
|
|
|
Percent of Total Revenues |
|
|
|
Three Months Ended |
|
|
|
December 31, |
|
|
|
2004 |
|
|
2005 |
|
Commercial and Industrial |
|
|
64 |
% |
|
|
60 |
% |
Residential |
|
|
36 |
% |
|
|
40 |
% |
|
|
|
|
|
|
|
Total Company |
|
|
100 |
% |
|
|
100 |
% |
|
|
|
|
|
|
|
Total revenues increased $21.0 million, or 10.2%, from $205.7 million for the three months
ended December 31, 2004, to $226.7 million for the three months ended December 31, 2005. This
increase in revenues is primarily the result of an increase in revenues of $4.1 million in
commercial and industrial revenues and an increase of $16.9 million in residential revenues for the
three months
31
ended December 31, 2005.
Commercial and industrial revenues increased $4.1 million, or 3.1%, from $132.3 million for
the three months ended December 31, 2004, to $136.4 million for the three months ended December
31, 2005. The increase in revenues for the three months ended December 31, 2005 is primarily the
result of overall growth in the segment as well as increased commodity prices.
Residential revenues increased $16.9 million, or 23.0%, from $73.4 million for the three
months ended December 31, 2004 to $90.3 million for the three months ended December 31, 2005,
primarily as a result of increased demand for new single-family and multi-family housing.
GROSS PROFIT
|
|
|
|
|
|
|
|
|
|
|
Segment Gross Profit Margins |
|
|
As a Percent of Segment Revenues |
|
|
Three Months Ended |
|
|
December 31, |
|
|
2004 |
|
2005 |
|
|
|
|
|
|
(Restated) |
Commercial and Industrial |
|
|
12.9 |
% |
|
|
13.3 |
% |
Residential |
|
|
19.6 |
% |
|
|
18.1 |
% |
|
|
|
|
|
|
|
|
|
Total Company |
|
|
15.3 |
% |
|
|
15.2 |
% |
|
|
|
|
|
|
|
|
|
Gross profit increased $3.0 million, or 9.5%, from $31.5 million for the three months ended
December 31, 2004, to $34.5 million for the three months ended December 31, 2005. Gross profit
margin as a percentage of revenues decreased slightly from 15.3% to 15.2% for the three months
ended December 31, 2004 compared to three months ended December 31, 2005. The increase in gross
profit dollars is a result of our focus on improving margins, completion of older lower margin
projects and passing on increased material costs to our customers.
Commercial and industrial gross profit increased $1.1 million, or 6.4%, from $17.1 million for
the three months ended December 31, 2004 to $18.2 million for the three months ended December 31,
2005. Commercial and industrial gross profit margin as a percentage of revenues increased from
12.9% for the three months ended December 31, 2004, to 13.3% for the three months ended December
31, 2005. This increase in gross profit margin as a percentage of revenues was primarily the result
of increased job profitability at specific subsidiaries.
Residential gross profit increased $1.9 million, or 13.2%, from $14.4 million for the three
months ended December 31, 2004, to $16.3 million for the three months ended December 31, 2005.
Residential gross profit margin as a percentage of revenues decreased from 19.6% for the three
months ended December 31, 2004, to 18.1% for the three months ended December 31, 2005. This
decrease is due to the increase in costs of materials that have not fully been passed to customers.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses increased $0.2 million, or 0.7%, from $29.5
million for the three months ended December 31, 2004, to $29.7 million for the three months ended
December 31, 2005. Selling, general and administrative expenses as a percentage of revenues
decreased from 14.3% for the three months ended December 31, 2004 to 13.1% for the three months
ended December 31, 2005. Employment expenses decreased $0.3 million due to a reduction in work
force. Depreciation expense decreased $0.3 million as a result of the impairment and write down of
assets according to SFAS No. 144, Accounting for the Impairment or Disposal of Long-lived Assets
taken in fiscal year 2005. There were also reductions in travel and entertainment of $0.4 million
and $0.5 million in insurance expense. These reductions were partially offset by additional costs
incurred of $1.4 million for legal fees during the three months ended December 31, 2005 resulting
from litigation.
INCOME FROM OPERATIONS
Income from operations increased $2.8 million from $2.0 million for the three months ended
December 31, 2004, to $4.8 million for the three months ended December 31, 2005. This increase in
income from operations was attributed to increased demand for new single-family and mutli-family
housing and non-bonded work during the three months ended December 31, 2005 over the same period
in the prior year and the decrease in selling, general and administrative costs of $0.2 million
during the three months ended December 31, 2005.
32
NET INTEREST AND OTHER EXPENSE
Interest and other expense, net decreased from $9.1 million for the three months ended
December 31, 2004, to $5.9 million for the three months ended December 31, 2005. This decrease in
net interest and other expense was the result of $2.6 million in non-cash mark to market interest
associated with the embedded conversion option within our Senior Convertible Notes issued November
2004, a $0.3 million equity loss in investments, and $0.8 million in interest expense related to
the outstanding credit at the three months ended December 31, 2004 and no such events occurred in
December 31, 2005. Also included in the change was an increase in interest expense of $0.6 million
related to a full three months interest on the Senior Convertible Notes at December 31, 2005 versus
45 days at December 31, 2004. This is partially offset by $0.2 million in lower deferred financing
charges and $0.1 million in interest income related to the bond premium not received in the three
months ended December 31, 2004.
PROVISION FOR INCOME TAXES
Our effective tax rate from continuing operations increased from a negative rate of 23.5% for
the three months ended December 31, 2004 to a negative rate of 65.0% for the three months ended
December 31, 2005. This increase is attributable to a decrease in pretax net loss, permanent
differences required to be added back for income tax purposes, an additional valuation allowance
against certain federal and state deferred tax assets and a change in contingent tax liabilities.
DISCONTINUED OPERATIONS
Costs Associated with Exit or Disposal Activities
As a result of disappointing operating results, the Board of Directors directed us to develop
alternatives with respect to certain underperforming subsidiaries. These subsidiaries were included
in our commercial and industrial segment. On March 28, 2006, we committed to an exit plan with
respect to those underperforming subsidiaries. The exit plan committed to a shut-down or
consolidation of the operations of these subsidiaries or the sale or other disposition of the
subsidiaries, whichever came earlier.
Remaining net working capital related to these subsidiaries was $25.7 million at December 31,
2005. As a result of inherent uncertainty in the exit plan and in monetizing net working capital
related to these subsidiaries, we could experience additional losses of working capital. At
December 31, 2006, we believe we have recorded adequate reserves to reflect the net realizable
value of the working capital; however, subsequent events such as loss of specific customer
knowledge may impact our ability to collect.
We have included the results of operations related to these subsidiaries in discontinued
operations for the three months ended December 31, 2005 and all prior periods presented have been
reclassified accordingly. Revenue for these shutdown subsidiaries was $59.7 million and $32.4
million for the three months ended December 31, 2004 and 2005, respectively. Operating losses for
these subsidiaries were $2.4 million and $1.4 million for the three months ended December 31, 2004
and 2005, respectively.
Divestitures
During October 2004, we announced plans to begin a strategic realignment including the planned
divestiture of certain subsidiaries within our commercial and industrial segment. As of December
31, 2005, the planned divestitures had been completed.
During the year ended September 30, 2005, we completed the sale of all the net assets of
thirteen of our operating subsidiaries for $54.1 million in total consideration. During the three
months ended December 31, 2005, we completed the sale of one additional operating subsidiary for
$7.3 million in total consideration. Including goodwill impairments, if any, these divestitures
generated a pre-tax net loss of $7.7 million and a pre-tax net income of $0.5 million for the three
months ended December 31, 2004 and 2005, respectively, and have been recognized as discontinued
operations in the consolidated statements of operations for all periods presented.
The discontinued operations disclosures include only those identified subsidiaries qualifying
for discontinued operations treatment for the periods presented. Depreciation expense associated
with discontinued operations for the three months ended December 31, 2004 and 2005 was $0.9 million
and $ million, respectively.
Summarized financial data for discontinued operations are outlined below (in thousands):
33
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
December 31, |
|
December 31, |
|
|
2004 |
|
2005 |
Revenues |
|
$ |
117,856 |
|
|
$ |
37,852 |
|
Gross profit |
|
|
5,706 |
|
|
|
2,038 |
|
Pretax loss |
|
$ |
(10,160 |
) |
|
$ |
(910 |
) |
|
|
|
|
|
|
|
|
|
|
|
Balance as of |
|
|
|
September 30, |
|
|
December 31, |
|
|
|
2005 |
|
|
2005 |
|
Accounts receivable, net |
|
$ |
64,622 |
|
|
$ |
46,470 |
|
Inventory |
|
|
1,455 |
|
|
|
986 |
|
Costs and estimated earnings in excess of billings on uncompleted contracts |
|
|
7,879 |
|
|
|
7,645 |
|
Other current assets |
|
|
341 |
|
|
|
241 |
|
Property and equipment, net |
|
|
928 |
|
|
|
198 |
|
Other noncurrent assets |
|
|
8 |
|
|
|
8 |
|
|
|
|
|
|
|
|
Total assets |
|
$ |
75,233 |
|
|
$ |
55,548 |
|
|
|
|
|
|
|
|
Accounts payable and accrued liabilities |
|
$ |
21,384 |
|
|
$ |
12,920 |
|
Billings in excess of costs and estimated earnings on uncompleted contracts |
|
|
10,307 |
|
|
|
5,348 |
|
|
|
|
|
|
|
|
Total liabilities |
|
|
31,691 |
|
|
|
18,268 |
|
|
|
|
|
|
|
|
Net assets |
|
$ |
43,542 |
|
|
$ |
37,280 |
|
|
|
|
|
|
|
|
Goodwill Impairment Associated with Discontinued Operations
During the first quarter ended December 31, 2004, we recorded a goodwill impairment charge of
$6.2 million related to the identification of certain subsidiaries for disposal by sale. This
impairment charge is included in the net loss from discontinued operations caption in the statement
of operations. The impairment charge was calculated based on the assessed fair value ascribed to
the subsidiaries identified for disposal less the net book value of the assets related to those
subsidiaries. The fair value utilized in this calculation was the same as that discussed in the
preceding paragraph addressing the impairment of discontinued operations. Where the fair value did
not exceed the net book value of a subsidiary including goodwill, the goodwill balance was impaired
as appropriate. This impairment of goodwill was determined prior to the disclosed calculation of
any additional impairment of the identified subsidiary disposal group as required pursuant to SFAS
No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets. There was no goodwill
impairment during the quarter ended December 31, 2005 related to discontinued operations.
Impairment Associated with Discontinued Operations
In accordance with SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived
Assets, during the fiscal first quarter ended December 31, 2004, we recorded an impairment charge
of $0.7 million related to the identification of certain subsidiaries for disposal by sale prior to
the end of the fiscal 2005. The impairment was calculated as the difference between the fair
values, less costs to sell, assessed at the date the companies individually were selected for sale
and their respective net book values after all other adjustments had been recorded. In determining
the fair value for the disposed assets and liabilities, we evaluated past performance, expected
future performance, management issues, bonding requirements, market forecasts and the carrying
value of such assets and liabilities and received a fairness opinion from an independent consulting
and investment banking firm in support of this determination for certain of the subsidiaries
included in the assessment. The impairment charge was related to subsidiaries included in the
commercial and industrial segment of our. There was no impairment charge for long-lived assets
during the quarter ended December 31, 2005 related to discontinued operations.
WORKING CAPITAL
|
|
|
|
|
|
|
|
|
|
|
September 30, |
|
|
December 31, |
|
|
|
2005 |
|
|
2005 |
|
|
|
|
|
|
|
(Restated) |
|
CURRENT ASSETS: |
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
28,349 |
|
|
$ |
24,879 |
|
Restricted cash |
|
|
9,596 |
|
|
|
19,090 |
|
Accounts receivable: |
|
|
|
|
|
|
|
|
Trade, net of allowance of $2,925 and $1,645 respectively |
|
|
141,824 |
|
|
|
141,534 |
|
Retainage |
|
|
33,878 |
|
|
|
31,487 |
|
Costs and estimated earnings in excess of billings on uncompleted contracts |
|
|
17,699 |
|
|
|
15,837 |
|
34
|
|
|
|
|
|
|
|
|
|
|
September 30, |
|
|
December 31, |
|
|
|
2005 |
|
|
2005 |
|
|
|
|
|
|
|
(Restated) |
|
Inventories |
|
|
21,572 |
|
|
|
21,972 |
|
Prepaid expenses and other current assets |
|
|
22,271 |
|
|
|
23,856 |
|
Assets held for sale associated with discontinued operations |
|
|
75,233 |
|
|
|
55,548 |
|
|
|
|
|
|
|
|
Total current assets |
|
$ |
350,422 |
|
|
$ |
334,203 |
|
|
|
|
|
|
|
|
CURRENT LIABILITIES: |
|
|
|
|
|
|
|
|
Current maturities of long-term debt |
|
$ |
223,857 |
|
|
$ |
223,852 |
|
Accounts payable and accrued expenses |
|
|
100,570 |
|
|
|
99,303 |
|
Billings in excess of costs and estimated earnings on uncompleted contracts |
|
|
26,868 |
|
|
|
26,705 |
|
Liabilities related to assets held for sale associated with discontinued operations |
|
|
31,691 |
|
|
|
18,268 |
|
|
|
|
|
|
|
|
Total current liabilities |
|
$ |
382,986 |
|
|
$ |
368,128 |
|
|
|
|
|
|
|
|
Working capital |
|
$ |
(32,564 |
) |
|
$ |
(33,925 |
) |
|
|
|
|
|
|
|
Total current assets decreased $16.2 million, or 4.6%, from $350.4 million as of September 30,
2005 to $334.2 million as of December 31, 2005. This is the result of a $19.7 million decrease in
assets held for sale associated with discontinued operations due to the sale of one business unit
during the three months ended December 31, 2005, $2.4 million decrease in retainage due to
collections; partially offset by an increase in cash and restricted cash of $6.0 million resulting
from the proceeds received from the assets sales and the focus on collections.
As of December 31, 2005, the status of our costs in excess of billings versus our billings in
excess of costs decreased over that at September 30, 2005; and days sales outstanding improved by 4
days from 70 days at September 30, 2005 to 66 days at December 31, 2005. Our receivables and costs
and earnings in excess of billings on uncompleted contracts as compared to quarterly revenues
decreased from 86.6% at September 30, 2005 to 83.3% at December 31, 2005, when adjusted for a
balance of $5.2 million as of September 30, 2005 in long-standing receivables not outstanding at
December 31, 2005. As is common in the construction industry, some of these receivables are in
litigation or require us to exercise our contractual lien rights and are expected to be collected.
These receivables are primarily associated with a few operating companies within our commercial and
industrial segments. Some of our receivables are slow pay in nature or require us to exercise our
contractual or lien rights. We believe that our allowance for doubtful accounts is sufficient to
cover any uncollectible accounts.
Total current liabilities decreased $14.9 million, or 3.9%, from $383.0 million as of
September 30, 2005 to $368.1 million as of December 31, 2005. This decrease is primarily the result
of $1.3 million decrease in accounts payable and accrued expenses due to the timing of payments
made and reduced operating activity resulting from the seasonality of our business during the three
months ended December 31, 2005 and a $13.4 million decrease related to the sale of one business
unit during the three months ended December 31, 2005 pursuant to a divestiture plan previously
disclosed.
Working capital decreased $1.4 million, or 4.2%, due primarily to a net decrease of $6.3
million in the net assets held for sale associated with discontinued operations and a net decrease
in accounts payable and accrued expenses of $1.3 million, offset by an increase to working capital
related to an increase in net cash and cash equivalents and restricted cash of $6.0 million. See
Liquidity and Capital Resources below for further information.
LIQUIDITY AND CAPITAL RESOURCES
As of December 31, 2005, we had cash and cash equivalents of $24.9 million, restricted cash of
$19.1 million, negative working capital of $33.9 million, no outstanding borrowings under our
credit facility and term loan, $49.5 million of letters of credit outstanding, and available
capacity under our credit facility of $3.7 million. The principal amount outstanding under our
Senior Subordinated Notes was $172.9 million and $50.0 million outstanding under our Senior
Convertible Notes.
During the three months ended December 31, 2005, we provided $1.1 million of net cash from
operating activities. This net cash provided by operating activities comprised of a net loss of
$2.4 million, decreased by $0.6 million in net loss discontinued operations, $0.1 million net
operating cash flows from discontinued operations, $3.0 million of non-cash charges related
primarily to $0.6 million of amortization of deferred financing costs and $1.7 million of other
depreciation and amortization expense, and $0.4 million bad debt expense; offset by changes in
working capital of $0.1 million. Working capital changes consisted of a $1.3 million reduction in
accounts payable and accrued expenses, $1.6 million increase in prepaid expenses and other current
assets and a $1.1 million increase in other non-current assets; offset by a $2.3 million decrease
in accounts receivable due to the timing of and increased focus on collections and a $1.9 million
decrease in costs in excess of billings. Net cash used in investing activities was $4.6 million
related to the purchase of property and equipment of $0.8 million and additional cash collateral of
$9.5 million held by BofA as security for our obligations under the credit facility, recorded as
restricted cash on the balance sheet (see Note 4), in addition to net cash provided by investing
activities of discontinued operations of $5.7 million.
35
Credit Facility
On August 1, 2005, we entered into a three-year $80 million asset-based revolving Credit
Facility with BofA, as administrative agent. The new Credit Facility replaced our existing
revolving credit facility with JPMorgan Chase Bank, N.A., which was scheduled to mature on August
31, 2005. IES and each of our operating subsidiaries are co-borrowers and are jointly and severally
liable for all obligations under the Credit Facility. Our subsidiaries have guaranteed all of the
obligations under the Credit Facility. The obligations of the borrowers and the guarantors are
secured by a pledge of substantially all of the assets of IES and our subsidiaries, excluding any
assets pledged to secure surety bonds procured by us and our subsidiaries in connection with the
operations of the subsidiaries.
The Credit Facility allows us and the other borrowers to obtain revolving credit loans and
provides for the issuance of letters of credit. The amount available at any time under the Credit
Facility for revolving credit loans or the issuance of letters of credit is determined by a
borrowing base calculated as a percentage of accounts receivable, inventory and equipment. The
borrowing base is limited to $80 million, reduced by a fixed reserve, which is currently $27.9
million. We have also deposited $19.1 million in an account pledged to BofA destined to
collateralize letters of credit. The amount in the collateral account can be used to increase
borrowing capacity.
We have amended the Credit Facility to provide relief for the Fixed Charge covenant for the
months of August and September 2005, and eliminated the requirement for a Fixed Charge covenant
test to be performed in September and October 2005. The second amendment obtained limited
availability under the facility by requiring us to have at least $12.0 million in excess fund
availability at all times. These amendments required the payments of fees upon their execution.
These fees are capitalized as deferred financing costs and amortized over the life of the facility.
Since January 3, 2006, we have amended the Credit Facility three times to provided relief for
the Fixed Charge Coverage Ratio test for November 2005 and to extend the deadline for the
submission of the financial statements covering the period ended December 31, 2005. This final
amendment extended the deadline for the submission of financial statements to January 26, 2006.
On January 27, 2006, we disclosed we had not met the Fixed Charge Coverage Ratio test for the
period ended December 31, 2005 and therefore are in default under the credit agreement.
Additionally, we are in default with respect to the pledge of our ownership interest in EnerTech to
BofA as collateral under the credit agreement.
Bank of America does not have any obligation to make additional extensions of the credit under
the credit agreement due to the existence of these defaults and, absent forbearance, has full legal
right to exercise its rights and remedies under the credit agreement and related agreements. We
currently have no outstanding borrowings under the revolving credit line of the credit agreement
and have reimbursement obligations under letters of credit outstanding under the credit agreement
in the amount of $54.6 million as of February 7, 2006.
On January 27, 2006, we entered into a Forbearance Agreement with BofA. The forbearance
agreement provides for BofA forbearance from exercising its rights and remedies under the credit
agreement and related agreements. To exercise its rights, BofA may send a blockage notice to the
trustee of our Senior Subordinated Notes preventing any payments being made on such notes by us. On
January 26, 2006, BofA sent a blockage notice. Also under the forbearance agreement, BofA has no
obligation to make any loans or otherwise extend any credit to us under the credit agreement. Any
agreement by BofA to make any loans or otherwise extend any further credit shall be in the sole
discretion of BofA.
Capitalized terms used but not defined under this heading have the meaning set forth in the
Loan and Security Agreement dated as of August 1, 2005, and filed as exhibit 10.1 to the Form 8-K
dated August 4, 2005.
Amendment to Surety Pledge Agreement
On January 17, 2006, we entered into an amendment to our surety agreements with Chubb,
including a Restated Pledge Agreement and the Underwriting, Continuing Indemnity and Security
Agreement. The amendment provides for Chubbs issuance of surety bonds to support our projects in
an aggregate amount of up to $20 million between the date of the amendment, January 14, 2006, and
the date of any petition for relief that we may file under Chapter 11 of the United States Code
(the Bankruptcy Code). Issuance of any surety bonds will be evaluated by Chubb on a case by case
basis. No surety bond will be issued unless we provide Chubb with collateral in the form of cash or
a letter of credit in an amount of not less than 50% of the penal sum of the bond to be issued.
36
Senior Subordinated Notes
We have outstanding two different issues of Senior Subordinated Notes with similar terms. The
notes bear interest at 9 3/8 % and will mature on February 1, 2009. Interest is paid on the notes
on February 1 and August 1 of each year. The notes are unsecured senior subordinated obligations
and are subordinated to all other existing and future senior indebtedness. The notes are guaranteed
on a senior subordinated basis by all 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. At December 30,
2004 and 2005, we have $172.9 million principal amount in outstanding Senior Subordinated Notes.
An interest payment on the Senior Subordinated Notes was due on February 1, 2006. The Company
did not make this interest payment. Under the indenture for the Senior Subordinated Notes, this
non-payment does not become an Event of Default until 30 days after the due date for such payment
(See Note 4).
Senior Convertible Notes
On November 24, 2004, we entered into a purchase agreement for a private placement of $36.0
million aggregate principal amount of our 6.5% Senior Convertible Notes due 2014. Investors in the
Senior convertible Notes agreed to a purchase price equal to 100% of the principal amount of these
notes. These notes require payment of interest semi-annually in arrears at an annual rate of 6.5%,
have a stated maturity of November 1, 2014, constitute senior unsecured obligations, are guaranteed
on a senior unsecured basis by our significant domestic subsidiaries, and are convertible at the
option of the holder under certain circumstances into shares of our common stock at an initial
conversion price of $3.25 per share or 15,384,615 (including the Series B notes) shares of common
stock, subject to adjustment.
On November 1, 2008, we have the option to redeem the Senior Convertible Notes, subject to
certain conditions. The net proceeds from the sale of these notes were used to prepay a portion of
our senior secured credit facility and for general corporate purposes. The Senior Convertible
Notes, the guarantees and the shares of common stock issuable upon conversion of these notes to be
offered have not been registered under the Securities Act of 1933, as amended, or any state
securities laws and, unless so registered, the securities may not be offered or sold in the United
States except pursuant to an exemption from, or in a transaction not subject to, the registration
requirements of the Securities Act and applicable state securities laws. A default under the credit
facility or the Senior Subordinated Notes resulting in acceleration that is not cured within 30
days is also a cross default under the Senior Convertible Notes.
In addition, other events of default under the Senior Convertible Notes indenture include, but
are not limited to, a change of control, the de-listing of our stock from a national exchange or
the commencement of a bankruptcy proceeding.
On February 24, 2005 and following shareholder approval, we sold $14 million in principal
amount of our Series B 6.5% Senior Convertible Notes due 2014, pursuant to separate option
exercises by the holders of the aforementioned $36 million aggregate principal amount of Senior
Convertible Notes issued by us in an initial private placement on November 24, 2004. The Senior
Convertible Notes are a hybrid instrument comprised of two components: (1) a debt instrument and
(2) certain embedded derivatives. The embedded derivatives include a redemption premium and a
make-whole provision. In accordance with the guidance that SFAS No. 133, as amended, Accounting for
Derivative Instruments and Hedging Activities, (SFAS 133) and EITF 00-19, Accounting for
Derivative Financial Instruments Indexed to, and Potentially Settled in, a Companys Own Stock
provide, the embedded derivatives must be removed from the debt host and accounted for separately
as a derivative instrument. These derivative instruments will be marked-to-market each reporting
period. During the three months ended December 31, 2004, we were required to also value the
portion of the Senior Convertible Notes that would settle in cash because of shareholder approval
of the Senior Convertible Notes had not yet been obtained. The initial value of this derivative was
$1.4 million and the value at December 31, 2004 was $4.0 million, and consequently, a $2.6 million
mark to market loss was recorded. The value of this derivative immediately prior to the affirmative
shareholder vote was $2.0 million and accordingly, we recorded a mark to market gain of $2.0
million during the three months ended March 31, 2005. There was no mark-to-market gain or loss
during the three months ended June 30, 2005. At the end of September 30, 2005, there was a
mark-to-market loss of $0.1 million recorded. There was no mark-to-market gain or loss during the
three months ended December 30, 2005. The calculation of the fair value of the conversion option
was performed utilizing the Black-Scholes option pricing model with the following assumptions
effective over the six months ended March 31, 2005: expected dividend yield of 0.00%, expected
stock price volatility of 40.00%, weighted average risk free interest rate ranging from 3.67% to
4.15% for four to ten years, respectively, and an expected term of four to ten years. The valuation
of the other embedded derivatives was derived by other valuation methods, including present value
measures and binomial models. At December 31, 2005, the fair value of the two remaining derivatives
was $1.5 million. Additionally, we recorded at March 31, 2005 a net discount of $0.8 million, which
is being amortized over the remaining term of the Senior Convertible Notes.
37
On January 19, 2006, the holders of the outstanding Series A and Series B 6.5% Senior
Convertible Notes, delivered written notice (the Notices) to us alleging that a Termination of
Trading constituting a Fundamental Change, each as defined under the Indenture dated as of
November 24, 2004 (the Indenture) by and among us, the guarantors party thereto and the Bank of
New York, as trustee, had occurred with respect to the Senior Convertible Notes and that, as a
result, we are required to repurchase the Senior Convertible Notes on the terms and conditions
specified in the Indenture. Pursuant to the Indenture, a Termination of Trading is deemed to have
occurred if the common stock of IES, into which the Senior Convertible Notes are convertible, is
neither listed for trading on the New York Stock Exchange (the NYSE) or the American Stock
Exchange nor approved for listing on the NASDAQ National Market or the NASDAQ SmallCap Market, and
no American Depositary Shares or similar instruments for such common stock are so listed or
approved for listing in the United States. The Notices allege that a Termination of Trading
occurred with respect to the Senior Convertible Notes when we were orally notified on December 15,
2005 that our common stock had been suspended from trading on the NYSE. As further described below,
we do not believe that a Termination of Trading has occurred and disputes any assertion to the
contrary.
As previously disclosed by us in Current Reports on Form 8-K filed with the Securities and
Exchange Commission (SEC), the NYSE on December 15, 2005 suspended trading of our common stock
and informed us of the NYSEs intent to submit an application to the SEC to de-list our common
stock after completion of applicable procedures, including any appeal by IES of the NYSEs staffs
decision. On December 30, 2005, in accordance with Rule 804.00 of the NYSE Listed Company Manual,
we appealed the NYSEs staffs decision by requesting a review by the designated committee of the
Board of Directors of the NYSE (the Committee) of the staffs determination to suspend the
trading of our common stock and an oral presentation before the Committee. We believe that, until
our common stock is de-listed by the NYSE after application to the SEC, which is not expected to
occur prior to completion of our appeal to the Committee, our common stock has not ceased to be
listed on the NYSE for purposes of determining whether a Termination of Trading has occurred
under the Indenture. Our shares now trade over-the-counter on the pink sheets under the symbol
IESR.
The Notices state that we were required to provide the holders of the Senior Convertible Notes
with notice of the occurrence of a Termination of Trading within 15 Business Days after December
15, 2005 and that we failed to do so. If a Termination of Trading occurred on December 15, 2005,
our failure to provide notice to the holders of the Senior Convertible Notes on or about, or prior
to, January 9, 2006 would constitute an Event of Default under the Indenture.
If a Termination of Trading occurred on December 15, 2005, then pursuant to the Notices, we
would have been required to repurchase the Senior Convertible Notes in cash at a purchase price
equal to 100% of the principal amount of the Senior Convertible Notes held by such holders plus
accrued and unpaid interest and Liquidated Damages (as defined in the Indenture) thereon on or
about, or prior to, February 7, 2006. If an Event of Default occurred as a result of our failure to
deliver notice to the holders of the Senior Convertible Notes of the occurrence of a Termination of
Trading, the holders of at least 25% in aggregate principal amount of the Senior Convertible Notes
have the right to declare the principal amount plus accrued and unpaid interest and Liquidated
Damages thereon immediately due and payable in cash.
In either case, the amount due under the Senior Convertible Notes, including the principal
amount plus accrued and unpaid interest and Liquidated Damages thereon, would be approximately $51
million, and we would not be able to make such payment when due. Pursuant to the Notices, the
holders have elected to exercise their repurchase rights following a Termination of Trading and
have not accelerated the obligations under the Senior Convertible Notes pursuant to an Event of
Default; however, the Notices expressly reserve the holders rights to accelerate the Senior
Convertible Notes under the terms of the Indenture. Nevertheless, we have previously announced that
we are contemplating filing a consensual Chapter 11 plan of reorganization pursuant to a
non-binding agreement in principle reached with an ad hoc committee, whose members hold a majority
in outstanding principal amount of our Senior Subordinated Notes. The agreement in principle
contemplates that the Senior Convertible Notes would be reinstated or the holders otherwise
provided the full value of their Senior Convertible Note claims. See Part I, Item 2. Managements
Discussion and Analysis on Financial Condition and Results of Operations Update on Financial
Restructuring. We do not believe that the delivery of the Notices is likely to have any impact
upon the recovery of the holders of the Senior Convertible Notes in a Chapter 11 proceeding.
There is no assurance that we will successfully complete the Restructuring contemplated by the
agreement in principle, or any other Restructuring. The agreement in principle is subject to the
negotiation of definitive documentation, approval by the requisite note holders and a court in a
Chapter 11 proceeding and customary closing conditions. Because the agreement in principle is not
binding and because there is no assurance it will be consummated, we will continue to evaluate
other alternatives for reorganizing our capital structure. In addition, we may be forced by our
creditors to seek the protection of federal bankruptcy law. If we consummates
38
any Restructuring, we may do so outside of bankruptcy, in a prepackaged Chapter 11 proceeding,
in a pre-arranged Chapter 11 bankruptcy proceeding or in another proceeding under federal
bankruptcy law. Any Restructuring could cause the holders of IES outstanding securities, including
our common stock, Senior Subordinated Notes and Senior Convertible Notes, to lose some or all of
the value of their investment in our securities. Furthermore, such Restructuring could result in
material changes in the nature of our business and material adverse changes to our financial
condition and results of operations. See Item 1A. Risk Factors.
If an Event of Default has occurred or occurs in the future under the Indenture, the
cross-default provisions in our other debt instruments and agreements, including our senior bank
credit facility, Senior Subordinated Notes and agreement with our primary surety bonding company,
unless cured or waived, would result in an event of default under these instruments and agreements.
In such event, the lenders under these instruments and agreements may exercise their remedies
hereunder, including causing all outstanding indebtedness to accelerate and become due.
Capitalized terms used in this section but not otherwise defined herein shall have the
meanings ascribed to them in the Indenture. A copy of the Indenture is filed as an exhibit to our
Current Report on Form 8-K filed with the SEC on November 22, 2004.
OFF-BALANCE SHEET ARRANGEMENTS
As is common in our industry, we have entered into certain off balance sheet arrangements that
expose us to increased risk. Our significant off balance sheet transactions include commitments
associated with noncancelable operating leases, letter of credit obligations and surety guarantees.
We enter into noncancelable operating leases for many of our vehicle and equipment needs.
These leases allow us to retain our cash when we do not own the vehicles or equipment and we pay a
monthly lease rental fee. At the end of the lease, we have no further obligation to the lessor. We
may determine to cancel or terminate a lease before the end of its term. Typically, we are liable
to the lessor for various lease cancellation or termination costs 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 and vendors 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 or vendor has had reasonable cause to effect
payment under a letter of credit. At December 31, 2005, $2.6 million of our outstanding letters of
credit were to collateralize our customers and vendors.
Some of the underwriters of our casualty insurance program require us to post letters of
credit as collateral. This is common in the insurance industry. To date we have not had a situation
where an underwriter has had reasonable cause to effect payment under a letter of credit. At
December 31, 2005, $34.0 million of our outstanding letters of credit were to collateralize our
insurance program.
Many of our customers require us to post performance and payment bonds issued by a surety.
Those bonds guarantee the customer that we will perform under the terms of a contract and that we
will pay subcontractors and vendors. In the event that we fail to perform under a contract or pay
subcontractors and vendors, the customer may demand the surety to pay or perform under our bond.
Our relationship with our sureties is such that we will indemnify the sureties for any expenses
they incur in connection with any of the bonds they issues on our behalf. To date, we have not
incurred significant costs to indemnify our sureties for expenses they incurred on our behalf. As
of December 31, 2005, our cost to complete projects covered by surety bonds was approximately $59.6
million and we utilized a combination of cash and letters of credit totaling $30.9 million to
collateralize our bonding program.
In April 2000, we committed to invest up to $5.0 million in 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, 2005, we
had invested $4.3 million under our commitment to EnerTech. The carrying value of this EnerTech
investment at September 30, 2005 and December 31, 2005 was $3.1 million and $3.6 million,
respectively. This investment is accounted for on the cost basis of accounting and accordingly, we
do not record unrealized losses for the EnerTech investment that we believe are temporary in
nature. As of December 31, 2005, the unrealized losses related to our share of the EnerTech fund
amounted to approximately $0.7 million, which we believe are temporary in nature. If facts arise
that lead us to determine that such unrealized losses are not temporary, we would write down our
investment in EnerTech through a charge to other expense during the period of such determination.
39
Our future contractual obligations due by September 30 of each of the following fiscal years
include (in thousands) (1):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006 |
|
2007 |
|
2008 |
|
2009 |
|
2010 |
|
Thereafter |
|
Total |
Debt obligations |
|
$ |
222,902 |
|
|
$ |
15 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
222,917 |
|
Operating lease obligations |
|
$ |
8,958 |
|
|
$ |
6,538 |
|
|
$ |
4,399 |
|
|
$ |
2,865 |
|
|
$ |
1,309 |
|
|
$ |
814 |
|
|
$ |
24,883 |
|
Deferred and contingent tax liabilities |
|
$ |
|
|
|
$ |
13,532 |
|
|
$ |
148 |
|
|
$ |
368 |
|
|
$ |
200 |
|
|
$ |
22 |
|
|
$ |
14,270 |
|
Capital lease obligations |
|
$ |
53 |
|
|
$ |
38 |
|
|
$ |
38 |
|
|
$ |
3 |
|
|
$ |
1 |
|
|
|
|
|
|
$ |
133 |
|
|
|
|
(1) |
|
The tabular amounts exclude the interest obligations that will be created if the debt
and capital lease obligations are outstanding for the periods presented. |
Our other commercial commitments expire by September 30 of each of the following fiscal years
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006 |
|
2007 |
|
2008 |
|
2009 |
|
2010 |
|
Thereafter |
|
Total |
Standby letters of credit |
|
$ |
49,506 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
49,506 |
|
Other commercial commitments |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
650 |
(2) |
|
$ |
|
|
|
$ |
|
|
|
$ |
650 |
|
|
|
|
(2) |
|
Balance of investment commitment in EnerTech. On October 3, 2005, we invested $450,000 in
EnerTech reducing our remaining commitment to $650,000. |
OUTLOOK
As described above in Managements Discussion and Analysis of Financial Condition and Results
of Operations Introduction Update on Financial Restructuring, our independent registered
public accounting firm, Ernst & Young LLP, included a going concern modification in its audit
opinion on our consolidated financial statements for the fiscal year
ended September 30, 2005
included in our Form 10-K as a result of our operating losses during fiscal 2005, our
non-compliance with certain debt covenants as of September 30, 2005 and our potential
non-compliance with certain debt covenants subsequent to September 30, 2005. Each of the efforts
that we are currently undertaking to address this uncertainty, including the Restructuring and
implementation of our Successful Projects process is expected to have an impact on our liquidity
and capital resources.
We expect that any restructuring of our capital structure would de-lever, and therefore
strengthen, our balance sheet, including the proposed Restructuring set forth in our non-binding
agreement in principle with the ad hoc committee of noteholders described above. The proposed
Restructuring, if consummated, would result in our $172.9 million principal amount Senior
Subordinated Notes being exchanged for common stock, and for the reinstatement or refinancing of
our $50 million principal amount Senior Convertible Notes and our bank credit facility. In
addition, as described above, the agreement in principle contemplates that our customers, vendors
and trade creditors would not be impaired by the Restructuring and would be paid in full in the
ordinary course of business. Our liquidity may not improve or may be adversely affected, however,
until our Restructuring is consummated. There is no certainty as to when or if any Restructuring
will be consummated. See Managements Discussion and Analysis of Financial Condition and Results
of Operations for a further discussion of the proposed Restructuring. See Item 1A. Risk Factors.
While we expect to reach consensual agreement with the holders of our $50 million Senior
Convertible Notes or refinance their indebtedness, we may be de-listed from the NYSE. If our common
stock is de-listed from the NYSE and we have not reached agreement with these noteholders, the
holders of our Senior Convertible Notes would have the right, beginning 35 business days after
de-listing, to put their notes back to us. We would likely not be able to pay the principal and
accrued interest on those notes if put to us. Additionally, our credit facility restricts our
ability to repurchase these notes. Our inability to repurchase these notes and the limitations in
our credit facility to repurchase these notes could affect the success of any plan of
reorganization contemplated by us without an agreement with the holders of the Senior Convertible
Notes. Absent an agreement with the holders of the Senior Convertible Notes to any Chapter 11 plan
that may be filed, we would seek to reinstate their notes or give them property equal to the full
value of their note claims. We do not presently have an agreement with any of the holders of the
Senior Convertible Notes to the agreement in principle or any other proposed restructuring plan.
See Managements Discussion and Analysis of Financial Condition and Results of Operations
Introduction Senior Convertible Notes.
On January 27, 2006, IES entered into a Forbearance Agreement (Forbearance Agreement) with
BofA in connection with the Credit Facility. The Forbearance Agreement provided for BofAs
forbearance from exercising its rights and remedies under the Credit Facility and related
agreements from January 27, 2006 through the earliest to occur of (i) 5:00 p.m. (Dallas, Texas
time) on February 28, 2006 or (ii) the date that any Forbearance Default (as defined in the
Forbearance Agreement) occurs. Notwithstanding the
40
forbearance, on January 26, 2006 BofA sent a blockage notice to the Senior Subordinated
Notes Indenture Trustee preventing any payments from being made on such notes. Lastly, under the
Forbearance Agreement, BofA had no obligation to make any loans or otherwise extend any credit to
the Company under the Credit Facility. Any agreement by BofA to make any loans or otherwise extend
any further credit was in the sole discretion of BofA.
Capitalized terms used but not defined under this heading have the meaning set forth in the
Loan and Security Agreement, dated as of August 1, 2005, and filed as exhibit 10.1 to the Form 8-K
dated August 4, 2005.
An interest payment of approximately $8.1 million on the Senior Subordinated Notes was due on
February 1, 2006. We did not make this interest payment. Under the indenture for the Senior
Subordinated Notes, this non-payment does not become an Event of Default until 30 days after the
due date for such payment.
Our debt instruments and agreements, including the Credit Facility, the Senior Subordinated
Notes, the Senior Convertible Notes and our agreement with our primary surety bonding company,
contain cross-default provisions whereby an uncured and unwaived event of default under one will
result in an event of default under each of the others. In accordance with Emerging Issues Task
Force (EITF) 86-30, Classifications of Obligations When a Violation is Waived by the Creditor, we
have classified the long-term portion of senior convertible notes and senior subordinated notes as
current liabilities on the balance sheet due to the defaults under the Credit Facility and the
potential for cross-defaults described above.
We expect to generate cash flow from operations and borrowings under our credit facility. Our
cash flows from operations tend to track with the seasonality of our business and historically have
improved in the latter part of our fiscal year. We anticipate that these combined cash flows
including those resulting from successful completion of the proposed Restructuring will provide
sufficient cash to enable us to meet our working capital needs, debt service requirements and
capital expenditures for property and equipment through the next twelve months. We currently expect
revenues of $0.90 billion to $0.95 billion, operating income of $9 million to $12 million, and
EBITDA of $16 million to $19 million for fiscal 2006 before considering any costs related to the
Restructuring. Our projections have been revised lower as compared to the projections previously
disclosed in our annual report on Form 10-K due to uncertainty related to the Restructuring and its
impact on our business in the near term. We expect capital expenditures of approximately $6.0
million for the fiscal year ending September 30, 2006. Our ability to generate cash flow is
dependent on our successful completion of the proposed Restructuring and many other factors,
including demand for our products and services, the availability of projects at margins acceptable
to us, the ultimate collectibility of our receivables, the ability to consummate transactions to
dispose of businesses and our ability to borrow on our credit facility. See Disclosure Regarding
Forward-Looking Statements.
SEASONALITY AND QUARTERLY FLUCTUATIONS
Our results of operations from residential construction are seasonal, depending on weather
trends, with typically higher revenues generated during spring and summer and lower revenues during
fall and winter. The commercial and industrial aspect of our business is less subject to seasonal
trends, as this work generally is performed inside structures protected from the weather. Our
service and maintenance business is generally not affected by seasonality. In addition, the
construction industry has historically been highly cyclical. Our volume of business may be
adversely affected by declines in construction projects resulting from adverse regional or national
economic conditions. Quarterly results may also be materially affected by the timing of new
construction projects, acquisitions and the timing and magnitude of acquisition assimilation costs.
Accordingly, operating results for any fiscal period are not necessarily indicative of results that
may be achieved for any subsequent fiscal period.
INFLATION
Due to the relatively low levels of inflation experienced in fiscal 2002 and 2003, inflation
did not have a significant effect on our results in those fiscal years or on any of the acquired
businesses during similar periods. During fiscal 2004 and 2005, however, we experienced significant
increases in the commodity prices of copper products, steel products and fuel. We expect to
experience continued fluctuations in commodity prices in fiscal 2006. Over the long-term, we expect
to be able to pass these increased costs to our customers.
RECENT ACCOUNTING PRONOUNCEMENTS
In December 2004, the Financial Accounting Standards Board (FASB) issued Statement of
Financial Accounting Standards (SFAS) No. 123 (revised 2004), Share-Based Payment, which is a
revision of SFAS No. 123, Accounting for Stock-Based Compensation. SFAS No. 123(R) supersedes APB
Opinion No. 25, Accounting for Stock Issued to Employees, and amends SFAS
41
No. 95, Statement of Cash Flows. SFAS No. 123(R) requires companies to account for
stock-based compensation awards based on the fair value of the awards at the date they are granted.
The resulting compensation cost is shown as an expense in the consolidated statements of
operations. This statement was effective for the Company beginning on October 1, 2005. SFAS No.
123(R) permits adoption using one of two methods: 1) a modified prospective method, in which
compensation cost is recognized beginning on the effective date (a) based on the requirements of
SFAS No. 123(R) for all share-based payments granted after the effective date and (b) based on the
requirements of SFAS No. 123 for all awards granted to employees prior to the effective date of
SFAS No. 123(R) that remain unvested on the effective date and 2) a modified retrospective method
that includes the requirements above, but also permits entities to restate based on the amounts
previously recognized under SFAS No. 123 for purposes of pro forma disclosures of all prior periods
presented. The Company adopted SFAS No. 123(R) using the modified prospective method. As
discussed above, the Company prior to October 1, 2005, accounted for share-based payments to
employees using the intrinsic value method and, as such, generally recognized no compensation cost
for stock option awards and stock issued pursuant to its Employee Stock Purchase Plan (ESPP).
Accordingly, the adoption of SFAS No. 123(R) will have a significant impact on our reported results
of operations and cash flows; however, the ultimate impact of the adoption of SFAS No. 123(R)
cannot be predicted at this time because it will depend on the levels of share-based payments
granted in the future. However, had the Company adopted SFAS No. 123(R) in the periods presented,
the impact on results of operations would have approximated the impact of SFAS No. 123 as presented
in Note 2. SFAS No. 123(R) also requires the benefits of tax deductions in excess of recognized
compensation cost to be reported as a financing cash flow, rather than as an operating cash flow as
required under current literature. This requirement will reduce net operating cash flows and
increase net financing cash flows in periods after adoption. See further discussion in Note 2 to
the financial statements.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Management is actively involved in monitoring exposure to market risk and continues to develop
and utilize appropriate risk management techniques. Our exposure to significant market risks
include outstanding borrowings under our floating rate credit facility and fluctuations in
commodity prices for copper products, steel products and fuel. As of December 31, 2005, there were
no borrowings outstanding under our credit facility and outstanding borrowings under our senior
convertible notes was $50.0 million. The senior convertible notes are a hybrid instrument comprised
of two components: (1) a debt instrument and (2) certain embedded derivatives. The embedded
derivatives include a redemption premium and a make-whole provision. In accordance with the
guidance that Statement of Financial Accounting Standards No. 133, as amended, Accounting for
Derivative Instruments and Hedging Activities, (SFAS 133) and Emerging Issues Task Force Issue
No. 00-19, Accounting for Derivative Financial Instruments Indexed to, and Potentially Settled in,
a Companys Own Stock (EITF 00-19) provide, the embedded derivatives must be removed from the
debt host and accounted for separately as a derivative instrument. These derivative instruments
will be marked-to-market each reporting period. During the three months ended December 31, 2004, we
were required to also value the portion of the Notes that would settle in cash because shareholder
approval of the notes had not yet been obtained. The initial value of this derivative was $1.4
million and the value at December 31, 2004 was $4.0 million and consequently, a $2.6 million mark
to market loss was recorded. The value of this derivative immediately prior to the affirmative
shareholder vote was $2.0 million and accordingly, we recorded a mark to market gain of $2.0
million during the three months ended March 31, 2005. There was no mark to market gain or loss
during the three months ended June 30, 2005. During the quarter ended September 30, 2005 there was
a mark to market loss of $0.1 million recorded. There was no mark to market gain or loss during the
three months ended December 31, 2005. The calculation of the fair value of the conversion option
was performed utilizing the Black-Scholes option pricing model with the following assumptions
effective over the three months ended December 31, 2005: expected dividend yield of 0.00%, expected
stock price volatility of 40.00%, weighted average risk free interest rate ranging from 3.67% to
4.15% and an expected term of four to ten years. The valuation of the other embedded derivatives
was derived by other valuation methods, including present value measures and binomial models. At
December 31, 2005, the fair value of the two remaining derivatives was $1.5 million. Additionally,
we recorded at March 31, 2005 a net discount of $0.8 million which is being amortized over the
remaining term of the Notes. Management does not use derivative financial instruments for trading
purposes or to speculate on changes in interest rates or commodity prices. We did not cause a
registration statement to become effective on or before November 23, 2005, to register the
underlying shares for the notes and liquidated damages began to accrue at the rate of 0.25% per
annum.
As a result, our exposure to changes in interest rates results from our short-term and
long-term debt with both fixed and floating interest rates. The following table presents principal
or notional amounts (stated in thousands) and related interest rates by fiscal year of maturity for
our debt obligations and their indicated fair market value at December 31, 2005:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006 |
|
2007 |
|
2008 |
|
2009 |
|
2010 |
|
Thereafter |
|
Total |
LiabilitiesDebt: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed Rate (senior subordinated notes) |
|
$ |
172,885 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
172,885 |
|
Fixed Interest Rate |
|
|
9.375 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9.375 |
% |
42
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006 |
|
2007 |
|
2008 |
|
2009 |
|
2010 |
|
Thereafter |
|
Total |
Fixed Rate (senior convertible notes) |
|
$ |
50,000 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
50,000 |
|
Fixed Interest Rate |
|
|
6.5 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6.5 |
% |
Fair Value of Debt: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed Rate (senior subordinated notes) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
102,867 |
|
Fixed Rate (senior convertible notes) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
49,229 |
|
ITEM 4. CONTROLS AND PROCEDURES
(a) Disclosure controls and procedures.
Disclosure controls and procedures are designed to ensure that information required to be
disclosed by us in reports filed or submitted under the Securities Exchange Act of 1934 (Exchange
Act) is recorded, processed, summarized and reported within the time periods specified in the
SECs rules and forms. Disclosure controls and procedures include, without limitation, controls and
procedures designed to ensure that information required to be disclosed under the Exchange Act is
accumulated and communicated to management, including the principal executive and financial
officers, as appropriate to allow timely decisions regarding required disclosure. There are
inherent limitations to the effectiveness of any system of disclosure controls and procedures,
including the possibility of human error and the circumvention or overriding of the controls and
procedures. Accordingly, even effective disclosure controls and procedures can only provide
reasonable assurance of achieving their control objectives.
An evaluation was performed under the supervision and with the participation of the Companys
management, under the supervision of our principal executive officer (CEO) and principal financial
officer (CFO), of the effectiveness of the design and operation of the Companys disclosure
controls and procedures as of December 31, 2005. Based on that evaluation and the material weakness
identified below, the Companys management, including the CEO and the CFO, concluded that the
Companys disclosure controls and procedures were not effective, as of December 31, 2005.
The conclusion that the Companys disclosure controls and procedures were not effective as of
December 31, 2005, was based on the identification of a material weakness in internal controls as
of September 30, 2005, for which remediation is still ongoing.
Effective for the six months ended March 31, 2006, the Company determined that a measurement
error occurred related to the accounting for its self-insurance reserves, which warranted revision
to the previously reported results for the three months ended December 31, 2005.
While analyzing the self-insurance reserves during the financial close for the month of May
2006, management identified a measurement error that related to the quarters ended December 31,
2005 and March 31, 2006. The error was derived from an unintentional misapplication of information
provided by the Companys insurance carriers whereby the Company underestimated the outstanding
amount of unbilled payables to those insurance carriers. The error resulted in an understatement of
self-insurance reserves and cost of revenues.
The discovery of this measurement error continues to lead management to conclude that the
Companys disclosure controls and procedures were not effective as of December 31, 2005. The
Company will take appropriate steps to reduce the possibility of such a measurement error from
occurring in the future. These steps include adding a checklist to the review of self-insurance
liabilities, adding more documentation to assist in a more thorough analysis of the self-insurance
reserves and increasing the degree of review over the insurance accrual process.
In addition, during the financial statement reporting process for the year ended September 30,
2006, the Company determined that a measurement error occurred, which warranted revision to the
previously reported results for the quarters ended December 31, 2005,
March 31, 2006 and June 30, 2006. The error was the result of a breakdown in the operation of
a designed control whereby a significant unexplained difference between the inventory sub-ledger
and the general ledger was not adequately researched and resolved until after the financial
statement close process. The error resulted in an overstatement of inventory, an understatement of
vendor receivable, an overstatement of selling, general and administrative expenses and an
understatement of cost of services.
43
The discovery of this measurement error does not change Company managements earlier
conclusion that the Companys disclosure controls and procedures were not effective as of December
31, 2005. The Company believes it has taken appropriate steps to reduce the possibility of such a
measurement error from occurring in the future. These steps include reconciling the sub-ledger to
the general ledger monthly, calculating vendor receivables attributable to inventory sales monthly
and increasing the degree of review over the reconciliation process.
(b) Update on Internal Control Over Financial Reporting.
Our management assessed the effectiveness of our internal control over financial reporting as
of September 30, 2005. In making this assessment, it used the framework entitled Internal Control
Integrated Framework set forth by the Committee of Sponsoring Organizations of the Treadway
Commission (COSO). Based on its evaluation of the COSO framework applied to Integrated Electrical
Services, Inc.s internal control over financial reporting, and the identification of a material
weakness related to the Companys year-end financial statement close process with respect to
controls over certain non-routine financial reporting procedures, management concluded that the
Company did not maintain effective internal control over financial reporting as of September 30,
2005.
This material weakness resulted, at least in part, from high turnover in an already limited
corporate finance and accounting staff and the significant demands placed on that accounting staff.
While the accounting staff was increased significantly, many of the new staff members were not
added until late in the year, with several being added subsequent to September 30, 2005 and having
not been through even a month-end close prior to the year end close. Much of the learning required
to complete the close was done while working on the year-end close. This led to time pressures in
delivering support to our auditors and resulted in many post closing entries. We have also had
several vacancies in Regional Controller positions during fiscal 2005. These vacancies were filled
subsequent to September 30, 2005. Additionally, management believes the material weakness continues
to exist as a result of the measurement error related to the accounting for the Companys
self-insurance reserves and inventory described in this item.
To remediate this material weakness, the Company is executing the following plan:
|
|
|
Provide additional training and education for the recent additions in the finance department. |
|
|
|
|
Fill the vacant Regional Controller positions. These vacancies have been filled. |
|
|
|
|
Provide more detailed structure and evaluation of the Regional Controller function. |
|
|
|
|
Continue the review and monitoring of the accounting department structure and
organization, both in terms of size and expertise. |
|
|
|
|
Continue review, testing and monitoring of the internal controls with respect to the
operation of the Companys financial reporting and close processes. |
At December 31, 2005 the Company believes that the additional steps identified above will
serve to remediate the identified material weakness. This remediation is ongoing at December 31,
2005 and this represents the only changes to the Companys internal controls over financial
reporting that were identified in connection with the evaluation required by Rules 13a-15(d) or
15d-15(d) under the Exchange Act during the quarter ended December 31, 2005 that have materially
affected, or are reasonably likely to materially affect, Integrated Electrical Services, Inc.s
internal control over financial reporting.
Since December 31, 2005, to address the error detected in accounting for self-insurance
reserves, the Company has added increased review of its self-insurance liabilities including adding
a checklist to the review of self-insurance liabilities, adding more documentation to assist in a
more thorough analysis of the self-insurance reserves and increasing the degree of review over the
insurance accrual process.
In addition, to address the error detected in accounting for inventory, the Company has added
increased review of its inventory reconciliation process including reconciling the sub-ledger to
the general ledger monthly, calculating vendor receivables attributable to inventory sales monthly and increased the degree of review over the reconciliation process.
44
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
In re Integrated Electrical Services, Inc. Securities Litigation, No. 4:04-CV-3342; in the
United States District Court for the Southern District of Texas, Houston Division: Between August
20 and October 4, 2004, five putative securities fraud class actions were filed against IES and
certain of its officers and directors in the United States District Court for the Southern District
of Texas. The five lawsuits were consolidated under the caption In re Integrated Electrical
Services, Inc. Securities Litigation, No. 4:04-CV-3342. On March 23, 2005, the Court appointed
Central Laborer Pension Fund as lead plaintiff and appointed lead counsel. Pursuant to the
parties agreed scheduling order, lead plaintiff filed its amended complaint on June 6, 2005. The
amended complaint alleges that defendants violated Section 10(b) and 20(a) of the Securities
Exchange Act of 1934 by making materially false and misleading statements during the proposed class
period of November 10, 2003 to August 13, 2004. Specifically, the amended complaint alleges that
defendants misrepresented the Companys financial condition in 2003 and 2004 as evidenced by the
restatement, violated generally accepted accounting principles, and misrepresented the sufficiency
of the Companys internal controls so that they could engage in insider trading at
artificially-inflated prices, retain their positions at the Company, and obtain a $175 million
credit facility for the Company.
On August 5, 2005, the defendants moved to dismiss the amended complaint for failure to state
a claim. The defendants argued, among other things, that the amended complaint fails to allege
fraud with particularity as required by Rule 9(b) of the Federal Rules of Civil Procedure and fails
to satisfy the heightened pleading requirements for securities fraud class actions under the
Private Securities Litigation Reform Act of 1995. Specifically, defendants argue that the amended
complaint does not allege fraud with particularity as to numerous GAAP violations and opinion
statements about internal controls, fails to raise a strong inference that defendants acted
knowingly or with severe recklessness, and includes vague and conclusory allegations from
confidential witnesses without a proper factual basis. Lead plaintiff filed its opposition to the
motion to dismiss on September 28, 2005, and defendants filed their reply in support of the motion
to dismiss on November 14, 2005.
On December 21, 2005, the Court held a telephonic hearing relating to the motion to dismiss.
On January 10, the Court issued a memorandum and order dismissing with prejudice all claims filed
against the Defendants. Plaintiff in the securities class action filed its notice of appeal on
February 2, 2006. No dates for briefing the appeal have yet been set or determined. The Company
intends to vigorously contest this action. An adverse outcome in this action could have a material
adverse effect on our business, consolidated financial condition, results of operations or cash
flows.
Radek v. Allen, et al., No. 2004-48577; in the 113th Judicial District Court, Harris County,
Texas: On September 3, 2004, Chris Radek filed a shareholder derivative action in the District
Court of Harris County, Texas naming Herbert R. Allen, Richard L. China, William W. Reynolds, Britt
Rice, David A. Miller, Ronald P. Badie, Donald P. Hodel, Alan R. Sielbeck, C. Byron Snyder, Donald
C. Trauscht, and James D. Woods as individual defendants and IES as nominal defendant. On July 15,
2005, plaintiff filed an amended shareholder derivative petition alleging substantially similar
factual claims to those made in the putative class action, and making common law claims against the
individual defendants for breach of fiduciary duties, misappropriation of information, abuse of
control, gross mismanagement, waste of corporate assets, and unjust enrichment. On September 16,
2005, defendants filed special exceptions or, alternatively, a motion to stay the derivative
action. On November 11, 2005, Plaintiff filed a response to defendants special exceptions and
motion to stay. . A hearing on defendants special exceptions and motion to stay took place on
January 9, 2006. Following that hearing, the parties submitted supplemental briefing relating to
the standard for finding director self-interest in a derivative case. Defendants also advised the
Court that the class action had been dismissed with prejudice. The Court has not yet ruled on the
special exceptions. The Company intends to vigorously contest this action. An adverse outcome in
this action could have a material adverse effect on our business, consolidated financial condition,
results of operations or cash flows.
Florida Power & Light Company vs. Qualified Contractors, Davis Electrical Contractors, Inc.,
et.al. Case No. 04-80505, United States District Court for the Southern District of Florida, Miami
Division: This is a property damage claim arising out of installation of electrical and pipe
fitting work performed on a turbine construction project at a power plant. After the Company
subsidiary completed the project there was a failure at one of the turbines resulting in damage to
the turbines alleged to be approximately $9.2 million. A bench trial began on January 19 and is
expected to conclude early February. The company does not believe it is liable for any of the
damages and that even if held liable is insured for amounts in excess of any potential verdict The
Company intends to vigorously contest this action. An adverse outcome in this action could have a
material adverse effect on our business, consolidated financial condition, results of operations or
cash flows.
45
SEC Investigation On August 31, 2004, the Fort Worth Regional Office of the SEC sent a
request for information concerning IESs inability to file its 10-Q in a timely fashion, the
internal investigation conducted by counsel to the Audit Committee of the companys Board of
Directors, and the material weaknesses identified by IESs auditors in August 2004. In December
2004, the Commission issued a formal order authorizing the staff to conduct a private investigation
into these and related matters. The investigation is still ongoing, and the Company is cooperating
with the SEC. An adverse outcome in this matter could have a material adverse effect on our
business, consolidated financial condition, results of operations or cash flows.
Cynthia People v. Primo Electric Company, Inc., Robert Wilson, Ray Hopkins, and Darcia Perini;
In the United States District Court for the District of Maryland; C.A. No. 24-C-05-002152: On March
10, 2005, one of IES wholly-owned subsidiaries was served with a lawsuit filed by an ex-employee
alleging thirteen causes of action including employment, race and sex discrimination as well as
claims for fraud, intentional infliction of emotional distress, negligence and conversion. On each
claim plaintiff is demanding $5-10 million in compensatory and $10-20 million in punitive damages;
attorneys fees and costs. This action was filed after the local office of the EEOC terminated
their process and issued plaintiff a right-to -sue letter per her request. IES will vigorously
contest any claim of wrongdoing in this matter and does not believe the claimed damages bear any
likelihood of being found in this case. However, if such damages were to be found, it would have a
material adverse effect on consolidated financial condition and cash flows.
We are involved in various other legal proceedings that have arisen in the ordinary course of
business. While it is not possible to predict the outcome of any of these proceedings with
certainty and it is possible that the results of legal proceedings may materially adversely affect
us, in our opinion, these proceedings are either adequately covered by insurance or, if not so
covered, should not ultimately result in any liability which would have a material adverse effect
on our financial position, liquidity or results of operations
ITEM 1A. RISK FACTORS
The factors set forth under the caption Risk Factors in the Companys Annual Report on Form
10-K for the fiscal year ended September 30, 2005 (the 10-K) are hereby modified and supplemented
by the risks described below. Your should carefully consider the risks described below in addition
to those set forth in the 10-K, as well as the other information included in this document. Our
business, results of operations and/or financial condition could be materially and adversely
affected by any of these risks, and the value of your investment may decrease due to any of these
risks.
Holders of our Equity Securities and Certain of our Unsecured Debt Obligations May Lose a
Significant Portion of the Value of Their Investment.
The terms of the Restructuring or any reorganization plan ultimately confirmed in a Chapter 11
Bankruptcy proceeding can affect the value of our various pre-petition liabilities, including,
without limitation, IES common stock, senior convertible notes, senior subordinated notes and other
securities. No assurance can be given as to what values, if any, will be ascribed in any bankruptcy
proceedings to each of these securities. A plan of reorganization could result in holders of the
liabilities and the securities of the Company receiving no value, minimal value or speculative
value for their interests.
Our initiative to de-lever our balance sheet may not be completed.
The completion of our initiative to de-lever our balance sheet will require support from our
creditors. If it is implemented pursuant to a bankruptcy proceeding, as currently proposed,
consummation of any plan of reorganization will require a favorable vote by certain impaired
classes of creditors, satisfaction of certain bankruptcy law requirements and confirmation by the
bankruptcy court, which, as a court of equity, may exercise substantial discretion and choose not
to confirm the plan. If the proposed Restructuring, our initiative and/or any plan of
reorganization does not receive the requisite support, our financial condition and the value of our
securities will likely be materially adversely affected.
Because the agreement in principle for the proposed Restructuring is not binding and because
there is no assurance it will be consummated, we continue to evaluate other alternatives for
restructuring our capital structure. The uncertainty as to whether, how and when our restructuring
may be consummated may cause concern in the marketplace among customers or vendors. If that concern
results in the changing of payment or credit terms to us or our subsidiaries then our results from
operations may be significantly affected. If a sufficient percentage of such constituencies were to
make changes the Company may be forced to seek protection of the federal bankruptcy laws to manage
the exposure. If we consummate any restructuring, we may do so outside of bankruptcy, or in a
pre-arranged Chapter 11 proceeding or in another proceeding under federal bankruptcy law.
46
Any bankruptcy proceeding involves uncertainties and risks including the potential to involve
more contested issues with creditors and other parties in interest and result in significantly
increased administrative expenses, a negative impact on cash flow due to weakened trade and
customer relations and a corresponding reduction in the consideration received by holders of
unsecured or undersecured claims. Any of these alternatives may be potentially materially adverse
to the holders of our common stock and our other securities, including our senior convertible notes
and our senior subordinated notes, and may cause holders of our common stock and our other
securities to lose a significant portion of the value of their investment in us.
If we are unable to service or refinance our indebtedness, we may need to seek protection from our
creditors under federal bankruptcy laws.
We have a substantial amount of indebtedness outstanding under our senior subordinated notes,
senior convertible notes and credit facility. If we are unable to service our indebtedness or
refinance our indebtedness on acceptable terms, it may be necessary for us to seek protection from
our creditors under federal bankruptcy laws unless we reach an agreement with our creditors to the
proposed Restructuring plan or to another mutually agreeable restructuring plan. We cannot assure
you that we will be able to consummate a restructuring plan on terms acceptable to us or at all.
Our last interest payment on our senior subordinated notes was due on February 1, 2006, on which
date we owed approximately $8.1 million in accrued interest to the holders of these notes, and we
did not make this interest payment. The failure to make this interest payment will result in an
event of default if uncured within 30 days. It has been necessary for us to seek amendments of our
new credit facility in order to avoid our non-compliance with the fixed coverage ratio set forth in
the agreement relating to our credit facility. As of January 27, 2006, we were in default under the
credit facility. We entered into a forbearance agreement with BofA pursuant to which BofA has
agreed not to exercise any rights and remedies it may have under the credit facility documents. A
default under the credit facility that is not cured or waived within 30 days would also result in
defaults under our senior subordinated notes and senior convertible notes, which would cause the
outstanding indebtedness under the new credit facility, senior subordinated notes and senior
convertible notes to accelerate and become due. It would also be a default under our agreement with
our primary surety bonding company. We do not have the necessary cash to repay our indebtedness if
it were to become due and would likely have to seek protection from our creditors under federal
bankruptcy laws unless we reach an agreement with our creditors to the proposed Restructuring plan
or to another mutually agreeable restructuring plan. Filing of bankruptcy would also be a
Fundamental Change under our senior convertible notes. Please see Managements Discussion and
Analysis Liquidity and Capital Resources. Whether or not we file for protection in connection
with a pre-arranged bankruptcy proceeding or otherwise, it is likely that the current holders of
our equity securities will lose a significant portion of their value as a result of the dilution
that will result from the claims of our more senior stakeholders.
The Class Action Litigation
In the 10-K, we included the risk captioned: The Class Action Securities Litigation if
continued or decided against us could have a material adverse effect. Between August 20, 2004 and
October 4, 2004, five putative securities fraud class actions were filed against IES and certain of
its existing and former officers and directors. The five lawsuits were consolidated under the
caption In re Integrated Electrical Services, Inc. Securities Litigation. The plaintiffs allege
that the defendants violated Section 10(b) and Section 20(a) of the Securities Exchange Act of 1934
by making materially false and misleading statements during the proposed class period of November
10, 2003 to August 13, 2004. On January 10, 2006, the district court dismissed the lawsuit, with
prejudice. Plaintiff in the securities class action filed its notice of appeal on February 2, 2006.
No dates for briefing the appeal have yet been set or determined. We believe there is no merit to
the claims, which belief is supported by the recent dismissal with prejudice, we believe any
securities litigation claim held by these plaintiffs ultimately would not be recoverable against
IES.
47
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
Issuer Purchases of Equity Securities(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(c) Total Number of |
|
|
(d) Maximum Approximate |
|
|
|
(a) Total Number |
|
|
(b) Average |
|
|
Shares Purchased as Part |
|
|
Dollar Value of Shares |
|
|
|
of Shares |
|
|
Price Paid Per |
|
|
of Publicly Announced |
|
|
that May Yet Be |
|
Period |
|
Purchased |
|
|
Share |
|
|
Plans of Programs |
|
|
Purchased Under the Plan |
|
|
|
(Amounts in thousands, except per share amounts) |
|
October 1, 2005October 31, 2005 |
|
|
|
|
|
$ |
|
|
|
|
|
|
|
$ |
8,353 |
|
November 1, 2005November 30, 2005 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8,353 |
|
December 1, 2005December 31, 2005 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8,353 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
|
|
|
$ |
|
|
|
|
|
|
|
$ |
8,353 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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(1) |
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On November 10, 2003, the Company announced that its Board of Directors authorized the
repurchase of up to $13 million of the Companys Common Stock. The share repurchase plan does
not have an expiration date. The table does not include 19,341 shares withheld to satisfy tax
withholding requirements relating to restricted stock issued pursuant to the 1999 Plan which
vested on December 1, 2005. The average price of these shares was $0.58. |
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Credit Facility
On January 3, 2006, we entered into an amendment, effective as of December 30, 2005, to the
Credit Facility with Bank of America, N.A. (BofA). The amendment eliminates the Fixed Charge
Coverage Ratio test for the period ended November 30, 2005 and provides that the test for the
period ended December 31, 2005 will not be made until the delivery on or before January 16, 2006
of financial statements covering such period. The amendment further provides a limited waiver of
any Event of Default that would otherwise exist with respect to the audited annual financial
statements for the period ended September 30, 2005. Subsequent amendments further extended the
delivery date for financial statements covering the period ended December 31, 2005 to January 26,
2006.
As of January 26, 2006, the Company failed to meet the Fixed Charge Coverage Ratio for the
period ended December 31, 2005, constituting an event of default under the Credit Facility.
Additionally, the Company was in default with respect to the pledge of its ownership interest in
EnerTech Capital Partners II L.P. to BofA as Collateral under the Credit Facility. By reason of the
existence of these defaults, BofA did not have any obligation to make additional extensions of
credit under the Credit Facility and had full legal right to exercise its rights and remedies under
the Credit Facility and related agreements.
On January 27, 2006, IES entered into a Forbearance Agreement (Forbearance Agreement) with
BofA in connection with the Credit Facility. The Forbearance Agreement provided for BofAs
forbearance from exercising its rights and remedies under the Credit Facility and related
agreements from January 27, 2006 through the earliest to occur of (i) 5:00 p.m. (Dallas, Texas
time) on February 28, 2006 or (ii) the date that any Forbearance Default (as defined in the
Forbearance Agreement) occurs. Notwithstanding the forbearance, on January 26, 2006 BofA sent a
blockage notice to the Senior Subordinated Notes Indenture Trustee preventing any payments from
being made on such notes. Lastly, under the Forbearance Agreement, BofA had no obligation to make
any loans or otherwise extend any credit to the Company under the Credit Facility. Any agreement by
BofA to make any loans or otherwise extend any further credit was in the sole discretion of BofA.
Capitalized terms used but not defined under this heading have the meaning set forth in the
Loan and Security Agreement, dated as of August 1, 2005, and filed as exhibit 10.1 to the Form 8-K
dated August 4, 2005.
Senior Convertible Notes
On November 24, 2004, we entered into a purchase agreement for a private placement of $36.0
million aggregate principal amount of its 6.5% Senior Convertible Notes due 2014. Investors in the
notes agreed to a purchase price equal to 100% of the principal amount of the notes. The notes
require payment of interest semi-annually in arrears at an annual rate of 6.5%, have a stated
maturity of November 1, 2014, constitute senior unsecured obligations, are guaranteed on a senior
unsecured basis by our significant domestic subsidiaries, and are convertible at the option of the
holder under certain circumstances into shares of our common stock at an initial conversion price
of $3.25 per share, subject to adjustment. On November 1, 2008, we have the option to redeem the
Senior Convertible Notes, subject to certain conditions. The net proceeds from the sale of the
notes were used to prepay a portion of our senior secured credit facility and for general corporate
purposes. The notes, the guarantees and the shares of common stock issuable
48
upon conversion of the notes to be offered have not been registered under the Securities Act
of 1933, as amended, or any state securities laws and, unless so registered, the securities may not
be offered or sold in the United States except pursuant to an exemption from, or in a transaction
not subject to, the registration requirements of the Securities Act and applicable state securities
laws. A default under the credit facility or the senior subordinated notes resulting in
acceleration that is not cured within 30 days is also a cross default under the senior convertible
notes. In addition, other events of default under the senior convertible notes indenture include,
but are not limited to, a change of control, the de-listing of the Companys stock from a national
exchange or the commencement of a bankruptcy proceeding.
On February 24, 2004 and following shareholder approval, we sold $14 million in principal
amount of our Series B 6.5% Senior Convertible Notes due 2014 pursuant to separate option exercises
by the holders of the aforementioned $36 million aggregate principal amount of Senior Convertible
Notes issued by the us in an initial private placement on November 24, 2004. The Senior Convertible
Notes are a hybrid instrument comprised of two components: (1) a debt instrument and (2) certain
embedded derivatives. The embedded derivatives include a redemption premium and a make-whole
provision. In accordance with the guidance that Statement of Financial Accounting Standards No.
133, as amended, Accounting for Derivative Instruments and Hedging Activities, (SFAS 133) and
Emerging Issues Task Force Issue No. 00-19, Accounting for Derivative Financial Instruments Indexed
to, and Potentially Settled in, a Companys Own Stock (EITF 00-19) provide, the embedded
derivatives must be removed from the debt host and accounted for separately as a derivative
instrument. These derivative instruments will be marked-to-market each reporting period. During the
three months ended December 31, 2004, we were required to also value the portion of the Senior
Convertible Notes that would settle in cash because of shareholder approval of the Notes had not
yet been obtained. The initial value of this derivative was $1.4 million and the value at December
31, 2004 was $4.0 million, and consequently, a $2.6 million mark-to-market loss was recorded. The
value of this derivative immediately prior to the affirmative shareholder vote was $2.0 million and
accordingly, we recorded a mark to market gain of $2.0 million during the three months ended March
31, 2005. There was no mark-to-market gain or loss during the three months ended June 30, 2005.
During the quarter ended September 30, 2005, there was a mark to market loss of $0.1 million
recorded. There was no mark-to-market gain or loss during the three months ended December 31, 2005.
The calculation of the fair value of the conversion option was performed utilizing the
Black-Scholes option pricing model with the following assumptions effective at the three months
ended December 31, 2005: expected dividend yield of 0.00%, expected stock price volatility of
40.00%, weighted average risk free interest rate ranging from 3.67% to 4.15% for four to ten years,
respectively, and an expected term of four to ten years. The valuation of the other embedded
derivatives was derived by other valuation methods, including present value measures and binomial
models. At December 31, 2005, the fair value of the two remaining derivatives was $1.5 million.
Additionally, we recorded at March 31, 2005 a net discount of $0.8 million which is being amortized
over the remaining term of the Notes. We did not cause a registration statement to become effective
on or before November 23, 2005, to register the underlying shares for the notes and liquidated
damages began to accrue at the rate of 0.25% per annum.
On December 14, 2005, the Company announced it had reached a non-binding agreement in
principle with an ad hoc committee of holders of approximately $101 million of 58% of its $172.9
million principal amount of Senior Subordinated Notes for a potential restructuring pursuant to
which the senior subordinated noteholders would receive in exchange for all of their notes, shares
representing 82% of the common stock of the reorganized company. If the proposed restructuring were
to be consummated, the proposed plan contemplates the filing of a pre-packaged Chapter 11 plan of
reorganization.
On January 19, 2006, the holders of the outstanding Series A and Series B 6.5% Senior
Convertible Notes, delivered written notice (the Notices) to the Company alleging that a
Termination of Trading constituting a Fundamental Change, each as defined under the Indenture
dated as of November 24, 2004 (the Indenture) by and among the Company, the guarantors party
thereto and the Bank of New York, as trustee, had occurred with respect to the Senior Convertible
Notes and that, as a result, the Company is required to repurchase the Senior Convertible Notes on
the terms and conditions specified in the Indenture. Pursuant to the Indenture, a Termination of
Trading is deemed to have occurred if the common stock of the Company into which the Senior
Convertible Notes are convertible is neither listed for trading on the New York Stock Exchange
(the NYSE) or the American Stock Exchange nor approved for listing on the Nasdaq National Market
or the Nasdaq SmallCap Market, and no American Depositary Shares or similar instruments for such
common stock are so listed or approved for listing in the United States. The Notices allege that a
Termination of Trading occurred with respect to the Senior Convertible Notes when the Company was
orally notified on December 15, 2005 that its common stock had been suspended from trading on the
NYSE. As further described below, the Company does not believe that a Termination of Trading has
occurred and disputes any assertion to the contrary.
As previously disclosed by the Company in Current Reports on Form 8-K filed with the
Securities and Exchange Commission (SEC), the NYSE on December 15, 2005 the NYSE suspended
trading of the Companys common stock and informed the Company of the NYSEs intent to submit an
application to the SEC to de-list the Companys common stock after completion of applicable
procedures, including any appeal by IES of the NYSEs staffs decision. On December 30, 2005, in
accordance with Rule 804.00 of
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the NYSE Listed Company Manual, the Company appealed the NYSEs staffs decision by requesting
a review by the designated committee of the Board of Directors of the NYSE (the Committee) of the
staffs determination to suspend the trading of the Companys common stock and an oral presentation
before the Committee. The Company believes that, until its common stock is de-listed by the NYSE
after application to the SEC, which is not expected to occur prior to completion of the Companys
appeal to the Committee, the Companys common stock has not ceased to be listed on the NYSE for
purposes of determining whether a Termination of Trading has occurred under the Indenture.
The Notices state that the Company was required to provide the holders of the Senior
Convertible Notes with notice of the occurrence of a Termination of Trading within 15 Business Days
after December 15, 2005 and that the Company failed to do so. If a Termination of Trading occurred
on December 15, 2005, the Companys failure to provide notice to the holders of the Senior
Convertible Notes on or about, or prior to, January 9, 2006 would constitute an Event of Default
under the Indenture.
If a Termination of Trading occurred on December 15, 2005, then pursuant to the Notices, the
Company would have been required to repurchase the Senior Convertible Notes in cash at a purchase
price equal to 100% of the principal amount of the Notes held by such holders plus accrued and
unpaid interest and Liquidated Damages (as defined in the Indenture) thereon on or about, or prior
to, February 7, 2006. If an Event of Default occurred as a result of the Companys failure to
deliver notice to the holders of the Senior Convertible Notes of the occurrence of a Termination of
Trading, the holders of at least 25% in aggregate principal amount of the Senior Convertible Notes
have the right to declare the principal amount plus accrued and unpaid interest and Liquidated
Damages thereon immediately due and payable in cash.
In either case, the amount due under the Senior Convertible Notes, including the principal
amount plus accrued and unpaid interest and Liquidated Damages thereon, would be approximately $51
million, and the Company would not be able to make such payment when due. Pursuant to the Notices,
the holders have elected to exercise their repurchase rights following a Termination of Trading and
have not accelerated the obligations under the Senior Convertible Notes pursuant to an Event of
Default; however, the Notices expressly reserve the holders rights to accelerate the Senior
Convertible Notes under the terms of the Indenture. Nevertheless, the Companys contemplated
restructuring provides that the Senior Convertible Notes would be reinstated or the holders
otherwise provided the full value of their Senior Convertible Note claims. See Part I, Item 2.
Managements Discussion and Analysis of Financial Condition and Results of Operations Update on
Financial Restructuring. The Company does not believe that the delivery of the Notices is likely
to have any impact upon the recovery of the holders of the Senior Convertible Notes in a Chapter 11
proceeding. There is no assurance that the Company will successfully complete their contemplated
restructuring, or any other restructuring. See Item 1A. Risk Factors.
Senior Subordinated Notes
An interest payment of approximately $8.1 million on the Senior Subordinated Notes was due on
February 1, 2006. The Company did not make this interest payment. Under the indenture for the
Senior Subordinated Notes, this non-payment does not become an Event of Default until 30 days
after the due date for such payment.
Cross-Default Provisions
Our debt instruments and agreements, including the Credit Facility, the Senior Subordinated
Notes, the Senior Convertible Notes and our agreement with our primary surety bonding company,
contain cross-default provisions whereby an uncured and unwaived event of default under one will
result in an event of default under each of the others. In accordance with Emerging Issues Task
Force (EITF) 86-30, Classifications of Obligations When a Violation is Waived by the Creditor, we
have classified the long-term portion of senior convertible notes and senior subordinated notes as
current liabilities on the balance sheet due to the defaults under the Credit Facility and the
potential for cross-defaults described above.
ITEM 6. EXHIBITS
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31.1
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Rule 13a-14(a)/15d-14(a) Certification of Michael Caliel, Chief Executive Officer |
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31.2
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Rule 13a-14(a)/15d-14(a) Certification of Raymond Guba, Chief Financial Officer |
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32.1
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Section 1350 Certification of Michael Caliel, Chief Executive Officer |
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32.2
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Section 1350 Certification of Raymond Guba, Chief Financial Officer |
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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.
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Integrated Electrical Services, Inc. |
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Date: May 29, 2007
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By:
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/S/
Raymond Guba
Raymond Guba
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Senior Vice President and |
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Chief Financial Officer |
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Exhibit Index
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31.1
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Rule 13a-14(a)/15d-14(a) Certification of Michael Caliel, Chief Executive Officer |
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31.2
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Rule 13a-14(a)/15d-14(a) Certification of Raymond Guba, Chief Financial Officer |
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32.1
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Section 1350 Certification of Michael Caliel, Chief Executive Officer |
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32.2
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Section 1350 Certification of Raymond Guba, Chief Financial Officer |