1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON SEPTEMBER 14, 1998
REGISTRATION NO. 333-50031
================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
---------------------
Post-Effective
Amendment
No. 1
to
FORM S-1-A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
---------------------
INTEGRATED ELECTRICAL SERVICES, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 1731 76-0542208
(State or other jurisdiction (Primary Standard Industrial (I.R.S. Employer
of incorporation or organization) Classification Code Number) Identification No.)
515 POST OAK BOULEVARD
SUITE 450
HOUSTON, TEXAS 77027
(713) 860-1500
(Address, including zip code, and telephone number,
including area code, of registrant's principal executive offices)
---------------------
JOHN F. WOMBWELL
SENIOR VICE PRESIDENT, GENERAL COUNSEL AND SECRETARY
515 POST OAK BLVD., SUITE 450
HOUSTON, TEXAS 77027
(713) 860-1500
(Name, address, including zip code, and telephone
number, including area code, of agent for service)
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after the Registration Statement becomes effective.
---------------------
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [X]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ] ---------
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ] ---------
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ] ---------
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
THIS REGISTRATION STATEMENT CONTAINS A COMBINED PROSPECTUS PURSUANT TO RULE
429 UNDER THE SECURITIES ACT, WHICH RELATES TO THE COMPANY'S EARLIER
REGISTRATION STATEMENT NO. 333-45479.
================================================================================
2
EXPLANATORY NOTE
This Registration Statement contains two forms of prospectus: one (the
"Acquisition Prospectus") to be used in connection with the acquisition of the
assets or the securities of businesses by the Company and one (the "Selling
Stockholder Prospectus") to be used by persons or entities who have received
stock of the Company in exchange for the assets or the securities of a business
and who wish to sell such stock. The Acquisition Prospectus and the Selling
Stockholder Prospectus are identical except that they contain different front
and back cover pages and different descriptions of the plan of distribution. The
form of Acquisition Prospectus is included herein and is followed by those pages
to be used in the Selling Stockholder Prospectus which differ from those used in
the Acquisition Prospectus. Each of the pages for the Selling Stockholder
Prospectus included herein is labeled "Alternate Page for Selling Stockholder
Prospectus."
3
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
SUBJECT TO COMPLETION
PROSPECTUS
21,000,000 SHARES
INTEGRATED ELECTRICAL SERVICES, INC.
COMMON STOCK
This Prospectus covers 21,000,000 shares of Common Stock of Integrated
Electrical Services, Inc. ("IES" or the "Company") which may be offered and
issued from time to time by the Company in connection with its acquisition of
the securities and assets of other businesses. It is expected that the terms of
acquisitions involving the issuance and sale by the Company of Common Stock
covered by this Prospectus will be determined by direct negotiations with the
owners or controlling persons of the businesses whose securities or assets are
acquired. The Company expects that the shares of Common Stock issued in
exchange for securities or assets in business combination transactions will be
valued at prices reasonably related to market prices of the Common Stock either
at the time the terms of an acquisition are agreed upon or at or about the time
of delivery of such shares of Common Stock.
The Common Stock trades on The New York Stock Exchange (the "NYSE") under the
symbol "IEE." The last reported sale price of the Common Stock on the NYSE on
September 11, 1998 was $13 7/8 per share.
All expenses of this offering will be paid by the Company. No underwriting
discounts or commissions will be paid in connection with the issuance of Common
Stock, although finders fees may be paid with respect to specific acquisitions.
Any person receiving a finder's fee may be deemed to be an Underwriter within
the meaning of the Securities Act of 1933, as amended (the "Securities Act").
_______________
THE COMMON STOCK OFFERED HEREBY INVOLVES A HIGH DEGREE OF RISK. SEE "RISK
FACTORS" BEGINNING ON PAGE 7.
_______________
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS
A CRIMINAL OFFENSE.
THE DATE OF THIS PROSPECTUS IS SEPTEMBER 14, 1998.
1
4
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by reference to, and
should be read in conjunction with, the more detailed information and financial
statements, including the notes thereto, appearing elsewhere in this
Prospectus. See "Risk Factors" for information that should be carefully
considered by prospective investors.
THE COMPANY
Integrated Electrical Services, Inc. ("IES" or the "Company"), a Delaware
Corporation, was founded in June 1997 to create a leading national provider and
consolidator of electrical contracting and maintenance services, focusing
primarily on the commercial, industrial and residential markets. On January 30,
1998, concurrent with the closing of its initial public offering ("IPO" or
"Offering") of common stock, IES acquired, in separate transactions 16 companies
and related entities engaged in all facets of electrical contracting and
maintenance services (collectively, the "Founding Companies" or the "Founding
Company Acquisitions"). Subsequent to its IPO, and through September 11, 1998,
the Company has acquired 19 additional electrical contracting and maintenance
businesses (the "Post IPO Acquisitions"). Of these 19 Post IPO Acquisitions, 18
were accounted for using the purchase method of accounting (the "Post IPO
Purchased Companies") and one was accounted for using the pooling-of-interests
method of accounting (the "Pooled Company"). IES has acquired 35 electrical
contracting and maintenance service companies (collectively the "Companies")
with pro forma combined revenues of $705.0 million and $553.3 million for the
year ended September 30, 1997, and the nine months ended June 30, 1998,
respectively, making the Company one of the largest providers of electrical
contracting and maintenance services in the United States. Of such 1997 pro
forma revenues, approximately 80% was derived from commercial (approximately
46%) and industrial (approximately 34%) contracting, approximately 14% was
derived from residential contracting and approximately 6% was derived from
electrical maintenance work. Combined revenues of the Companies, which have
been in business an average of 21 years, increased at an average compound annual
growth rate of approximately 17% from fiscal 1995 through 1997.
The Company offers a broad range of electrical contracting services,
including design and installation for both new and renovation projects in the
commercial, industrial and residential markets. The Company also offers
long-term and per call maintenance services, which generally provide recurring
revenues that are relatively independent of levels of construction activity.
Typically, the Companies specialize in either commercial and industrial or
residential work, although a few of the Companies have both commercial and
industrial and residential operations.
In certain markets the Company offers design-and-build expertise and
specialized services, which typically require specific skills and equipment and
provide higher margins than general electrical contracting and maintenance
services. In a design-and-build project, the electrical contractor applies
in-house electrical engineering expertise to design the most cost-effective
electrical system for a given structure and purpose, taking into account local
code requirements. Specialized services offered by the Company include
installations of wiring or cabling for the following: data cabling for computer
networks; fiber optic cable systems; telecommunications systems; energy
management systems which control the amount of power used in facilities; fire
alarm and security systems; cellular phone transmission sites; "smart houses"
that integrate computer, energy management, security, safety, comfort and
telecommunication systems; lightning protection systems; clean rooms for
fabrication of microprocessors and similar devices; computer rooms; back-up
electrical systems and uninterruptible power supplies; high voltage
distribution and traffic signal systems.
2
5
INDUSTRY OVERVIEW
General. Virtually all construction and renovation in the United States
generates demand for electrical contracting services. Depending upon the exact
scope of work, electrical work generally accounts for approximately 8% to 12%
of the total construction cost of the Company's commercial and industrial
projects and 5% to 10% of the total construction cost of the Company's
residential projects. In recent years, the Companies have experienced a
growing demand for electrical contracting services per project due to increased
electrical code requirements, demand for additional electrical capacity,
including increased capacity for computer systems, additional data cabling
requirements and the construction of smart houses with integrated systems.
The overall electrical contracting industry, including commercial, industrial
and residential markets, was estimated by the U.S. Census to have generated
annual revenues in excess of $40 billion in 1992, the most recent available
U.S. Census data. These Census data indicate that the electrical contracting
industry is highly fragmented with more than 54,000 companies, most of which
are small, owner-operated businesses, performing various types of electrical
work. The Company believes there are significant opportunities for a
well-capitalized national company to provide comprehensive electrical
contracting and maintenance services and that the fragmented nature of the
electrical contracting industry will provide significant opportunities to
consolidate commercial and industrial and residential electrical contracting
and maintenance businesses.
Commercial and Industrial Market. Commercial and industrial consumers of
electrical contracting and maintenance services include general contractors;
developers; consulting engineers; architects; owners and managers of large
retail establishments, office buildings, high-rise apartments and condominiums;
theaters and restaurants; hotels and casinos; manufacturing and processing
facilities; arenas and convention centers; hospitals; school districts;
military and other government agencies; airports; prisons and car lots. The
Company provides electrical contracting and maintenance services to the full
range of commercial and industrial customers.
From fiscal 1995 through 1997, the Companies' revenues from electrical
contracting for commercial and industrial customers have grown at an average
compound annual rate of approximately 17% per year. The Company believes that
growth in the commercial and industrial market reflects a number of factors,
including (i) levels of construction and renovation activity; (ii) regulations
imposed by electric codes, which establish minimum power and wiring
requirements; (iii) safety codes mandating additional installation of smoke
detectors and the use of ground fault circuit protection devices in more
locations; (iv) revised national energy standards that dictate the use of more
energy-efficient lighting fixtures and other equipment; (v) continuing demand
to build out lease spaces in office buildings and to reconfigure space for new
tenants; (vi) increases in use of electrical power, creating needs for
increased capacity and outlets, as well as data cabling and fiber optics and
(vii) requirements of building owners and developers to facilitate marketing
their properties to tenants and buyers by installing electrical capacity in
excess of minimum code requirements.
Residential Market. Contracting work for the residential market consists
primarily of electrical installations in new single family and low-rise
multifamily residence construction for customers such as large homebuilders and
apartment developers. The Company also provides maintenance services to these
customers as well as to individual property owners in some locations. The
residential market is primarily dependent on the number of single family and
multi-family home starts, which are in turn affected by interest rates, tax
considerations and
3
6
general economic conditions. Competitive factors particularly important in the
residential market include a contractor's ability to build relationships with
customers by providing services in diverse geographic markets as construction
activity shifts to new locations. The Companies residential electrical
contracting revenues have grown at an average compound annual rate of
approximately 19% from fiscal 1995 through 1997.
STRATEGY
The Company believes that its size, geographical diversity of operations,
industry relationships, expertise in specialized markets, number of licensed
electricians and access to design technology give the Company significant
competitive advantages in the electrical contracting and maintenance services
industry. Through increased size, the Company believes it has greater ability
to compete for larger jobs that require greater technical expertise, personnel
availability and bonding capacity, to more effectively allocate and share
resources in serving customers in each of its markets, and to attract, train
and retain qualified electricians. The Company also believes that increased
size provides increased efficiency in materials purchasing, computer system
development, employee benefits, bonding, insurance and financing. The Company
believes that the diversity of its operations diminishes the effects of
regional and market downturns, offers opportunities to pursue growth in its
existing markets and creates a base of expertise to expand into new markets and
serve new customers.
The Company leverages its experienced management and extensive relationships
within the electrical contracting industry to increase its revenues and reduce
its cost infrastructure through internal growth as well as the acquisition of
additional electrical contracting businesses. The Company's management includes
a Chief Executive Officer and two Chief Operating Officers, each with 25 years
or more of experience in the electrical contracting industry. The Company has
extensive business relationships within the industry, in part through Companies
that are members of the Independent Electrical Contractors Association ("IEC").
The IEC is the second largest electrical trade organization in the U.S. and has
nearly 3,000 contracting firms as members. The Company's Chief Executive
Officer is a past president of the IEC, and two founders are members of the
executive committee of the IEC. The IEC sponsors forum groups, which are
discussion groups of members of the IEC that foster the sharing of best
business practices. The Companies are members of the IEC and other trade
organizations, and the Company has implemented programs to share best practices
among the Companies and future acquisitions.
The Company's goal is to become a leading national provider of electrical
services by improving its operations, expanding its business and markets
through internal growth and pursuing an aggressive acquisition strategy.
Operating Strategy. The Company believes there are significant opportunities
to increase revenues and profitability of the Founding Companies and
subsequently acquired businesses. The key elements of the Company's operating
strategy are:
Share Information, Technical Capabilities and Best Practices. The Company
believes it will be able to expand the services it offers in its local
markets by leveraging the specialized technical and marketing strengths of
individual Companies. The Company identifies and shares best practices that
can be successfully implemented throughout its operations. The Company
intends to use the computer-aided-design technology and expertise of certain
of the Companies to bid for more design-and-build projects and to assist
customers in value engineering and creating project documents. The Company
believes that its increased
4
7
size, capital and workforce will permit it to pursue projects that require
greater design and performance capabilities and the ability to meet
accelerated timetables.
Expand Scope of Maintenance and Specialized Services. The Company intends
to further develop its long-term and per-call maintenance service
operations, which generally realize higher gross margins and provide
recurring revenues that are relatively independent of levels of construction
activity. The Company also believes that certain specialized businesses
currently offered by only a few of the Companies can be expanded throughout
the Company and in some cases can provide higher margins. Through sharing of
expertise and specialized licenses and the ability to demonstrate a safety
record in specialized markets served by the Companies, the Company intends
to expand its presence and profitability in markets where it previously
relied on subcontractors.
Establish National Market Coverage. The Company believes that the growth
of many of the Companies has been restricted due to the geographic
limitations of existing operations and that the Company's broad geographic
coverage will increase internal growth opportunities. The Company intends to
leverage its geographic diversity to bid for additional business from
existing customers that operate on a regional and national basis, such as
developers, contractors, homebuilders and owners of national chains. The
Company believes that significant demand exists from such companies to
utilize the services of a single electrical contracting and maintenance
service provider and that existing local and regional relationships can be
expanded as the Company develops a nationwide network.
Operate on Decentralized Basis. The Company believes that, while
maintaining strong operating and financial controls, a decentralized
operating structure will retain the entrepreneurial spirit present in each
of the Companies. The Company also is structured to allow it to capitalize
on the considerable local and regional market knowledge and customer
relationships possessed by each Company, as well as companies that may be
acquired in the future. By maintaining a local and regional focus in each of
its markets, the Company believes it will be able to build relationships
with general contractors and other customers, address design preferences and
code requirements, respond quickly to customer demands for higher-margin
renovation and upgrade projects and adjust to local conditions.
Attract and Retain Quality Employees. The Company believes that the
ability to attract and retain qualified electricians is a critical
competitive factor and that the acquisitions of the Companies provides
competitive advantages in this regard. The Company attracts and develops
skilled employees by extending active recruiting and training programs,
offering stock-based compensation for key employees, and offering expanded
career paths and more stable income through the larger public company. The
Company believes that this ability will allow it to increase efficiency and
pursue additional customer relationships.
Achieve Operating Efficiencies. Certain administrative functions have been
centralized. In addition, by combining overlapping operations of certain of
the Companies, the Company expects to realize savings in overhead and other
expenses. The Company uses its increased purchasing power to gain volume
discounts in areas such as electrical materials, vehicles, advertising,
bonding, employee benefits and insurance. The Company will seek to realize
additional cost savings and other benefits by the sharing of purchasing,
pricing, bidding and other business practices and the sharing of licenses.
The Company intends to further develop and extend the use of computer
systems to facilitate communication among the Companies. At some locations,
the larger combined workforce provides additional staffing flexibility.
5
8
Acquisition Strategy. The Company believes that, due to the highly fragmented
nature of the electrical contracting and maintenance services industry, it has
significant opportunities to pursue its acquisition strategy. The Company
focuses on acquiring companies with management philosophies based on an
entrepreneurial attitude as well as a willingness to learn and share improved
business practices through open communications. The Company believes that many
electrical contracting and maintenance service businesses that lack the capital
necessary to expand operations will become acquisition candidates. For these
acquisition candidates, the Company provides (i) information on best practices,
(ii) expertise to expand in specialized markets, (iii) the opportunity to focus
on customers rather than administration, (iv) national name recognition, (v)
increased liquidity and (vi) the opportunity for a continued role in
management. The Companies participate in professional associations such as the
IEC and Associated Builders and Contractors, and the Company intends to
continue these relationships, in part to assist in identifying attractive
acquisition candidates. Other key elements of the Company's acquisition
strategy are:
Enter New Geographic Markets. The Company pursues acquisitions that are
located in new geographic markets, are financially stable and have the
customer base necessary to integrate with or complement its existing
business. The Company also expects that increasing its geographic diversity
will allow it to better serve an increasingly nationwide base of customers
and further reduce the impact on the Company of local and regional economic
cycles, as well as weather-related or seasonal variations in business.
Expand Within Existing Markets. Once the Company has entered a market, it
seeks to acquire other well-established electrical contracting and
maintenance businesses operating within that region, including "tuck-in"
acquisitions of smaller companies. The Company believes that tuck-in
acquisitions afford the opportunity to improve its overall cost structure
through the integration of such acquisitions into existing operations as
well as to increase revenues through access to additional specialized
markets, such as heavy industrial markets. Despite the integration
opportunities afforded by such tuck-in acquisitions, the Company maintains
existing business names and identities to retain goodwill for marketing
purposes.
6
9
SUMMARY PRO FORMA COMBINED FINANCIAL DATA
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
IES acquired the Founding Companies simultaneously with the consummation of
the Offering. Pursuant to the Securities and Exchange Commission's ("SEC") Staff
Accounting Bulletin No. 97 ("SAB97"), Houston-Stafford Electric, Inc. and
subsidiaries ("HSE") is considered for accounting purposes the entity which
acquired the other Founding Companies and IES (the "Accounting Acquirer"). As
such, IES's consolidated historical financial statements represent the financial
position and results of operations of (i) HSE (as restated to include the
financial position and results of operations of the Pooled Company), and (ii)
the other Founding Companies and the Post IPO Purchased Companies beginning
on their respective dates of acquisition. The following summary unaudited pro
forma combined financial data present certain data for IES, as adjusted for (i)
the effects of the acquisitions of the Founding Companies and the Post IPO
Purchased Companies, (ii) the effects of certain other pro forma adjustments to
the historical financial statements and (iii) the consummation of the Offering
(including the underwriters exercise of the overallotment option) and the
application of the net proceeds therefrom. Such pro forma data include the
results of operations of IES and the other Founding Companies and the Post IPO
Purchased Companies as if their acquisitions, the Offering and related
transactions were closed on October 1, 1996 and are not necessarily
indicative of the results that the Company would have obtained had these events
actually occurred at that date or indicative of the Company's future results.
During the periods presented below, the Companies were not under common control
or management and, therefore, the data presented may not be comparable to or
indicative of future performance. The unaudited pro forma combined income
statement data are based on preliminary estimates, available information and
certain assumptions that Company management deems appropriate. The unaudited pro
forma combined financial data should be read in conjunction with the other
financial information included elsewhere in this Prospectus. See "Selected
Financial Data," the Unaudited Pro Forma Combined Financial Statements and notes
thereto, and the historical financial statements of IES and for certain of the
Acquired Companies and the notes thereto, all included elsewhere in this
Prospectus.
PRO FORMA
-----------------------------------
NINE MONTHS
YEAR ENDED ENDED
SEPTEMBER 30,1997 JUNE 30, 1998
----------------- ----------------
(UNAUDITED)
INCOME STATEMENT DATA:
Revenues .................................... $ 705,034 $ 553,355
Cost of services (including depreciation) ... 562,171 442,475
------------ ------------
Gross profit ................................ 142,863 110,880
Selling, general and administrative
expenses(a) ............................... 72,901 56,856
Goodwill amortization(b) .................... 7,154 5,449
------------ ------------
Income from operations ...................... 62,808 48,575
Interest and other income (expense), net(c).. (4,902) (3,695)
------------ ------------
Income before income taxes .................. 57,906 44,880
Provision for income taxes .................. 24,401 18,874
------------ ------------
Net income(d) ............................... $ 33,505 $ 26,006
============ ============
Net income per share:
Basic .................................. $ 1.09 .85
============ ============
Diluted ................................ $ 1.09 .84
============ ============
Shares used in computing pro forma net
income per share(e):
Basic .................................. 30,756,875 30,756,875
============ ============
Diluted ................................ 30,756,875 31,114,124
============ ============
AS OF JUNE 30, 1998
------------------------------
ACTUAL PRO FORMA (F) (G)
-------- -----------------
(UNAUDITED)
BALANCE SHEET DATA:
Working capital .................... $ 57,504 $ 80,908
Total assets ....................... 363,497 492,544
Long-term debt, net of current
maturities ....................... 28,628 98,544
Total stockholders' equity ......... 255,382 295,498
7
10
(a) The unaudited pro forma combined income statement data reflect certain
reductions in salary, bonus and benefits of the owners of the Companies to
which they have agreed prospectively, and the effect of revisions of certain
lease agreements between the Companies and certain stockholders of the
Companies. Additionally, excludes the $13.6 million non-recurring, non-cash
compensation charge recognized by IES related to the issuance of Common
Stock to management and the $17.0 million non-recurring, non-cash
compensation charge recorded by HSE in connection with a note receivable and
rights held by an officer of HSE which was exchanged for cash and shares of
IES common stock in connection with the Founding Company Acquisitions. See
"Certain Transactions."
(b) Reflects amortization of the goodwill recorded as a result of the
acquisitions of the Founding Companies and the Post IPO Purchased Companies
over a 40-year period and computed on the basis described in the notes to
the Unaudited Pro Forma Combined Financial Statements.
(c) Reflects additional interest expense related to the debt discussed in (g)
below, net of the reduction of interest expense attributable to $8.1
million of historical debt which was repaid with proceeds from the Offering
or distributed prior to the acquisitions of the Founding Companies.
Additionally, reflects elimination of interest income, and a $316,000
reduction in minority interest expense.
(d) Assumes all pretax income before non-deductible goodwill and other
permanent items is subject to a 38% overall tax rate.
(e) Includes (i) 12,313,025 shares issued to the owners of the Founding
Companies, (ii) 1,396,602 shares issued to the management of IES, (iii)
2,655,709 shares of Restricted Common Stock issued to the founder and
Chairman of the Board of IES and trusts for the benefit of his children,
(iv) the 8,050,000 shares sold in the Offering (including the underwriters
exercise of the overallotment option for 1,050,000 shares), and (v)
6,341,539 shares issued to the owners of the Post IPO Acquisitions. Also,
the nine months ended June 30, 1998 includes 357,249 shares computed under
the treasury stock method related to 3,110,550 options outstanding at
September 11, 1998. See "Description of Capital Stock."
(f) Reflects the acquisitions of the eight post IPO Acquisitions which closed
subsequent to June 30, 1998, as if they had occurred on June 30, 1998 as
described in the notes to the Unaudited Pro Forma Combined Financial
Statements. The unaudited pro forma combined balance sheet data are based
upon preliminary estimates, available information and certain assumptions
that management deems appropriate and should be read in conjunction with the
other financial information and historical financial statements, and notes
thereto, included elsewhere in this Prospectus.
(g) Reflects $4.2 million of previously undistributed earnings and nonoperating
assets, net of liabilities distributed in connection with the acquisitions
to the owners of the eight post IPO Acquisitions which closed subsequent to
June 30, 1998. This amount was funded through transfers of cash and
nonoperating assets. See "Certain Transactions." Also, includes
approximately $63.6 million of debt incurred net of cash acquired to fund
the cash portion of the consideration paid for the eight post IPO
Acquisitions which closed subsequent to June 30, 1998.
8
11
RISK FACTORS
Prospective investors should carefully consider the following factors as well
as the other information contained in this Prospectus. This Prospectus contains
forward-looking statements. Actual results could differ materially from those
projected in the forward-looking statements as a result of a number of factors,
including the risk factors set forth below and elsewhere in this Prospectus.
ABSENCE OF COMBINED OPERATING HISTORY
Prior to January 30, 1998, the Founding Companies and prior to the date of
acquisition the Post IPO Acquisitions operated as separate independent
entities, and there can be no assurance that the Company will be able to
integrate these businesses on an economic basis. In addition, there can be no
assurance that the recently assembled management group will be able to oversee
the combined entity and effectively implement the Company's operating or growth
strategies. The pro forma combined financial results of the Companies cover
periods during which the Companies and IES were not under common control or
management and, therefore, may not be indicative of the Company's future
financial or operating results. The success of the Company will depend on
management's ability to integrate the Companies and other future acquisitions
into one organization in a profitable manner. The inability of the Company to
successfully integrate the Companies and to coordinate and integrate certain
administrative, banking, insurance and accounting functions and computer
systems would have a material adverse effect on the Company's financial
condition and results of operations and would make it unlikely that the
Company's acquisition program will be successful.
EXPOSURE TO DOWNTURNS IN COMMERCIAL CONSTRUCTION OR HOUSING STARTS
A substantial portion of the Company's business involves installation of
electrical systems in newly constructed and renovated commercial buildings,
plants and residences. The extent to which the Company is able to maintain or
increase revenues from new installation services will depend on the levels of
new construction starts from time to time in the geographic markets in which it
operates and likely will reflect the cyclical nature of the construction
industry. The level of new commercial installation services is affected by
fluctuations in the level of new construction of commercial buildings in the
markets in which the Company operates, due to local economic conditions,
changes in interest rates and other related factors. The housing industry is
similarly affected by changes in general and local economic conditions, such as
employment and income levels, the availability and cost of financing for home
buyers (including the continued deductibility of mortgage-linked interest
expenses in determining federal income tax), consumer confidence and housing
demand. Downturns in levels of commercial construction or housing starts would
have a material adverse effect on the Company's business, financial condition
and results of operations. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Seasonality and Quarterly
Fluctuations."
RELIANCE ON ACQUISITIONS
One of the Company's principal growth strategies is to increase its
revenues, geographic diversity and the scope of services offered and to
diversify its business mix through the acquisition of electrical contracting
companies. There can be no assurance that the Company will be able to acquire
additional businesses or to integrate and manage such additional businesses
successfully. Acquisitions may involve a number of risks, including: adverse
short-term effects on the Company's reported operating results; diversion of
management's
9
12
attention; dependence on retention, hiring and training of key personnel; risks
associated with unanticipated problems or legal liabilities and amortization of
acquired intangible assets. Some or all of these risks could have a material
adverse effect on the Company's financial condition or results of operations.
In addition, to the extent that consolidation becomes more prevalent in the
industry, the prices for attractive acquisition candidates may increase and the
number of attractive acquisition candidates may decrease. The Company believes
that the electrical contracting industry may experience consolidation on both a
national and a regional level by other companies that have acquisition
objectives similar to the Company's objectives. Other consolidators may have
greater financial resources than the Company to finance acquisition and
internal growth opportunities and might be willing to pay higher prices than
the Company for the same acquisition opportunities. If such acquisitions can be
made, there can be no assurance that the businesses acquired will achieve sales
and profitability that justify the investment therein. See "Business --
Strategy."
MANAGEMENT OF GROWTH
The Company expects to grow internally and through acquisitions. Management
expects to expend significant time and effort in evaluating, completing and
integrating acquisitions and opening new facilities. There can be no assurance
that the Company's systems, procedures and controls will be adequate to support
the Company's operations as they expand. Any future growth also will impose
significant added responsibilities on members of senior management, including
the need to identify, recruit and integrate new senior level managers and
executives. There can be no assurance that such additional management will be
identified and retained by the Company. If the Company is unable to manage its
growth efficiently and effectively, or is unable to attract and retain
additional qualified management, there could be a material adverse effect on
the Company's financial condition and results of operations. See "Business --
Strategy."
AVAILABILITY OF ELECTRICIANS
The Company's ability to provide high-quality electrical services on a timely
basis is dependent upon an adequate supply of skilled electricians.
Accordingly, the Company's ability to increase its productivity and
profitability will be limited by its ability to employ, train and retain
skilled electricians necessary to meet the Company's requirements. Many
companies in the electrical contracting and maintenance service industry are
currently experiencing shortages of qualified electricians, and there can be no
assurance that the Company will be able to maintain an adequate skilled labor
force necessary to operate efficiently, that the Company's labor expenses will
not increase as a result of a shortage in the supply of skilled technicians or
that the Company will not have to curtail its planned internal growth as a
result of labor shortages. See "Business -- Company Operations -- Employee
Screening, Training and Development."
COMPETITION
The electrical contracting industry is highly competitive and is served by
small, owner-operated private companies, public companies and several large
regional companies. Additionally, the Company could face competition in the
future from other competitors entering the market, including public utilities.
Certain of the Company's larger competitors offer a greater range of services,
such as mechanical construction, plumbing and heating, ventilation and air
conditioning services. In certain geographic regions, the Company may not be
eligible to compete for certain contracts because its employees are not subject
to collective bargaining arrangements. See "Business -- Industry Overview."
Competition in the electrical contracting industry depends on a number of
factors, including price. Certain of the Company's competitors may have lower
overhead cost structures and may, therefore, be able to provide their services
at lower rates than the Company. See "Business -- Competition."
10
13
ACQUISITION FINANCING
The Company intends to use its Common Stock for a portion of the
consideration for future acquisitions. If the Common Stock does not maintain a
sufficient valuation or potential acquisition candidates are unwilling to
accept Common Stock as part of the consideration for the sale of their
businesses, the Company may be required to utilize more of its cash resources,
if available, in order to pursue its acquisition program. If the Company does
not have sufficient cash resources, its growth could be limited unless it is
able to obtain additional capital through future debt or equity financings.
The Company has a bank line of credit for $175 million for working capital,
capital expenditures, other corporate purposes and acquisitions. The line of
credit is subject to customary drawing conditions. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations -- Combined
Liquidity and Capital Resources."
SEASONALITY; FLUCTUATION OF QUARTERLY OPERATING RESULTS
The electrical contracting service business can be subject to seasonal
variations in operations and demand that affect the construction business,
particularly in residential construction, which is affected by weather
conditions. Quarterly results may also be materially affected by the timing of
acquisitions, the timing and magnitude of acquisition assimilation costs and
regional economic conditions. Accordingly, the Company's performance in any
particular quarter may not be indicative of the results which can be expected
for any other quarter or for the entire year. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Seasonality and
Quarterly Fluctuations."
CONTROL BY EXISTING MANAGEMENT AND STOCKHOLDERS
The Company's executive officers, directors and affiliates beneficially own
approximately 31% of the total outstanding shares of Common Stock and
Restricted Common Stock. These persons, if acting in concert, will be able to
continue to exercise control over the Company's affairs, to elect the entire
Board of Directors and to control the disposition of any matter submitted to a
vote of stockholders. See "Principal Stockholders."
POSSIBLE VOLATILITY OF STOCK
The Common Stock is traded on the NYSE, but no assurance can be given that an
active trading market for the Common Stock will continue. The market price of
the Common Stock may be subject to significant fluctuations from time to time
in response to numerous factors, including variations in the reported financial
results of the Company and changing conditions in the economy in general or in
the electrical contracting and maintenance service industry in particular. In
addition, the stock markets experience significant price and volume volatility
from time to time which may affect the market price of the Common Stock for
reasons unrelated to the Company's performance.
11
14
DEPENDENCE ON KEY PERSONNEL
The Company's operations are dependent on the continued efforts of its
executive officers and senior management of the Companies. Furthermore, the
Company will be dependent on the senior management of companies that may be
acquired in the future. Although the Company entered into an employment
agreement with each of the Company's executive officers, there can be no
assurance that any individual will continue in such capacity for any particular
period of time. The loss of key personnel, or the inability to hire and retain
qualified employees could have an adverse effect on the Company's business,
financial condition and results of operations. The Company does not maintain key
man life insurance. See "Management."
SHARES ELIGIBLE FOR FUTURE SALE
As of September 11, 1998, 28,182,698 shares of Common Stock and 2,655,709
shares of Restricted Common Stock were issued and outstanding. Prior to and
simultaneously with the closing of the Offering, the Company issued 13,709,627
shares of Common Stock and 2,655,709 shares of Restricted Common Stock. None of
these 16,365,336 shares was issued in a transaction registered under the
Securities Act, and, accordingly, such shares may not be sold except in
transactions registered under the Securities Act or pursuant to an exemption
from registration, including the exemptions contained in Rules 144 and 701 under
the Securities Act. In addition, the owners of the Companies have agreed with
the Company not to sell, contract to sell or otherwise dispose of 21,231,920
shares of Common Stock received as consideration in the acquisitions for a
period of two years following receipt thereof without the Company's consent.
When these shares become saleable, the market price of the Common Stock could be
adversely affected by the sale of substantial amounts of the shares in the
public market. Certain stockholders of the Company have certain piggy-back
registration rights with respect to 16,365,336 shares of Common Stock, which may
be exercised during the two-year period referred to above. The Company has
outstanding options to purchase up to a total of approximately 3,110,550 shares
of Common Stock issued pursuant to the Company's Option Stock Plans.
There can be no assurance that the resale or the availability for sale of the
shares of Common Stock eligible for future sale will not have an adverse effect
on the prevailing market price of the Common Stock.
12
15
CERTAIN ANTI-TAKEOVER PROVISIONS
The Company's Amended and Restated Certificate of Incorporation, Bylaws,
employment agreements and employee benefit plans contain provisions which may
have the effect of delaying, deferring or preventing a change in control of the
Company. For example, the Company's Amended and Restated Certificate of
Incorporation and Bylaws provide for, among other things, a classified Board of
Directors, the prohibition of stockholder action by written consent and the
affirmative vote of at least 66 2/3% of all outstanding shares of Common Stock
to approve the removal of directors from office. The Company's Board of
Directors has the authority to issue shares of preferred stock in one or more
series and to fix the rights and preferences of the shares of any such series
without stockholder approval. Any series of preferred stock is likely to be
senior to the Common Stock with respect to dividends, liquidation rights and,
possibly, voting. In addition, the Board of Directors may issue certain rights
pursuant to the rights plan authorized by the Amended and Restated Certificate
of Incorporation. The ability to issue preferred stock or rights could have the
effect of discouraging unsolicited acquisition proposals. The Company's 1997
Stock Plan contains provisions that allow for, among other things, the
acceleration of vesting or payment of awards granted under such plan in the
event of a "change of control," as defined in such plan. In addition, the
Company has entered into employment agreements with certain executive officers
and key employees allowing for cash payments under certain circumstances
following a change in control, which is generally defined to occur upon (i) the
acquisition by any person of 20% or more of the total voting power of the
outstanding securities of the Company, (ii) the first purchase pursuant to a
tender or exchange offer for Common Stock, (iii) the approval of certain
mergers, sale of substantially all the assets, or dissolution of the Company or
(iv) a change in a majority of the members of the Company's Board of Directors.
13
16
THE COMPANY
IES was founded in June 1997 to create a leading national provider and
consolidator of electrical contracting and maintenance services, focusing
primarily on the commercial, industrial and residential markets. Since the
closing of the Offering, IES has acquired 35 companies. The Companies, which
have been in business for an average of 21 years, had pro forma combined year
ended September 30, 1997, and the nine months ended June 30, 1998, revenues of
approximately $705.0 million and $553.0 million, respectively.
Integrated Electrical Services, Inc. was incorporated in Delaware in June
1997. Its executive offices are located at 515 Post Oak Boulevard, Suite 450,
Houston, Texas 77027, and its telephone number is (713) 860-1500.
USE OF PROCEEDS
This Prospectus relates to shares of Common Stock that may be offered and
issued by the Company from time to time in connection with the acquisitions of
the securities and assets of other businesses. Other than the securities and
assets acquired, there will be no proceeds to the Company from these offerings.
PRICE RANGE OF COMMON STOCK
The Company's Common Stock has traded on the NYSE since January 27, 1998, the
effective date of the Company's initial public offering. Set forth below are
the high and low trading prices for the common stock during the periods
presented.
HIGH LOW
-------- ------
FISCAL YEAR ENDED SEPTEMBER 30, 1998:
2nd Quarter (from January 30, 1998) ........ 19 7/8 13
3rd Quarter ................................ 23 3/4 17 1/8
4th Quarter (through September 11, 1998) ... 22 15/16 13 1/8
At September 11, 1998, there were approximately 207 stockholders of record of
the Company's Common Stock. On September 11, 1998, the last reported sale of
the Common Stock on the NYSE was $13 7/8 per share.
DIVIDEND POLICY
The Company intends to retain all of its earnings, if any, to finance the
expansion of its business and for general corporate purposes, including future
acquisitions, and does not anticipate paying any cash dividends on its Common
Stock for the foreseeable future. In addition, the Company's revolving credit
facility includes, and any additional lines of credit established in the future
may include, restrictions on the ability of the Company to pay dividends
without the consent of the lender.
14
17
SELECTED FINANCIAL DATA
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
IES acquired the Founding Companies simultaneously with the consummation of
the Offering on January 30, 1998. Pursuant to the Securities and Exchange
Commission's ("SEC") Staff Accounting Bulletin No. 97 ("SAB97"), Houston-
Stafford Electric, Inc. and subsidiaries ("HSE") is considered for accounting
purposes the entity which acquired the other Founding Companies and IES (the
"Accounting Acquirer"). As such, IES's consolidated historical financial
statements represent the financial position and results of operations of (i) HSE
as restated to include the financial position and results of operations of the
Pooled Company, and (ii) the other Founding Companies and the Post IPO
Purchased Companies beginning on their respective dates of acquisition. The
following selected historical financial data for IES as of December 31, 1995 and
1996, and September 30, 1997, and for the years ended December 31, 1994, 1995
and 1996, and the year ended September 30, 1997, have been derived from the
consolidated audited financial statements of IES included elsewhere in this
Prospectus and reflect all adjustments, consisting of normal recurring
adjustments, necessary for a fair presentation of such data. The selected
historical financial data as of June 30, 1998, and for the nine months ended
June 30, 1997 and 1998, nine months ended September 30, 1997 and as of December
31, 1993 and for the year ended December 31, 1993, have been derived from the
unaudited consolidated financial statements of IES, which have been prepared on
the same basis as the audited financial statements and, in the opinion of
Company management, reflect all adjustments consisting of normal recurring
adjustments, necessary for a fair presentation of such data. The results of
operations for the interim periods presented should not be regarded as
indicative of the results that may be expected for a full year.
The summary unaudited pro forma combined financial data below present certain
data including IES as adjusted for (i) the effects of the acquisitions of the
Founding Companies and the Post IPO Purchased Companies, (ii) the effects of
certain other pro forma adjustments to the historical financial statements and
(iii) the consummation of the Offering and the application of the net proceeds
therefrom. Such pro forma data include the results of operations of IES and the
other Founding Companies and the Post IPO Purchased Companies as if their
acquisitions, the Offering and related transactions were closed on October 1,
1996, and are not necessarily indicative of the results that the Company would
have obtained had these events actually occurred at that date or indicative of
the Company's future results. During the periods presented below, the Companies
were not under common control or management and, therefore, the data presented
may not be comparable to or indicative of post-combination results to be
achieved by the Company. The unaudited pro forma combined income statement data
are based on preliminary estimates, available information and certain
assumptions that Company management deems appropriate. The unaudited pro forma
combined financial data should be read in conjunction with the other financial
information included elsewhere in this Prospectus. See the Unaudited Pro Forma
Combined Financial Statements and the notes thereto, included elsewhere in this
Prospectus.
15
18
NINE MONTHS YEAR NINE MONTHS
ENDED ENDED ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30, SEPTEMBER 30, JUNE 30,
--------------------------------------------- ---------- ---------- ----------------------
1993 1994 1995 1996 1997 1997 1997 1998
--------- --------- --------- ---------- ---------- ---------- ---------- ----------
(UNAUDITED) (UNAUDITED) (UNAUDITED)
HISTORICAL INCOME STATEMENT
DATA (IES AND SUBSIDIARIES):
Revenues .......................... $ 49,220 $ 65,211 $ 73,345 $ 101,431 $ 92,379 $ 117,111 $ 79,847 $ 219,620
Cost of services .................. 44,169 57,633 63,709 85,081 76,306 95,937 65,189 173,420
--------- --------- --------- ---------- ---------- ---------- ---------- ----------
Gross profit ...................... 5,051 7,578 9,636 16,350 16,073 21,174 14,658 46,200
Selling, general and
administrative expenses ......... 4,373 6,786 7,905 10,228 10,222 14,261 10,170 29,467
Non-cash, non-recurring
Compensation charge ........... -- -- -- -- -- -- -- 17,036
Goodwill amortization .............. -- -- -- -- -- -- -- 1,743
--------- --------- --------- ---------- ---------- ---------- ---------- ----------
Income (loss) from operations ...... 678 792 1,731 6,122 5,851 6,913 4,488 (2,046)
--------- --------- --------- ---------- ---------- ---------- ---------- ----------
Interest and other income
(expense), net ................... 32 (80) (182) 14 292 385 44 348
--------- --------- --------- ---------- ---------- ---------- ---------- ----------
Income (loss) before
income taxes ..................... 710 712 1,549 6,136 6,143 7,298 4,532 (1,698)
Provision for income taxes ........ 228 287 563 2,471 2,408 2,923 1,847 6,443
--------- --------- --------- ---------- ---------- ---------- ---------- ----------
Net income (loss) ................. $ 482 $ 425 $ 986 $ 3,665 $ 3,735 $ 4,375 $ 2,685 $ (8,141)
========= ========= ========= ========== ========== ========== ========== ==========
Net income (loss) per share (i):
Basic ......................... $ .11 $ .09 $ .22 $ .82 $ .83 $ .97 $ .60 $ (.49)
========= ========= ========= ========== ========== ========== ========== ==========
Diluted ....................... $ .11 $ .09 $ .22 $ .82 $ .83 $ .97 $ .60 $ (.49)
========= ========= ========= ========== ========== ========== ========== ==========
16
19
NINE MONTHS
YEAR ENDED ENDED
SEPTEMBER 30, 1997 JUNE 30, 1998
------------------ ------------
(UNAUDITED)
PRO FORMA COMBINED:
Revenues ........................................... $ 705,034 $ 553,355
Cost of services (including depreciation) .......... 562,171 442,475
------------ ------------
Gross profit ....................................... 142,863 110,880
Selling, general and administrative expenses(a) ... 72,901 56,856
Goodwill amortization(b) ........................... 7,154 5,449
------------ ------------
Income from operations ............................. 62,808 48,575
Interest and other income (expense), net(c) ........ (4,902) (3,695)
------------ ------------
Income before income taxes ......................... 57,906 44,880
Provision for income taxes ......................... 24,401 18,874
------------ ------------
Net income(d) ...................................... $ 33,505 $ 26,006
============ ============
Net income per share:
Basic ......................................... $ 1.09 $ .85
============ ============
Diluted ....................................... $ 1.09 $ .84
============ ============
Shares used in computing pro forma net income per share(e):
Basic ......................................... 30,756,875 30,756,875
============ ============
Diluted ....................................... 30,756,875 31,114,124
============ ============
HISTORICAL (h)
--------------------------------------------------------------------------
AS OF DECEMBER 31, AS OF AS OF PRO FORMA
----------------------------------------------- SEPTEMBER 30, JUNE 30, AS OF JUNE 30,
1993 1994 1995 1996 1997 1998 1998 (f) (g)
-------- -------- -------- -------- ------------- -------- --------------
(UNAUDITED) (UNAUDITED)
BALANCE SHEET
DATA:
Working capital .............. $ 2,729 $ 3,095 $ 3,905 $ 6,351 $ 8,568 $ 57,504 $ 80,908
Total assets ................. 11,337 13,594 14,882 23,712 35,795 363,497 492,544
Long-term debt, net
of current maturities ...... 852 1,429 812 1,406 1,275 28,628 98,544
-------- -------- -------- -------- -------- -------- --------
Total stockholders' equity ... $ 4,641 $ 4,431 $ 5,842 $ 8,706 $ 12,635 255,382 295,498
======== ======== ======== ======== ======== ======== ========
__________
(a) The unaudited pro forma combined income statement data reflect certain
reductions in salary, bonus and benefits of the owners of the Companies to
which they have agreed prospectively, and the effect of revisions of
certain lease agreements between the Companies and certain stockholders of
the Companies. Additionally, excludes the $13.6 million non-recurring,
non-cash compensation charge recognized by IES related to the issuance of
Common Stock to management and the $17.0 million non-recurring, non-cash
compensation charge recorded by HSE in connection with a note receivable
and rights held by an officer of HSE which was exchanged for cash and
shares of IES common stock in connection with the Founding Company
Acquisitions. See "Certain Transactions."
(b) Reflects amortization of the goodwill to be recorded as a result of the
acquisitions of the Founding Companies and the Post IPO Purchased Companies
over a 40-year period and computed on the basis described in the notes to
the Unaudited Pro Forma Combined Financial Statements.
(c) Reflects additional interest expense related to the debt discussed in (g)
below, net of the reduction of interest expense attributable to $8.1
million of historical debt which was repaid with proceeds from the Offering
or distributed prior to the acquisitions of the Founding Companies.
Additionally, reflects elimination of interest income, and a $316,000
reduction in minority interest expense.
17
20
(d) Assumes all pretax income before non-deductible goodwill and other
permanent items is subject to a 38% overall tax rate.
(e) Includes (i) 12,313,025 shares issued to the owners of the Founding
Companies, (ii) 1,396,602 shares issued to the management of IES, (iii)
2,655,709 shares of Restricted Common Stock issued to the founder and
Chairman of the Board of IES and trusts for the benefit of his children,
(iv) the 8,050,000 shares sold in the Offering (including the underwriters
exercise of the overallotment option for 1,050,000 shares), and (v)
6,341,539 shares issued to the owners of the Post IPO Acquisitions. Also,
the nine months ended June 30, 1998, includes 357,249 shares computed under
the treasury stock method related to 3,110,550 options outstanding at
September 11, 1998. See "Description of Capital Stock."
(f) Reflects the acquisitions of the 8 post IPO Acquisitions which closed
subsequent to June 30, 1998, as if they had occurred on June 30, 1998 as
described in the notes to the Unaudited Pro Forma Combined Financial
Statements. The unaudited pro forma combined balance sheet data are based
upon preliminary estimates, available information and certain assumptions
that management deems appropriate and should be read in conjunction with the
other financial information and historical financial statements, and notes
thereto, included elsewhere in this Prospectus.
(g) Reflects $4.2 million of previously undistributed earnings and nonoperating
assets, net of liabilities distributed in connection with the acquisitions
to the owners of the 8 post IPO Acquisitions which closed subsequent to June
30, 1998. This amount was funded through transfers of cash and nonoperating
assets. See "Certain Transactions." Also, includes approximately $63.6
million of debt incurred net of cash acquired to fund the cash portion of
the consideration paid for the 8 post IPO Acquisitions which closed
subsequent to June 30, 1998,
(h) Historical balance sheet data for IES and Subsidiaries represents the
financial position of the accounting acquirer (HSE) as of periods ended
prior to January 30, 1998 (as restated for the Pooled Company) and HSE and
the Post IPO Purchased Companies beginning on their respective dates of
acquisition.
(i) Historical shares used in determining historical earnings per share are
based on (a) the shares issued to acquire HSE and the Pooled Company
totaling 4,492,039 (basic and diluted) for periods ended prior to January
30, 1998, and (b) the shares in (a) plus the shares issued to acquire the
other Founding Companies and the Post IPO Purchased Companies beginning on
their respective dates of acquisition, along with the incremental shares for
options outstanding determined using the treasury stock method as follows:
BASIC DILUTED
---------- ----------
Weighted average shares outstanding .... 16,400,110 16,400,110
Common stock equivalents ............... -- 357,249
---------- ----------
16,400,110 16,757,359
========== ==========
18
21
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
INTRODUCTION
The following discussion should be read in conjunction with the Founding
Companies' Financial Statements, and related notes thereto, and "Selected
Financial Data" appearing elsewhere in this Prospectus.
The Company's revenues are derived primarily from electrical construction and
maintenance services provided to commercial, industrial and residential
customers. Of the Company's pro forma combined year ended September 30, 1997
revenues of $705.0 million, approximately 80% was derived from commercial and
industrial contracting, approximately 14% was derived from residential
contracting and approximately 6% was derived from electrical maintenance work.
Revenues from fixed-price construction and renovation contracts are generally
accounted for on a percentage-of-completion basis, using the cost-to-cost
method. The cost-to-cost method measures the percentage completion of a
contract based on total costs incurred to date compared to total estimated
costs at completion. Maintenance and other service revenues are recognized as
the services are performed.
Cost of services consists primarily of salaries and benefits of employees,
subcontracted services, materials, parts and supplies, depreciation, fuel and
other vehicle expenses and equipment rentals. The Company's gross margin, which
is gross profit expressed as a percentage of revenues, depends on the relative
proportions of costs related to labor and materials. On jobs in which a higher
percentage of the cost of services consists of labor costs, the Company
typically achieves higher gross margins than on jobs where materials represent
more of the cost of services. Materials costs can be calculated with relatively
greater accuracy than labor costs, and the Company seeks to maintain higher
margins on its labor-intensive projects to compensate for the potential
variability of labor costs for these projects. Selling, general and
administrative expenses consist primarily of compensation and related benefits
for owners, administrative salaries and benefits, advertising, office rent and
utilities, communications and professional fees. Certain owners and certain key
employees of the Companies have agreed to reductions in their compensation and
related benefits in connection with the Acquisitions. Such reductions in
salaries, bonuses and benefits have been reflected as a pro forma adjustment in
the Unaudited Pro Forma Combined Statement of Operations and are reflected in
the terms of employment agreements with the Company.
The Company believes that it has realized savings from (i) consolidation of
insurance and bonding programs; (ii) reduction in other general and
administrative expenses, such as training and advertising; (iii) the Company's
ability to borrow at lower interest rates than the Companies; (iv)
consolidation of operations in certain locations and (v) greater volume
discounts from suppliers of materials, parts and supplies. Offsetting these
savings are costs related to the Company's corporate management, costs of being
a public company and costs of integrating companies acquired in acquisitions.
As a result of the acquisitions of the Companies accounted for as purchases,
the excess of the consideration paid over the fair value of the net assets
acquired was recorded as goodwill on the Company's balance sheet and is being
amortized as a non-cash charge to the income statement over a 40-year period.
19
22
INTEGRATED ELECTRICAL SERVICES, INC. AND SUBSIDIARIES CONSOLIDATED RESULTS OF
OPERATIONS
The following table presents selected historical results of operations of IES
and Subsidiaries. These historical income statements represent the results of
operations of (i) the Accounting Acquirer (HSE), (as restated to include the
financial position and results of operations of the Pooled Company) for periods
ending prior to January 30, 1998 and (ii) HSE (as restated) and the results of
operations of the Post IPO Purchased Companies beginning on their respective
dates of acquisition.
Nine Months Ended Year Ended
Years Ended December 31, September 30, September 30,
------------------------------------ ----------------- -----------------
1995 1996 1997 1997
---------------- ---------------- ----------------- -----------------
(UNAUDITED)
Revenues ............................... $ 73,345 100% $ 101,431 100% $ 92,379 100% $ 117,111 100%
Cost of Services ....................... 63,709 87 85,081 84 76,306 83 95,937 82
--------- ---- --------- ---- --------- ---- --------- ----
Gross profit ........................ 9,636 13 16,350 16 16,073 17 21,174 18
Selling, general and
administrative expenses ............. 7,905 11 10,228 10 10,222 11 14,261 12
Goodwill amortization .................. -- -- -- -- -- -- -- --
Non-cash, non-recurring compensation
charge in connection with the
founding company acquisitions ....... -- -- -- -- -- -- -- --
--------- ---- --------- ---- --------- ---- --------- ----
Income/(loss) from operations .......... $ 1,731 2% $ 6,122 6% $ 5,851 6% $ 6,913 6%
========= ==== ========= ==== ========= ==== ========= ====
Nine Months Ended
June 30,
------------------------------------
1997 1998
----------------- -----------------
(UNAUDITED)
Revenues ............................... $ 79,847 100% $ 219,620 100%
Cost of Services ....................... 65,189 82 173,420 79
--------- ---- --------- ----
Gross profit ........................ 14,658 18 46,200 21
Selling, general and
administrative expenses ............. 10,170 13 29,467 13
Goodwill amortization .................. -- -- 1,743 1
Non-cash, non-recurring compensation
charge in connection with the
founding company acquisitions ....... -- -- 17,036 8
--------- ---- --------- ----
Income/(loss) from operations .......... $ 4,488 5% $ (2,046) (1)%
========= ==== ========= ====
20
23
Integrated Electrical Services, Inc. and Subsidiaries Consolidated results for
the nine months ended June 30, 1998 compared to the nine months ended June 30,
1997
Revenues increased $139.8 million, or 175%, from $79.8 million for the nine
months ended June 30, 1997, to $219.6 million for the nine months ended June 30,
1998. The increase in revenues is principally due to the acquisition of the
Founding Companies (excluding Houston-Stafford) on January 30, 1998, and the
acquisition of the Post IPO Acquisitions during the three months ended June 30,
1998.
Gross profit increased $31.5 million, or 215%, from $14.7 million for the nine
months ended June 30, 1997, to $46.2 million for the nine months ended June 30,
1998. The increase in gross profit was principally due to the Acquisitions of
the Founding Companies (excluding Houston-Stafford) on January 30, 1998, and the
acquisitions of the Post IPO Acquisitions during the three months ended June 30,
1998. As a percentage of revenues, gross profit increased from 18.4% in 1997 to
21.0% in 1998. This increase is attributed to Houston Stafford's lower markup
on certain materials acquired under significant customer contracts and
additional overtime in the prior year.
Selling, general and administrative expenses increased $19.3 million, or 189%,
from $10.2 million for the nine months ended June 30, 1997, to $29.5 million for
the nine months ended June 30, 1998. This increase in selling, general and
administrative expenses was primarily attributable to the Acquisitions of the
Founding Companies (excluding Houston-Stafford) on January 30, 1998, the
acquisitions of the Post IPO Acquisitions during the three months ended June 30,
1998, a $5.6 million bonus paid to the owners of Houston-Stafford during the
four months ended in January 1998, compared to a $1.5 million bonus during the
four months ended in January 1997, and approximately $1.7 million of additional
corporate costs incurred in 1998 associated with being a public company which
did not exist in 1997. Excluding such bonuses and higher corporate costs,
selling, general and administrative expenses as a percentage of revenues
decreased from 10.7% in 1997 to 10.0% in 1998.
Operating income decreased $6.5 million, or 233%, from $4.5 million for the
nine months ended June 30, 1997, to $(2.0) million for the nine months ended
June 30, 1998. This decrease in operating income is primarily attributed to the
Founding Company Acquisitions (excluding Houston-Stafford) on January 30, 1998,
the acquisitions of the Post IPO Acquisitions during the three months ended June
30, 1998, the non-recurring owner bonuses in 1997, which was partially offset by
higher corporate costs discussed above. As a percentage of revenues, operating
income (excluding the owner bonuses and higher corporate costs noted above)
increased from 7.7% in 1997 to 10.3% in 1998.
Integrated Electrical Services, Inc. and Subsidiaries Consolidated results for
the year ended September 30, 1997 compared to the year ended December 31, 1996.
Revenues increased $15.7 million, or 15%, from $101.4 million for the year
ended December 31, 1996 to $117.1 million for the year ended September 30, 1997
primarily as a result of increased demand and the consolidation of an
electrical supply company, partially offset by the effects of unusually rainy
weather in Texas.
Gross profit increased $4.8 million, or 30%, during the year ended September
30, 1997 to $21.2 million, and gross margin increased to 18% during the year
ended September 30, 1997 from 16% during the year ended December 31, 1996 as a
result of favorable pricing related to the increase in demand and higher
discounts on certain long-term material purchase commitments.
Selling, general and administrative expenses increased 40% from $10.2 million
to $14.3 million. The increase was primarily attributable to an increase in
bonuses for certain key employees and to a lesser degree higher insurance
costs.
Integrated Electrical Services, Inc. and Subsidiaries Consolidated results for
the year ended December 31, 1996 compared to the year ended December 31, 1995
21
24
Revenues increased $28.1 million, or 38%, from $73.3 million for the year
ended December 31, 1995, to $101.4 million for the year ended December 31,
1996, primarily due to an overall increase in demand and new contracts under
which Houston-Stafford is the sole or primary provider of electrical
installation services for certain significant residential contractors.
Gross profit increased $6.8 million, or 71%, from $9.6 million for the year
ended December 31, 1995 to $16.4 million for the year ended December 31, 1996.
Gross margin increased from 14% to 18% over these periods. The increase in
gross profit amounts and percentages is primarily attributable to favorable
pricing related to the increase in demand and higher discounts on certain
long-term material purchase commitments.
Selling, general and administrative expenses increased 29% from $7.9 million
to $10.2 million. The increase was attributable to the addition of
administrative infrastructure necessary to support Houston-Stafford's growth
and the establishment of a new merit bonus system. Selling, general and
administrative expenses as a percentage of revenues remained constant during
1996 when compared to 1995.
INTEGRATED ELECTRICAL SERVICES, INC. AND SUBSIDIARIES CONSOLIDATED LIQUIDITY
AND CAPITAL RESOURCES
As of June 30, 1998, the Company had cash of $13.3 million and, had borrowed
$20.0 million under its Credit Facility, had $1.0 million of letters of credit
outstanding and had available capacity under its Credit Facility of $49.0
million.
During the nine months ended June 30, 1998, the Company generated $7.9 million
of net cash from operating activities. Net cash used in investing activities
was $68.2 million, including $66.6 million used for the purchase of businesses.
Net cash flows provided by financing activities was $69.5 million resulting
primarily from $91.5 million of net proceeds from the IPO, $20.6 million from
borrowings under the Company's Credit Facility, reduced by payments of debt
assumed in connection with acquisitions and distributions to the Accounting
Acquirer totaling $42.7 million.
On August 7, 1998, the Company increased its three-year revolving credit
facility to $175.0 million (the "Credit Facility"). The Credit Facility is used
for working capital, capital expenditures, other corporate purposes and
acquisitions. The amounts borrowed under the Credit Facility bear interest at
an annual rate equal to either (a) the London interbank offered rate ("LIBOR")
plus 1.0% to 2.0%, as determined by the ratio of the Company's total funded debt
to EBITDA (as defined), or (b) the higher of (i) the bank's prime rate and (ii)
the Federal Funds rate plus 0.5%, plus up to an additional 0.5% as determined by
the ratio of the Company's total funded debt to EBITDA. Commitment fees of
0.25% to 0.375%, as determined by the ratio of the Company's total funded debt
to EBITDA, are due on any unused borrowing capacity under the Credit Facility.
The Company's subsidiaries have guaranteed the repayment of all amounts due
under the facility, and the facility is secured by the capital stock of the
guarantors and the accounts receivable of the Company and the guarantors. The
Credit Facility requires the consent of the lenders for acquisitions exceeding a
certain level of cash consideration, prohibits the payment of cash dividends on
the Company's common stock, restricts the ability of the Company to incur other
indebtedness and requires the Company to comply with certain financial
covenants. Availability of the Credit Facility is subject to customary drawing
conditions.
The Company anticipates that its cash flow from operations and proceeds from
its Credit Facility will provide sufficient cash to enable the Company to meet
its working capital needs, debt service requirements and planned capital
expenditures for property and equipment through 1998.
Through September 14, 1998, the Company utilized a combination of existing
cash, borrowings under its credit facility, and its common stock to acquire 35
companies with total 1997 revenues of approximately $ 705.0 million. The cash
component of the consideration paid for these companies was funded with
proceeds from the IPO, existing cash, and borrowings under the Credit Facility.
As of September 14, 1998, $91.0 million was borrowed under the Credit Facility.
The Company intends to continue to pursue acquisition opportunities and may be
in various stages of negotiation, due diligence and documentation of potential
acquisitions at any time. The timing, size or success of any acquisition effort
and the associated potential capital commitments cannot be predicted. The
Company expects to fund future acquisitions primarily with working capital, cash
flow from operations and borrowings, including any unborrowed portion of the
Credit Facility, as well as issuances of additional equity. To the extent the
Company funds a significant portion of the consideration for future acquisitions
with cash, it may have to increase the amount of the Credit Facility or obtain
other sources of financing, including the issuance of
22
25
additional debt or equity. Capital expenditures for equipment and expansion of
facilities are expected to be funded from cash flow from operations and
supplemented as necessary by borrowings under the Credit Facility.
SEASONALITY AND QUARTERLY FLUCTUATIONS
The Company's results of operations from residential construction are seasonal,
depending on weather trends, with typically higher revenues generated during
the spring and summer and lower revenues during the fall and winter. The
commercial and industrial aspect of the Company's business is less subject to
seasonal trends, as this work is performed inside structures protected from the
weather. The Company's service business is generally not affected by
seasonality. In addition, the construction industry has historically been
highly cyclical. The Company's volume of business may be adversely affected by
declines in construction projects resulting from adverse regional or national
economic conditions. Quarterly results may also be materially affected by the
timing of new construction projects and acquisitions and the timing and
magnitude of acquisition assimilation costs. Accordingly, operating results
for any fiscal period are not necessarily indicative of results that may be
achieved for any subsequent fiscal period.
INFLATION
Due to the relatively low levels of inflation experienced in fiscal 1995, 1996,
and 1997, inflation did not have a significant effect on the results of the
company in those fiscal years, or any of the Acquired Companies during similar
periods.
RECENT ACCOUNTING PRONOUNCEMENTS
Statement of Financial Accounting Standards ("SFAS") No. 123, "Accounting for
Stock-Based Compensation," allows entities to choose between a new fair value
based method of accounting for employee stock options or similar equity
instruments and the current intrinsic, value-based method of accounting
prescribed by Accounting Principles Board Opinion No. 25 ("APB No. 25").
Entities electing to remain with the accounting in APB No. 25 must make pro
forma disclosures of net income and earnings per share as if the fair value
method of accounting had been applied. The Company will provide pro forma
disclosure of net income and earnings per share, as applicable, in the notes to
future consolidated annual financial statements.
In June, 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information" which establishes standards for the way
public enterprises are to report information about operating segments in annual
financial statements and requires the reporting of selected information about
operating segments in interim financial reports issued to shareholders. SFAS
No. 131 also establishes standards for related disclosures about products and
services, geographic areas, and major customers. SFAS No. 131 is effective for
fiscal years beginning after December 15, 1997, at which time the Company will
adopt the provision. This statement is not anticipated to have a material
impact on the Company's financial disclosures.
Effective January 1, 1996, the Company adopted SFAS No. 121, "Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed
Of." Accordingly, in the event that facts and circumstances indicate that
property and equipment or other assets may be impaired, and evaluation of
recoverability would be performed. If an evaluation is required, the estimated
future undiscounted cash flows associated with the asset are compared to the
asset's carrying amount to determine if an impairment of such property is
necessary. The effect of any impairment would be to expense the difference
between the fair value of such property and its carrying value. Adoption of
this standard did not have a material effect on the consolidated financial
position or results of operations of the Company.
In June 1997, the Financial Accounting Standards Board (FASB) issued SFAS No.
131, "Disclosure about Segments of an Enterprise and Related Information,"
which establishes standards for the way public enterprises are to report
information about operating segments in annual financial statements and
requires the reporting of selected information about operating systems in
interim financial reports issued to shareholders. SFAS No. 131 is effective
for the Company for its year ended September 30, 1999, at which time the
Company will adopt the provision. The Company is currently evaluating the
impact on the Company's financial disclosures.
In February 1998, the FASB issued SFAS No. 132, "Employers Disclosures about
Pensions and Other Retirement Benefits," which becomes effective for financial
statements for the year ended September 30, 1999. SFAS No. 132 requires
revised disclosures about pension and other postretirement benefit plans. The
Company is currently assessing the impact of this statement on its annual
financial statements.
On June 1, 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities," which becomes effective for the Company
for its year ended September 30, 2000. SFAS No. 133 requires a company to
recognize all derivative
23
26
instruments (including certain derivative instruments embedded in other
contracts) as assets or liabilities in its balance sheet and measure them at
fair value. The statement requires that changes in t he derivatives fair value
be recognized currently in earnings unless specific hedge accounting criteria
are met. The Company is evaluating SFAS No. 133 and the impact on existing
accounting policies and financial reporting disclosures. However, the Company
has not to date engaged in activities or entered into arrangements normally
associated with derivative instruments.
YEAR 2000 DATE CONVERSION
The Company is in the process of identifying and evaluating potential issues
for its information technology and third party relationships associated with
the date change in the year 2000. The Company has not yet fully assessed any
Year 2000 remedial costs, but is in the process of identifying and developing
solutions to the Year 2000 issues. While the Company is not currently able to
quantify the cost of corrective actions, it does not expect that these actions
will materially exceed the cost of normal software upgrades and replacements
expected to occur through the year 2000. While the Company believes all
necessary work will be completed in a timely fashion, it cannot guarantee that
the systems of other companies on which the Company relies will be converted
within the same timeframe. The Company is attempting to obtain assurances from
vendors, business partners, and others with which it conducts business that
their systems will be Year 2000 compliant. If as a result of foregoing process
the Company determines that a material business interruption may occur due to
the Year 2000 issue, it will attempt to implement an appropriate contingency
plan.
MILLS RESULTS OF OPERATIONS
Mills, headquartered in Dallas, Texas was founded in 1972 and operates
primarily in the greater Dallas-Fort Worth area. Mills derives a significant
portion of its revenues from higher margin design-and-build services and from
data cabling and fire alarm systems.
The following table sets forth selected statement of operations data as a
percentage of revenues for the periods indicated:
YEARS ENDED DECEMBER 31, NINE MONTHS ENDED SEPTEMBER 30, YEAR ENDED
-------------------------------- -------------------------------- SEPTEMBER 30,
1995 1996 1996 1997 1997
-------------- -------------- ------------- -------------- --------------
(IN THOUSANDS) (UNAUDITED)
Revenues ........................... $35,250 100% $65,439 100% $43,684 100% $52,644 100% $74,399 100%
Cost of services ................... 27,372 78 50,535 77 33,998 78 44,035 84 60,572 81
------- ---- ------- ---- ------- ---- ------- ---- ------- ----
Gross profit ..................... 7,878 22 14,904 23 9,686 22 8,609 16 13,827 19
Selling, general and
administrative expenses .......... 4,741 13 7,643 12 3,837 9 4,972 9 8,778 12
------- ---- ------- ---- ------- ---- ------- ---- ------- ----
Income (loss) from operations .... $ 3,137 9% $ 7,261 11% $ 5,849 13% $ 3,637 7% $ 5,049 7%
======= ==== ======= ==== ======= ==== ======= ==== ======= ====
24
27
Mills results for the year ended September 30, 1997 compared to the year ended
December 31, 1996
Revenues increased $9.0 million, or 14%, from $65.4 million for the year
ended December 31, 1996, to $74.4 million for the year ended September 30,
1997, primarily due to the acquisition of Regional Electric in June 1996 (which
represents approximately $13 million of 1997 and $5.2 million of 1996
revenues).
Gross profit decreased $1.1 million, or 7%, from $14.9 million for the year
ended December 31, 1996 to $13.8 million for the year ended September 30, 1997.
Gross margin decreased from 23% to 19% due to a decrease in demand for higher
margin, complex industrial work offset by an increase in demand for lower
margin commercial work, as well as a planned increase in the operating
infrastructure at Regional Electric to support Mill's growth strategy in the
Fort Worth market.
Selling, general and administrative expenses increased 15% from $7.6 million
to $8.8 million. The increase was attributable to a full year of general and
administrative expenses relating to the June 1996 acquisition of Regional
Electric, and a $0.2 million severance payment to the former owner of Regional
Electric.
Mills results for the nine months ended September 30, 1997 compared to nine
months ended September 30, 1996
Revenues increased $8.9 million, or 21%, from $43.7 million for the nine
months ended September 30, 1996 to $52.6 million for the nine months ended
September 30, 1997, primarily as a result of the acquisition of Regional
Electric, which specializes in commercial and industrial electrical contracting
and fire alarm, data cabling and control system installation in the greater
Fort Worth area.
Gross profit decreased $1.1 million, or 11%, during the first nine months of
1997 as compared to the nine months ended September 30, 1996. Gross margin
decreased from 22% to 16% due to a decrease in demand for higher margin,
complex industrial work offset by an increase in demand for lower margin
commercial work, as well as a planned increase in the operating infrastructure
at Regional Electric to support Mill's growth strategy in the Fort Worth
market.
Selling, general and administrative expenses increased 30% from $3.8 million
to $5.0 million. The increase was attributable to a full year of general and
administrative expenses relating to the June 1996 acquisition of Regional
Electric, and a $0.2 million severance payment to the former owner of Regional
Electric.
Mills results for the year ended December 31, 1996 compared to the year ended
December 31, 1995
Revenues increased $30.1 million, or 86%, from $35.3 million for the year
ended December 31, 1995 to $65.4 million for the year ended December 31, 1996,
primarily due to the acquisition of Regional Electric in June 1996 (which
represents approximately $5.2 million of 1996 revenues), an increase in demand
for large and complex industrial construction contracts for manufacturing and
distribution facilities in the greater Dallas area for which only a select
group of electrical contractors have the resources and expertise to bid and a
30% increase in maintenance and service revenues resulting from Mills' focus on
increasing its maintenance and service revenues.
25
28
Gross profit increased $7.0 million, or 89%, from $7.9 million for the year
ended December 31, 1995 to $14.9 million for the year ended December 31, 1996.
Gross margin increased to 23% from 22% during this period due to an increase in
higher margin maintenance and service work.
Selling, general and administrative expenses increased 61% from $4.7 million
to $7.6 million. The increase was attributable to increased business volume,
including that related to the acquisition of operations of Regional Electric
and increases in discretionary bonus and savings plan distributions.
MILLS LIQUIDITY AND CAPITAL RESOURCES
Mills used approximately $2.9 million of net cash for operating activities
for the nine months ended September 30, 1997, primarily for working capital.
Net cash used in investing activities was approximately $1.2 million, primarily
for the purchase of tools and equipment. Net cash used in financing activities
was $0.3 million, primarily for stockholder distributions and long-term debt.
At September 30, 1997, Mills had a $2.0 million revolving line of credit
available that expires June 1, 1999. At September 30, 1997, there were
outstanding draws against this line of credit in the amount of $400,000, which
are due and payable within one year.
Mills generated $2.7 million of net cash from operating activities for the
year ended September 30, 1997. Net cash used in investing activities was
approximately $1.5 million, primarily for additions to property and equipment.
Net cash used in financing activities of $3.7 million primarily resulted from
distributions to stockholders.
At September 30, 1997, Mills had working capital of $7.8 million and total
debt obligations of $0.8 million that relate to the acquisition of Regional
Electric and certain capital leases.
Mills generated $7.9 million in net cash from operating activities for the
year ended December 31, 1996, as a result of increased profitability. Net cash
used in investing activities was approximately $0.6 million, representing $0.9
million used for the purchase of property and equipment, partly offset by $0.3
million, net, in collection of loans. Net cash used in financing activities was
$3.9 million for the year ended December 31, 1996, primarily for distribution
of dividends to stockholders. At December 31, 1996, Mills had a $2.0 million
revolving line of credit that was originally scheduled to expire June 1, 1997
and was extended to June 1, 1999. At December 31, 1996, there were no
outstanding draws against this line of credit.
At December 31, 1996, Mills had working capital of $5.5 million and total debt
obligations of $0.6 million.
BEXAR-CALHOUN RESULTS OF OPERATIONS
Bexar was founded in 1966 and operates primarily in the areas around the
cities of San Antonio, New Braunfels and Laredo, Texas. Calhoun was founded in
1958 and operates in the counties around San Antonio.
The following table sets forth selected statement of operations data as a
percentage of revenues for the periods indicated:
26
29
NINE MONTHS ENDED YEAR ENDED
YEARS ENDED DECEMBER 31, SEPTEMBER 30, SEPTEMBER 30,
----------------------------------- ------------------------------------ ----------------
1995 1996 1996 1997 1997
--------------- ---------------- ---------------- ---------------- ----------------
(IN THOUSANDS) (UNAUDITED)
Revenues ....................... $27,730 100% $33,023 100% $24,994 100% $24,136 100% $32,165 100%
Cost of services ............... 20,964 76 25,017 76 18,909 76 18,868 78 24,976 78
------- ----- ------- ----- ------- ----- ------- ----- ------
Gross profit ................. 6,766 24 8,006 24 6,085 24 5,268 22 7,189 22
Selling, general and
administrative expenses ...... 3,637 13 3,686 11 2,713 11 2,793 12 3,766 12
------- ---- ------- ----- ------- ----- ------- ----- ------- ----
Income (loss)
from operations ............ $ 3,129 11% $ 4,320 13% $ 3,372 13% $ 2,475 10% $ 3,423 10%
======= ==== ======= ===== ======= ===== ======= ===== ======= ====
Bexar-Calhoun results of operations for the year ended September 30, 1997
compared to the year ended December 31, 1996
Revenues decreased $0.8 million, or 3%, from $33.0 million for the year ended
December 31, 1996, to $32.2 million for the year ended September 30, 1997,
primarily due to the completion in 1996 of an unusually large electrical
construction contract for a state university in Laredo, Texas.
Gross profit decreased $0.8 million, or 10%, from $8.0 million for the year
ended December 31, 1996, to $7.2 million for the year ended September 30, 1997.
Gross margins decreased to 22% from 24% over these periods. The decrease in
gross profit related to completion of the large state university contract in
1996 and gross margin declined due to a change in customer mix associated with
a decrease in higher margin retail construction in San Antonio.
Selling, general and administrative expenses remained relatively constant in
1997 as compared to 1996.
Bexar-Calhoun results for the nine months ended September 30, 1997 compared to
nine months ended September 30, 1996
Revenues decreased $0.9 million, or 3%, from $25.0 million in 1996 to $24.1
million in 1997, primarily due to an increase in overall growth offset by the
completion in 1996 of an unusually large electrical construction contract for a
state university in Laredo, Texas.
Gross profit decreased $0.8 million, or 13%, from $6.1 million in 1996 to
$5.3 million in 1997. Gross margin decreased from 24% in 1996 to 22% in 1997.
The decrease in gross profit related to completion of the large state
university contract in 1996 and gross margin declined due to a change in
customer mix associated with a decrease in higher margin retail construction in
San Antonio.
Selling, general and administrative expenses remained relatively constant
from 1996 to 1997.
Bexar-Calhoun results for the year ended December 31, 1996 compared to the
year ended December 31, 1995
Revenues increased $5.3 million, or 19%, from $27.7 million in 1995 to $33.0
million in 1996, primarily due to reassignment of certain personnel to Laredo
and New Braunfels, Texas. Bexar-Calhoun realized a $3.6 million increase in
revenues in these two markets between 1995 and 1996, in part from an unusually
large electrical construction contract for a university in Laredo, Texas.
27
30
Gross profit increased $1.2 million, or 18%, from $6.8 million in 1995 to
$8.0 million in 1996. Gross margin remained stable over these periods. The
increase in gross profit was attributable to higher revenues.
Selling, general and administrative expenses did not significantly change
from 1995 to 1996. Selling, general and administrative expenses declined as a
percentage of revenue from 13% in 1995 to 11% in 1996.
BEXAR-CALHOUN LIQUIDITY AND CAPITAL RESOURCES
Bexar-Calhoun generated $3.1 million of net cash from operating activities
for the nine months ended September 30, 1997. Net cash used in investing
activities was approximately $0.9 million, primarily for additions to property
and equipment and loans to stockholders. Net cash used in financing activities
of $1.5 million resulted from stockholder distributions net of debt repayments.
Bexar-Calhoun generated $3.3 million of net cash from operating activities
for the year ended September 30, 1997. Net cash used in investing activities
was approximately $1.1 million, primarily for additions of property and
equipment. Net cash used in financing activities of $1.9 million primarily
resulted from stockholder distributions and repayments of debt.
At September 30, 1997, Bexar-Calhoun had working capital of $4.2 million and
total debt of $0.9 million.
Bexar-Calhoun generated $2.7 million in net cash from operating activities
for the year ended December 31, 1996, primarily from net income offset by
growth in working capital. Net cash used in investing activities was
approximately $0.6 million for additions to property and equipment net of
stockholder loan repayments. Net cash used by financing activities was $2.8
million for the year ended December 31, 1996 primarily as a result of
stockholder distributions net of debt repayments.
At September 30, 1996, Bexar-Calhoun had working capital of $4.2 million and
total debt of $1.9 million.
POLLOCK RESULTS OF OPERATIONS
Pollock was founded in 1983 and is headquartered in Houston, Texas. Pollock
has specialized expertise in design-and-build projects for commercial and
industrial customers.
28
31
The following table sets forth selected statement of operations data as a
percentage of revenues for the periods indicated:
ELEVEN MONTHS ENDED YEAR ENDED
YEARS ENDED OCTOBER 31, SEPTEMBER 30, SEPTEMBER 30,
---------------------------------- ------------------------------------ ---------------
1995 1996 1996 1997 1997
--------------- --------------- ---------------- ---------------- ---------------
(IN THOUSANDS) (UNAUDITED)
Revenues ....................... $ 13,002 100% $ 15,816 100% $ 13,305 100% $ 17,780 100% $ 20,291 100%
Cost of services ............... 10,602 82 13,534 86 11,646 88 14,782 83 16,670 82
-------- ---- -------- ---- -------- ---- -------- ---- -------- ----
Gross profit ................. 2,400 18 2,282 14 1,659 12 2,998 17 3,621 18
Selling, general and
administrative expenses ...... 2,149 16 2,463 15 2,083 16 2,515 14 2,895 14
---- -------- ---- -------- ---- -------- ---- -------- ----
Income (loss)
from operations ............ $ 251 2% $ (181) (1)% $ (424) (4)% $ 483 3% $ 726 4%
======== ==== ======== ==== ======== ==== ======== ==== ======== ====
Pollock results for the year ended September 30, 1997 compared to the year
ended October 31, 1996
Revenues increased $4.5 million, or 28%, from $15.8 million for the year
ended October 31, 1996 to $20.3 million for the year ended September 30, 1997,
primarily due to an increase in large commercial contracts, increased data
cabling work, and higher revenues from service work.
Gross profit increased $1.4 million, or 59%, from $2.2 million for the year
ended October 31, 1996 to $3.6 million for the year ended September 30, 1997.
Gross margin increased to 18% from 14% over these periods. The gross profit and
gross margin increases in 1997 when compared to 1996 are primarily attributable
to specific low margin or loss contracts in 1996 that did not recur in 1997.
Selling, general and administrative expenses increased 18% from $2.5 million
to $2.9 million due to the addition of certain strategic management personnel.
As a percent of revenues, selling, general and administrative expenses
decreased in 1997 over 1996 by 1%.
Pollock results for the eleven months ended September 30, 1997 compared to
eleven months ended September 30, 1996
Revenues increased $4.5 million, or 34%, from $13.3 million for the eleven
months ended September 30, 1996 to $17.8 million for the eleven months ended
September 30, 1997, primarily due to an increase in large commercial contracts,
increased data cabling work and higher revenues for service and small project
work.
Gross profit increased $1.3 million, or 81%, from $1.7 million for the eleven
months ended September 30, 1996 to $3.0 million for the eleven months ended
September 30, 1997. Gross margin increased to 17% from 12% over these periods.
The gross profit and gross margin increases in 1997 when compared to 1996 are
primarily attributable to specific low margin or loss contracts in 1996 that
did not recur in 1997.
Selling, general and administrative expenses increased 21% from $2.1 million
to $2.5 million due to the addition of certain strategic management personnel.
As a percentage of revenues, selling, general and administrative expenses
actually decreased in 1997 over 1996 by 2%.
Pollock results for the year ended October 31, 1996 compared to the year ended
October 31, 1995
Revenues increased $2.8 million, or 22%, from $13.0 million for the year
ended October 31, 1995, to $15.8 million for the year ended October 31, 1996,
primarily due to an increase in commercial construction and the addition of
data cabling services.
29
32
Gross profit decreased $0.1 million, or 5%, from $2.4 million for the year
ended October 31, 1995 to $2.3 million for the year ended October 31, 1996.
Gross margin decreased to 14% from 18% over these periods. These decreases were
due to specific low margin or loss contracts in 1996.
Selling, general and administrative expenses increased 15% from $2.1 million
to $2.5 million. The increase was attributable to an increase in management
staff necessary to support Pollock's growth strategy, including the addition of
data cabling expertise.
POLLOCK LIQUIDITY AND CAPITAL RESOURCES
Pollock used $0.1 million of net cash for operating activities during the
eleven months ended September 30, 1997. Net cash used in investing activities
was approximately $0.1 million, primarily for increases in the leasing of
capital assets. Net cash provided by financing activities of $0.3 million
resulted from additional short-term line of credit borrowings.
Net cash from operating activities for the year ended September 30, 1997 was
not material in amount. Net cash used in investing activities was approximately
$0.2 million, primarily for increases in the leasing of capital assets. Net
cash provided by financing activities of $0.5 million resulted from additional
short-term line of credit borrowings.
At September 30, 1997, Pollock had working capital of $0.6 million and total
debt of $1.8 million.
Pollock used $0.7 million in net cash from operating activities for the year
ended October 31, 1996, primarily to fund working capital requirements. Net
cash used in investing activities was approximately $0.2 million for additions
to property and equipment. Net cash provided by financing activities was $0.7
million for the year ended October 31, 1996 primarily as a result of short-term
line of credit borrowings.
At October 31, 1996, Pollock had working capital of $0.5 million and total
debt of $1.5 million.
MUTH RESULTS OF OPERATIONS
Muth was founded in 1970 and has seven offices located in South Dakota,
including its headquarters in Mitchell. Muth also from time to time operates in
Wyoming, Montana, Nebraska and Minnesota.
The following table sets forth selected statement of operations data as a
percentage of revenues for the periods indicated:
NINE MONTHS ENDED YEAR ENDED
YEARS ENDED DECEMBER 31, SEPTEMBER 30, SEPTEMBER 30,
-------------------------------------- -------------------------------------- -----------------
1995 1996 1996 1997 1997
----------------- ----------------- ----------------- ----------------- -----------------
(IN THOUSANDS) (UNAUDITED)
Revenues .................. $16,012 100% $16,830 100% $12,517 100% $14,466 100% $18,779 100%
Cost of services .......... 12,189 76 12,834 76 9,751 78 11,428 79 14,511 77
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Gross profit ............ 3,823 24 3,996 24 2,766 22 3,038 21 4,268 23
Selling, general
and administrative
expenses ................ 2,923 18 2,957 18 2,147 17 2,264 16 3,074 16
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Income (loss)
from operations ....... $ 900 6% $ 1,039 6% $ 619 5% $ 774 5% $ 1,194 7%
======= ======= ======= ======= ======= ======= ======= ======= ======= =======
30
33
Muth results for the year ended September 30, 1997 compared to the year ended
December 31, 1996
Revenues increased $2.0 million, or 12%, from $16.8 million for the fiscal
period ended December 31, 1996 to $18.8 million for the fiscal year ended
September 30, 1997, due to a significant increase in market demand that was
offset by work delays caused by the harsh winter, which lasted from November
1996 through early April 1997.
Gross profit increased $0.3 million, or 7%, from $4.0 million for the fiscal
period ended December 31, 1996 to $4.3 million for the fiscal year ended
September 30, 1997. The increase in gross profit is attributable to increased
market demand that was offset by work delays caused by the harsh winter, which
lasted from November 1996 through early April 1997. Gross margin decreased to
23% from 24% over these periods.
Muth results for the nine months ended September 30, 1997 compared to nine
months ended September 30, 1996
Revenues increased $2.0 million, or 16%, from $12.5 million for the nine
months ended September 30, 1996 to $14.5 million for the nine months ended
September 30, 1997, due to a significant increase in market demand that was
offset by work delays caused by the harsh winter, which lasted from November
1996 through early April 1997.
Gross profit increased $0.2 million, or 10%, from $2.8 million for the nine
months ended September 30, 1996 to $3.0 million for the nine months ended
September 30, 1997. Gross margin decreased to 21% from 22% over these periods.
The decreases in the gross margin are solely attributable to the harsh winter
and related work delays in early 1997.
Selling, general and administrative expenses increased 5% from $2.1 million
to $2.3 million. The increase was attributable to the increase in market demand
and related infrastructure costs.
Muth results for the year ended December 31, 1996 compared to the year ended
December 31, 1995
Revenues increased $0.8 million, or 5%, from $16.0 million for the year ended
December 31, 1995 to $16.8 million for the year ended December 31, 1996, due to
increased market demands for electrical contracting services, slightly offset
by delays caused by the harsh winter, which started in November 1996 and
continued through early April 1997.
Gross profit increased $0.2 million, or 5%, from $3.8 million for the year
ended December 31, 1995 to $4.0 million for the year ended December 31, 1996.
There was no significant change in gross margin. The gross profit and gross
margin increases in 1996 when compared to 1995 were attributable to increased
margins on service work in 1996 and increased revenues.
Selling, general and administrative expenses remained constant over these
periods.
31
34
MUTH LIQUIDITY AND CAPITAL RESOURCES
Muth generated $0.5 million of net cash from operating activities for the
nine months ended September 30, 1997. Net cash used in investing activities was
approximately $0.2 million, primarily for additions to property and equipment.
Net cash used in financing activities of $0.4 million primarily related to
distributions to stockholders.
Muth generated $0.5 million of net cash from operating activities for the
fiscal year ended September 30, 1997. Net cash used in investing activities was
approximately $0.2 million, primarily for additions to property and equipment.
Net cash used in financing activities of $0.3 million primarily relates to
payments of short-term debt.
At September 30, 1997, Muth had working capital of $2.3 million and total debt
of $0.5 million. Muth currently has no long-term debt. Cash requirements
increased for the fiscal year ended September 30, 1997 as a result of a higher
proportion of government contracts, which typically have payment periods of 45
to 60 days rather than the 20-day period typical for private contracts.
Muth generated $0.5 million in net cash from operating activities for the
year ended December 31, 1996, primarily from earnings net of investments in
working capital. Net cash used in investing activities was approximately $0.4
million for additions to property and equipment. Net cash used by financing
activities was $0.1 million for the year ended December 31, 1996 primarily as a
result of stockholder distributions in excess of borrowings.
At December 31, 1996, Muth had working capital of $1.9 million and total debt
of $0.5 million.
32
35
DANIEL RESULTS OF OPERATIONS
Daniel Electrical Contractors, Inc. was founded in 1986, is headquartered in
Miami, Florida, and operates primarily in South Florida. Daniel Electrical of
Treasure Coast Inc. was founded in 1995 and is headquartered in Vero Beach,
Florida. In addition to commercial and industrial contracting, Daniel services
high-end residential construction and repairs on a time-and-material basis,
from both its Miami and Vero Beach, Florida locations.
The following table sets forth selected statement of operations data and such
data as a percentage of revenues for the periods indicated:
NINE MONTHS ENDED
YEARS ENDED DECEMBER 31, SEPTEMBER 30, YEAR ENDED
----------------------------------------- --------------------------------------- SEPTEMBER 30,
1995 1996 1996 1997 1997
------------------- ------------------ ------------------ ------------------ -------------------
(IN THOUSANDS) (UNAUDITED)
Revenues ................ $ 12,049 100% $ 12,585 100% $ 8,846 100% $ 14,670 100% $ 18,409 100%
Cost of services ........ 11,725 97 9,713 77 6,675 75 10,480 71 13,518 73
-------- -------- -------- -------- ------- -------- -------- -------- -------- --------
Gross profit .......... 324 3 2,872 23 2,171 25 4,190 29 4,891 27
Selling, general and
administrative ........ 1,502 13 1,884 15 1,360 15 1,792 12 2,316 13
-------- -------- -------- -------- ------- -------- -------- -------- -------- --------
expenses
Income/(loss) from
operations ........... $ (1,178) (10)% $ 988 8% $ 811 10% $ 2,398 17% $ 2,575 14%
======== ======== ======== ======== ======= ======== ======== ======== ======== ========
33
36
Daniel results for the year ended September 30, 1997 compared to the year
ended December 31, 1996
Revenues increased $5.8 million, or 46%, from $12.6 million for the year
ended December 31, 1996 to $18.4 million for the year ended September 30, 1997,
primarily due to increased contract revenues on several large high-rise
condominium projects in South Florida during the year ended September 30, 1997.
Gross profit increased $2.0 million, or 70%, from $2.9 million for the year
ended December 31, 1996 to $4.9 million for the year ended September 30, 1997.
Gross margin increased from 23% to 27%, primarily due to increased labor
efficiencies and an increase in higher margin high-rise residential contracts.
Selling, general and administrative expenses increased $0.4 million, or 23%,
from $1.9 million for the year ended December 31, 1996 to $2.3 million for the
year ended September 30, 1997, primarily due to increases in office salaries
associated with increased revenues. As a percentage of revenues, selling,
general and administrative expenses decreased from 15% to 13%.
Daniel results for the nine months ended September 30, 1997 compared to nine
months ended September 30, 1996
Revenues increased $5.9 million, or 66%, from $8.8 million for the nine
months ended September 30, 1996 to $14.7 million for the nine months ended
September 30, 1997, primarily due to favorable pricing for negotiated contracts
in process during the nine months ended September 30, 1997.
Gross profit increased $2.0 million, or 93%, from $2.2 million for the nine
months ended September 30, 1996 to $4.2 million for the nine months ended
September 30, 1997. Gross margin increased from 25% to 29%, primarily due to
increased labor efficiencies and an increase in higher margin high-rise
residential contracts.
Selling, general and administrative expenses increased $0.4 million, or 32%,
from $1.4 million for the nine months ended September 30, 1996 to $1.8 million
for the nine months ended September 30, 1997, primarily due to increases in
office salaries associated with increased revenues. As a percentage of
revenues, selling, general and administrative expenses decreased from 15% to
12%.
Daniel results for the year ended December 31, 1996 compared to the year ended
December 31, 1995
Revenues increased $0.6 million, or 4%, from $12.0 million for the year ended
December 31, 1995 to $12.6 million for the year ended December 31, 1996,
primarily due to increased revenues from negotiated contracts in process during
the year ended December 31, 1996.
Gross profit increased $2.6 million, or 786%, from $0.3 million for the year
ended December 31, 1995 to $2.9 million for the year ended December 31, 1996.
Gross margin increased from 3% to 23%, as a result of cost overruns incurred in
1995 on certain projects and an increase in labor efficiencies and an increase
in higher margin high-rise residential contracts.
Selling, general and administrative expenses increased $0.4 million, or 25%,
from $1.5 million for the year ended December 31, 1995 to $1.9 million for the
year ended December 31, 1996, as a result of the increase in revenues.
34
37
DANIEL LIQUIDITY AND CAPITAL RESOURCES
Daniel generated $1.8 million in net cash from operating activities for the
nine months ended September 30, 1997, primarily due to an increase in accounts
receivable and accounts payable, both of which represented offsets to net
income generated during the period. Net cash used in investing activities was
approximately $0.9 million, principally for capital expenditures. Net cash used
in financing activities was approximately $0.3 million, principally for
shareholder distributions net of long-term borrowings.
Daniel generated $2.0 million in net cash from operating activities for the
year ended September 30, 1997, primarily due to an increase in accounts
receivable and accounts payable, both of which represented offsets to net
income generated during the period. Net cash used in investing activities was
approximately $1.3 million, principally for capital expenditures. Net cash used
in financing activities was approximately $0.4 million, principally for
shareholder distributions net of long-term borrowings.
Working capital as of September 30, 1997 was $4.5 million, and total debt
outstanding was $0.7 million, of which $0.6 million was owed to a shareholder.
Days sales outstanding in accounts receivable increased from 42 days as of
December 31, 1996, to 68 days as of September 30, 1997. Such increase is
attributable to an increase in sales during the second and third quarters of
1997.
Daniel generated $1.2 million in net cash from operating activities for the
year ended December 31, 1996, primarily due to an increase in collections of
deposits and billings on contracts in progress. Net cash used in investing
activities was approximately $0.5 million, principally for capital expenditures
and increases in mutual fund investments. Net cash used in financing activities
was approximately $0.4 million, principally for debt repayments.
Working capital as of December 31, 1996 was $2.4 million, and total debt
outstanding was $0.6 million, all of which was owed to a shareholder.
35
38
AMBER RESULTS OF OPERATIONS
Amber was founded in 1979 and operates from its base near Orlando, Florida.
Amber's revenues in fiscal 1996 were primarily from commercial and industrial
contracting.
The following table sets forth selected statement of operations data as a
percentage of revenues for the periods indicated:
NINE MONTHS ENDED YEAR ENDED
YEARS ENDED DECEMBER 31, SEPTEMBER 30, SEPTEMBER 30,
1995 1996 1996 1997 1997
---------------- -------------- -------------- -------------- --------------
(UNAUDITED) (IN THOUSANDS)
Revenues ................ $ 9,728 100% $13,878 100% $10,572 100% $13,080 100% $16,386 100%
Cost of services ........ 8,635 89 12,215 88 8,710 82 9,910 76 13,415 82
------- ------- ------- ----- ------- ----- ------- ----- ------- -----
Gross profit .......... 1,093 11 1,663 12 1,862 18 3,170 24 2,971 18
Selling, general and
administrative
expenses .............. 957 10 1,160 8 978 9 1,197 9 1,379 8
------- ------- ------- ----- ------- ----- ------- ----- ------- -----
Income from
operations ........... $ 136 1% $ 503 4% $ 884 8% $ 1,973 15% $ 1,592 10%
======= ======= ======= ===== ======= ===== ======= ===== ======= =====
36
39
Amber results for the year ended September 30, 1997 compared to the year ended
December 31, 1996
Revenues increased $2.5 million, or 18%, from $13.9 million for the year
ended December 31, 1996 to $16.4 million for the year ended September 30, 1997,
primarily due to three large retail construction contracts in 1997.
Gross profit increased $1.3 million, or 79%, from $1.7 million for the year
ended December 31, 1996 to $3.0 million for the year ended September 30, 1997.
Gross margins increased to 18% from 12% over these periods. The gross profit
and gross margin increases in 1997 when compared to 1996 are attributable to an
increase in the overall demand, as well as demand for higher margin retail
construction contracts.
Selling, general and administrative expenses increased 19% from $1.2 million
to $1.4 million. As a percentage of revenues, selling, general and
administrative expenses remained relatively constant in 1997 as compared to
1996.
Amber results for the nine months ended September 30, 1997 compared to nine
months ended September 30, 1996
Revenues increased $2.5 million, or 24%, from $10.6 million for the nine
months ended September 30, 1996 to $13.1 million for the nine months ended
September 30, 1997, primarily from three large retail construction contracts in
1997.
Gross profit increased $1.3 million, or 70%, from $1.9 million in 1996 to
$3.2 million in 1997. Gross margin increased from 18% to 24% over these
periods. The improvement in gross margin was attributable to an increase in the
number of commercial contracts with higher gross margins recognized.
Selling, general and administrative expenses increased 22% from $1.0 million
to $1.2 million for the nine months ended September 30, 1996 compared to the
nine months ended September 30, 1997.
Amber results for the year ended December 31, 1996 compared to the year ended
December 31, 1995
Revenues increased $4.2 million, or 43%, from $9.7 million in 1995 to $13.9
million in 1996, primarily due to increased commercial construction of shopping
malls and grocery stores in central Florida.
Gross profit increased $0.6 million, or 52%, from $1.1 million in 1995 to
$1.7 million in 1996. Gross margin remained stable over these periods.
Selling, general and administrative expenses increased 21% from $1.0 million
in 1995 to $1.2 million in 1996. The increase was attributable to increased
management salaries associated with increased revenues.
AMBER LIQUIDITY AND CAPITAL RESOURCES
Amber generated $0.7 million of net cash from operating activities for the
nine months ended September 30, 1997. Net cash used in investing activities was
approximately $0.3 million, primarily for additions to property and equipment.
Net cash used in financing activities was not material in amount for the nine
months ended September 30, 1997.
37
40
Amber generated $0.7 million of net cash from operating activities for the
year ended September 30, 1997. Net cash used in investing activities was
approximately $0.3 million, primarily for additions to property and equipment.
Net cash provided by financing activities was not material for the year ended
September 30, 1997.
At September 30, 1997, Amber had working capital of $1.8 million and total
debt of $0.7 million.
Amber generated $0.7 million in net cash from operating activities for the
year ended December 31, 1996, primarily for earnings and reductions in working
capital. Net cash used in investing activities was approximately $0.2 million
for additions of property and equipment. Net cash provided by financing
activities was not material for the year ended December 31, 1996.
At December 31, 1996, Amber had working capital of $0.6 million and total
debt of $0.7 million.
HAYMAKER RESULTS OF OPERATIONS
Haymaker was founded in 1981, is headquartered in Birmingham, Alabama, and
operates in Alabama, northwest Florida and North Carolina. Haymaker's revenues
in fiscal 1996 were primarily from commercial and industrial contracting
services.
The following table sets forth selected statement of operations data as a
percentage of revenues for the periods indicated:
NINE MONTHS ENDED
YEAR ENDED SEPTEMBER 30, YEAR ENDED
DECEMBER 31, -------------------------------------- SEPTEMBER 30,
1996 1996 1997 1997
---------------- ---------------- ---------------- ----------------
(UNAUDITED) (IN THOUSANDS)
Revenues ..................... $ 7,634 100% $ 5,105 100% $ 9,243 100% $11,772 100%
Cost of services ............. 6,412 84 4,419 87 7,927 86 9,920 84
------- ------- ------- ------- ------- ------- ------- -------
Gross profit ............... 1,222 16 686 13 1,316 14 1,852 16
Selling, general and
administrative
expenses ................... 680 9 364 7 824 9 1,140 10
------- ------- ------- ------- ------- ------- ------- -------
Income from
operations ............... $ 542 7% $ 322 6% $ 492 5% $ 712 6%
======= ======= ======= ======= ======= ======= ======= =======
Haymaker results for the year ended September 30, 1997 compared to the year
ended December 31, 1996
Revenues increased $4.2 million, or 54%, from $7.6 million for the year ended
December 31, 1996 to $11.8 million for the year ended September 30, 1997,
primarily due to a large hospital contract and an overall increase in
construction activity in Birmingham, Alabama.
Gross profit increased $0.7 million, or 52%, from $1.2 million for the year
ended December 31, 1996 to $1.9 million for the year ended September 30, 1997.
Gross margins remained constant at 16%. The gross profit increase in 1997 when
compared to 1996 was attributable to higher demand.
Selling, general and administrative expenses increased 68% from $0.7 million
to $1.1 million due to higher bonus distributions under Haymaker's incentive
compensation plan. As a percentage of revenues, selling, general and
administrative expenses increased in 1997 as compared to 1996 by 1%.
38
41
Haymaker results for the nine months ended September 30, 1997 compared to nine
months ended September 30, 1996
Revenues increased $4.1 million, or 81%, from $5.1 million for the nine
months ended September 30, 1996, to $9.2 million for the nine months ended
September 30, 1997, primarily due to a large hospital contract and an overall
increase in construction activity in Birmingham, Alabama.
Gross profit increased $0.6 million, or 92%, from $0.7 million for the nine
months ended September 30, 1996 to $1.3 million for the same period in 1997.
Gross margin increased to 14% in 1997 from 13% in 1996 over these periods. The
increase in gross profit and gross margin was attributable to higher demand and
lower than expected costs and certain fixed price contracts.
Selling, general and administrative expenses increased 126% from $0.4 million
for the nine months ended September 30, 1996, to $0.8 million for the nine
months ended September 30, 1997. The increase was attributable to higher bonus
distributions under Haymaker's incentive compensation plan.
HAYMAKER LIQUIDITY AND CAPITAL RESOURCES
Haymaker generated $0.4 million of net cash from operating activities for the
nine months ended September 30, 1997. Net cash used in financing activities of
$0.1 million resulted from repayments of short-term borrowings.
Haymaker generated $0.7 million of net cash from operating activities for the
year ended September 30, 1997. Net cash used in investing activities was not
material in amount. Net cash used by financing activities of $0.5 million
resulted from distributions to owners of equity interests in consolidated
entities.
At September 30, 1997, Haymaker had working capital of $1.6 million and no
debt.
Haymaker used $0.1 million in net cash from operating activities for the year
ended December 31, 1996. Net cash used by financing activities was $0.4 million
for the year ended December 31, 1996 primarily as a result of distributions to
owners of equity interests in consolidated entities.
At December 31, 1996 Haymaker had working capital of $1.3 million and no
debt.
SUMMIT RESULTS OF OPERATIONS
Summit was founded in 1987 and is located in Houston, Texas. Summit's
revenues in its fiscal year ended March 31, 1997 were primarily from commercial
and industrial contracting. Summit has specialized expertise in data cable
design and installation and lighting design.
39
42
The following table sets forth selected statement of operations data as a
percentage of revenues for the periods indicated:
SIX MONTHS ENDED
YEAR ENDED SEPTEMBER 30, YEAR ENDED
MARCH 31, ----------------------------------- SEPTEMBER 30,
1997 1996 1997 1997
---------------- ---------------- ---------------- ----------------
(UNAUDITED) (IN THOUSANDS)
Revenues .......................... $10,565 100% $ 5,735 100% $ 6,165 100% $10,995 100%
Cost of services .................. 9,157 87 4,946 86 5,243 85 9,454 86
------- ------- ------- ------- ------- ------- ------- -------
Gross profit .................... 1,408 13 789 14 922 15 1,541 14
Selling, general and
administrative expenses ......... 1,340 12 699 12 822 13 1,463 13
------- ------- ------- ------- ------- ------- ------- -------
Income (loss) from
operations .................... $ 68 1% $ 90 2% $ 100 2% $ 78 1%
======= ======= ======= ======= ======= ======= ======= =======
Summit results for the year ended September 30, 1997 compared to the year
ended March 31, 1997
Revenues increased $0.4 million, or 4%, from $10.6 million for the year ended
March 31, 1997, to $11.0 million for the year ended September 30, 1997,
primarily due to an increase in larger commercial contracts.
Gross profit increased $0.1 million, or 9%, from $1.4 million for the year
ended March 31, 1997, to $1.5 million for the year ended September 30, 1997.
Gross margins increased to 14% from 13% over these periods. The gross profit
and gross margin increases in 1997 when compared to 1996 are primarily
attributable to the increase in larger commercial contracts.
Selling, general and administrative expenses increased 9% from $1.3 million
to $1.5 million due to increases in management bonuses, higher insurance and
business promotional expenses. As a percentage of revenues, selling, general
and administrative expenses remained constant.
Summit results for the six months ended September 30, 1997 compared to six
months ended September 30, 1996
Revenues increased $0.5 million, or 7%, from $5.7 million for the six months
ended September 30, 1996 to $6.2 million for the six months ended September 30,
1997, primarily due to the addition of large contracts with short construction
periods.
Gross profit increased $0.1 million, or 17%, from $0.8 million for the six
months ended September 30, 1996 to $0.9 million for the six months ended
September 30, 1997. Gross margin increased from 14% to 15% from 1996 to 1997.
The increase in gross profit was primarily attributable to high profitability
on certain jobs with tight deadlines, partially offset by the write-off of a
receivable from a contractor which went bankrupt.
Selling, general and administrative expenses increased 18% from $0.7 million
to $0.8 million. The increase was attributable to management bonuses, higher
insurance and business promotional expenses.
40
43
SUMMIT LIQUIDITY AND CAPITAL RESOURCES
Summit generated $0.1 million of net cash from operating activities for the
six months ended September 30, 1997. Net cash provided by investing activities
and net cash provided by financing activities were not material in amount for
the six months ended September 30, 1997.
Summit generated near break-even levels of net cash from operating activities
for the year ended September 30, 1997. Summit used $0.2 million of net cash
from investing activities for the year ended September 30, 1997 primarily for
the purchase of service trucks. Net cash provided by financing activities of
$0.2 million resulted from borrowings of long- term debt.
At September 30, 1997, Summit had working capital of $0.6 million and total
debt of $0.9 million.
Summit generated near break-even levels of net cash from operating activities
for the year ended March 31, 1997. Net cash used in investing activities was
approximately $0.2 million primarily for the purchase of service trucks. Net
cash provided by financing activities was $0.2 million for the year ended March
31, 1997 primarily as a result of long-term borrowings.
At March 31, 1997 Summit had working capital of $0.6 million and total debt
of $0.9 million.
41
44
THURMAN & O'CONNELL RESULTS OF OPERATIONS
Thurman & O'Connell was founded in 1988. It is headquartered in Louisville,
Kentucky, and operates primarily in Louisville and the surrounding areas.
Thurman & O'Connell's revenues in 1996 and 1997 were primarily from commercial
and industrial contracting, with an emphasis on institutional and commercial
properties.
The following table sets forth selected statement of operations data as a
percentage of revenues for the periods indicated:
NINE MONTHS ENDED
YEARS ENDED DECEMBER 31, SEPTEMBER 30, YEAR ENDED
----------------------------------------------------------------- SEPTEMBER 30,
1995 1996 1996 1997 1997
-------------- -------------- ------------------------------------------------
(UNAUDITED) (IN THOUSANDS)
Revenues ................... $4,729 100% $4,551 100% $3,741 100% $3,239 100% $4,049 100%
Cost of services ........... 3,309 70 3,059 67 2,531 68 1,653 51 2,181 54
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Gross profit ............. 1,420 30 1,492 33 1,210 32 1,586 49 1,868 46
Selling, general and
administrative
expenses ................. 512 11 503 11 397 10 397 12 503 12
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Income from operations ... $ 908 19% $ 989 22% $ 813 22% $1,189 37% $1,365 34%
====== ====== ====== ====== ====== ====== ====== ====== ====== ======
42
45
Thurman & O'Connell results for the year ended September 30, 1997 compared to
the year ended December 31, 1996
Revenues decreased $0.6 million, or 11%, from $4.6 million for the year ended
December 31, 1996, to $4.0 million for the year ended September 30 1997,
primarily due to the completion of a large multi-year hospital project in 1996.
Gross profit increased $0.4 million, or 25%, from $1.5 million for the year
ended December 31, 1996, to $1.9 million for the year ended September 30, 1997.
Gross margin increased to 46% from 33% over these periods. The gross profit and
gross margin increases in 1997 when compared to 1996 are attributable to
favorable pricing on certain overbudget projects for which Thurman & O'Connell
shared in the cost savings it provided to its customers.
Selling, general and administrative expenses did not change significantly
between the year ended September 30, 1997 and the year ended December 31, 1996.
Thurman & O'Connell results for the nine months ended September 30, 1997
compared to nine months ended September 30, 1996
Revenues decreased $0.5 million, or 13%, from $3.7 million in the nine months
ended September 30, 1996 to $3.2 million in the nine months ended September 30,
1997, primarily due to the completion of a large multi-year hospital project in
1996.
Gross profit increased $0.4 million, or 31%, from $1.2 million in the nine
months ended September 30, 1996 to $1.6 million in the nine months ended
September 30, 1997, primarily due to favorable pricing on certain overbudget
projects for which Thurman & O'Connell shares in the cost savings provided to
its customers. Gross margin increased from 32% in the nine months ended
September 30, 1996 to 49% in the nine months ended September 30, 1997 due to a
large multi-year lower profit margin hospital project that was completed in
1996.
Selling, general and administrative expenses did not change significantly
between the nine months ended September 30, 1997 and the nine months ended
September 30, 1996.
Thurman & O'Connell results for the year ended December 31, 1996 compared to
the year ended December 31, 1995
Revenues decreased $0.1 million, or 4%, from $4.7 million in 1995 to $4.6
million in 1996, primarily due to the completion of a large multi-year hospital
project in 1996.
Gross profit increased $0.1 million, or 5%, from $1.4 million in 1995 to $1.5
million in 1996. Gross margin increased 3% from 30% in 1995 to 33% in 1996.
Selling, general and administrative expenses remained relatively constant
between 1995 and 1996.
43
46
THURMAN & O'CONNELL LIQUIDITY AND CAPITAL RESOURCES
Thurman & O'Connell generated $0.9 million of net cash for operating
activities for the nine months ended September 30, 1997. Net cash used in
investing activities was not material in amount. Net cash used by financing
activities of $1.2 million primarily resulted from distributions to
stockholders.
Thurman & O'Connell generated $0.9 million of net cash from operating
activities for the year ended September 30, 1997. Net cash provided and used in
investing activities was not material in amount. Net cash used in financing
activities was $1.2 million, primarily for distributions to stockholders.
At September 30, 1997, Thurman & O'Connell had working capital of $1.5 million
and total debt of $0.1 million.
Thurman & O'Connell generated $1.3 million in net cash from operating
activities for the year ended December 31, 1996, primarily from earnings net of
investments in working capital. Net cash used by financing activities was $0.6
million for the year ended December 31, 1996 primarily as a result of
distributions to stockholders and payments on debt.
At December 31, 1996 Thurman & O'Connell had working capital of $1.3 million
and total debt of $0.1 million.
BUSINESS
IES was founded in June 1997 to create a leading national provider and
consolidator of electrical contracting and maintenance services, focusing
primarily on the commercial, industrial and residential markets. On January 30,
1998, concurrent with the closing of the Offering, IES acquired, in separate
transactions 16 Founding Companies engaged in all facets of electrical
contracting and maintenance services. Subsequent to its IPO, and through
September 11, 1998, the Company has acquired 19 additional electrical
contracting and maintenance businesses. Of these 19 Post IPO Acquisitions, 18
were accounted for using the purchase method of accounting and one was
accounted for using the pooling of interests method of accounting. IES has
44
47
acquired 35 electrical contracting and maintenance service companies with pro
forma combined revenues of $705.0 million and $553.3 million for the year ended
September 30, 1997 and the nine months ended June 30, 1998, respectively, making
the Company one of the largest providers of electrical contracting and
maintenance services in the United States. Of such fiscal 1997 pro forma
revenues, approximately 80% was derived from commercial approximately 46% and
industrial approximately 34% contracting, approximately 14% was derived from
residential contracting and approximately 6% was derived from electrical
maintenance work. Combined revenues of the Companies, which have been in
business an average of 21 years, increased at an average compound annual
growth rate of approximately 17% from fiscal 1995 through 1997.
The Company offers a broad range of electrical contracting services,
including design and installation for both new and renovation projects in the
commercial, industrial and residential markets. The Company also offers
long-term and per-call maintenance services, which generally provide recurring
revenues that are relatively independent of levels of construction activity.
Typically, the Companies specialize in either commercial and industrial or
residential work, although a few of the Companies have both commercial and
industrial and residential operations.
In certain markets the Company offers design-and-build expertise and
specialized services, which typically require specific skills and equipment and
provide higher margins than general electrical contracting and maintenance
services. In a design-and-build project, the electrical contractor applies
in-house electrical engineering expertise to design the most cost-effective
electrical system for a given structure and purpose, taking into account local
code requirements. Specialized services offered by the Company include
installations of wiring or cabling for the following: data cabling for computer
networks; fiber optic cable systems; telecommunications systems; energy
management systems which control the amount of power used in facilities; fire
alarm and security systems; cellular phone transmission sites; "smart houses"
that integrate computer, energy management, security, safety, comfort and
telecommunication systems; lightning protection systems; clean rooms for
fabrication of microprocessors and similar devices; computer rooms; back-up
electrical systems and uninterruptible power supplies; high voltage
distribution and traffic signal systems.
INDUSTRY OVERVIEW
General. Virtually all construction and renovation in the United States
generates demand for electrical contracting services. Depending upon the exact
scope of work, electrical work generally accounts for approximately 8% to 12%
of the total construction cost of the Company's commercial and industrial
projects and 5% to 10% of the total construction cost of the Company's
residential projects. In recent years, the Companies have experienced a growing
demand for electrical contracting services per project due to increased
electrical code requirements, demand for additional electrical capacity,
including increased capacity for computer systems, additional data cabling
requirements and the construction of "smart houses" with integrated systems.
The overall electrical contracting industry, including commercial, industrial
and residential markets, was estimated by the U.S. Census to have generated
annual revenues in excess of $40 billion in 1992, the most
45
48
recent available U.S. Census data. These Census data indicate that the
electrical contracting industry is highly fragmented with more than 54,000
companies, most of which are small, owner-operated businesses, performing
various types of electrical work. The Company believes there are significant
opportunities for a well-capitalized national company to provide comprehensive
electrical contracting and maintenance services and that the fragmented nature
of the electrical contracting industry will provide significant opportunities
to consolidate commercial and industrial and residential electrical contracting
and maintenance service businesses.
Commercial and Industrial Market. Commercial and industrial consumers of
electrical contracting and maintenance services include general contractors;
developers; consulting engineers; architects; owners and managers of large
retail establishments, office buildings, apartments and condominiums; theaters
and restaurants; hotels and casinos; manufacturing and processing facilities;
arenas and convention centers; hospitals; school districts; military and other
government agencies; airports; prisons and car lots. High-rise residential
projects are viewed as commercial rather than residential projects because the
electrical wiring methods and field skills require similar techniques.
Commercial and industrial electrical construction is most often performed by a
subcontractor for a general contractor, although an electrical contractor may
also perform services directly as a prime contractor. Generally, contracts are
obtained through a competitive bid process or on negotiated terms through
ongoing customer relationships.
Typically, electrical contracting services for the industrial and commercial
market involve wiring a structure to specifications set by the customer,
increasingly with design-and-build engineering expertise provided by the
electrical contractor. The normal commercial or industrial job is wired through
pipe or conduit, which is installed through metal or concrete structures. Some
commercial and industrial contractors prefabricate certain components offsite,
at the contractor's office or at the facilities of a subcontractor or
manufacturer, and these items are transported to the job site ready to be
installed.
From fiscal 1995 through 1997, the Companies revenues from electrical
contracting for commercial and industrial customers have grown at an average
compound annual rate of approximately 17% per year. The Company believes that
growth in the commercial and industrial market reflects a number of factors,
including (i) levels of construction and renovation activity; (ii) regulations
imposed by electric codes, which establish minimum power and wiring
requirements; (iii) safety codes mandating additional installation of smoke
detectors and the use of ground fault circuit protection devices in more
locations; (iv) revised national energy standards that dictate the use of more
energy-efficient lighting fixtures and other equipment; (v) continuing demand
to build out lease spaces in office buildings and to reconfigure space for new
tenants; (vi) increases in use of electrical power, creating needs for
increased capacity and outlets, as well as data cabling and fiber optics and
(vii) requirements of building owners and developers to facilitate marketing
their properties to tenants and buyers by installing electrical capacity in
excess of minimum code requirements.
Residential Market. Contracting work for the residential market consists
primarily of electrical installations in new single family and low-rise
multifamily residence construction for
46
49
customers such as large homebuilders and apartment developers. The Company also
provides maintenance services to these customers as well as to individual
property owners in some locations. The typical residential electrical wiring
job is done with plastic-jacketed wiring installed through wood studs. As in
the commercial and industrial market, the opportunities for design-and-build
projects have grown recently for residential contractors. The residential
market, with its repetitive floor plans, lends itself to prefabrication
techniques. The use of prefabricated components increases productivity by
reducing construction time, labor costs and skill requirements. The residential
market is primarily dependent on the number of single family and multifamily
home starts, which are in turn affected by interest rates, tax considerations
and general economic conditions. Competitive factors particularly important in
the residential market include a contractor's ability to build relationships
with customers such as large homebuilders and apartment developers by providing
services in diverse geographic markets as construction activity shifts to new
locations. The Companies residential electrical contracting revenues have grown
at an average compound annual rate of approximately 19% from fiscal 1995
through 1997.
Residential electrical contractors with specialized expertise and the
necessary licenses are in a position to meet market demand for increasingly
complex residential electrical systems. For example, some newly constructed
homes have been designed as smart houses with integrated computer-controlled
systems wired in during construction. In addition, more stringent building and
fire codes have resulted in more complex wiring requirements for smoke
detectors and alarms.
STRATEGY
The Company believes that its size, geographical diversity of operations,
industry relationships, expertise in specialized markets, number of licensed
electricians and access to design technology give the Company significant
competitive advantages in the electrical contracting and maintenance services
industry. Through increased size, the Company believes it has greater ability
to compete for larger jobs that require greater technical expertise, personnel
availability and bonding capacity, to more effectively allocate and share
resources in serving customers in each of its markets and to attract, train and
retain qualified electricians. The Company also believes that increased size
provides increased efficiency in materials purchasing, computer system
development, employee benefits, bonding, insurance and financing. The Company
believes that the diversity of its operations diminishes the effects of
regional and market downturns, offers opportunities to pursue growth in its
existing markets and creates a base of expertise to expand into new markets and
serve new customers.
The Company leverages its experienced management and extensive relationships
within the electrical contracting industry to increase its revenues and reduce
its cost infrastructure through internal growth as well as the acquisition of
additional electrical contracting businesses. The Company's management includes
a Chief Executive Officer and two Chief Operating Officers, each with 25 years
or more of experience in the electrical contracting industry. The Company has
extensive business relationships within the industry, in part through Companies
that are members of the IEC. The IEC is the second largest electrical trade
organization in the U.S. and has nearly 3,000 contracting firms as members. The
Company's Chief Executive Officer is a past president
47
50
of the IEC, and two founders are members of the executive committee of the IEC.
The IEC sponsors forum groups, which are discussion groups of members of the
IEC that foster the sharing of best business practices. The Companies are
members of the IEC and other trade organizations, and the Company has
implemented programs to share best practices among the Companies and future
acquisitions.
The Company's goal is to become a leading national provider of electrical
services by improving its operations, expanding its business and markets
through internal growth and pursuing an aggressive acquisition strategy.
Operating Strategy. The Company believes there are significant opportunities
to increase revenues and profitability of the Acquired Companies and
subsequently acquired businesses. The key elements of the Company's operating
strategy are:
Share Information, Technical Capabilities and Best Practices. The Company
believes it will be able to expand the services it offers in its local
markets by leveraging the specialized technical and marketing strengths of
individual Companies. The Company identifies and shares best practices that
can be successfully implemented throughout its operations. The Company
intends to use the computer-aided- design technology and expertise of
certain of the Companies to bid for more design-and-build projects and to
assist customers in value engineering and creating project documents. The
Company believes that its increased size, capital and workforce will permit
it to pursue projects that require greater design and performance
capabilities and the ability to meet accelerated timetables.
Expand Scope of Maintenance and Specialized Services. The Company intends
to further develop its long-term and per call maintenance service
operations, which generally realize higher gross margins and provide
recurring revenues that are relatively independent of levels of construction
activity. The Company also believes that certain specialized businesses
currently offered by only a few of the Companies can be expanded throughout
the Company and in some cases can provide higher margins. Through sharing of
expertise and specialized licenses and the ability to demonstrate a safety
record in specialized markets served by the Companies, the Company intends
to expand its presence and profitability in markets where it previously
relied on subcontractors.
Establish National Market Coverage. The Company believes that the growth
of many of the Companies has been restricted due to the geographic
limitations of existing operations and that the Company's broad geographic
coverage will increase internal growth opportunities. The Company intends to
leverage its geographic diversity to bid for additional business from
existing customers that operate on a regional and national basis, such as
developers, contractors, homebuilders and owners of national chains. The
Company believes that significant demand exists from such companies to
utilize the services of a single electrical contracting and maintenance
service provider and existing local and regional relationships can be
expanded as the Company develops a nationwide network.
Operate on Decentralized Basis. The Company believes that, while
maintaining strong operating and financial controls, a decentralized
operating structure will retain the
48
51
entrepreneurial spirit present in each of the Companies. The Company also
structured to allow it to capitalize on the considerable local and regional
market knowledge and customer relationships possessed by each of the
Companies, as well as companies that may be acquired in the future. By
maintaining a local and regional focus in each of its markets, the Company
believes it will be able to build relationships with general contractors and
other customers, address design preferences and code requirements, respond
quickly to customer demands for higher-margin renovation and upgrade
projects and adjust to local conditions.
Attract and Retain Quality Employees. The Company believes that the
ability to attract and retain qualified electricians is a critical
competitive factor and that the acquisitions of the Companies provide
competitive advantages in this regard. The Company attracts and develops
skilled employees by extending active recruiting and training programs,
offering stock-based compensation for key employees, and offering expanded
career paths and more stable income through the larger public company. The
Company believes that this ability will allow it to increase efficiency and
pursue additional customer relationships.
Achieve Operating Efficiencies. Certain administrative functions have been
centralized. In addition, by combining overlapping operations of certain of
the Companies, the Company expects to realize savings in overhead and other
expenses. The Company uses its increased purchasing power to gain volume
discounts in areas such as electrical materials, vehicles, advertising,
bonding, employee benefits and insurance. The Company will seek to realize
additional cost savings and other benefits by the sharing of purchasing,
pricing, bidding and other business practices and the sharing of licenses.
The Company intends to further develop and extend the use of computer
systems to facilitate communication among the Acquired Companies. At some
locations, the larger combined workforce provides additional staffing
flexibility.
Acquisition Strategy. The Company believes that, due to the highly fragmented
nature of the electrical contracting and maintenance services industry, it has
significant opportunities to pursue its acquisition strategy. The Company
focuses on acquiring companies with management philosophies based on an
entrepreneurial attitude as well as a willingness to learn and share improved
business practices through open communications. The Company believes that many
electrical contracting and maintenance service businesses that lack the capital
necessary to expand operations will become acquisition candidates. For these
acquisition candidates, the Company provides (i) information on best
practices, (ii) expertise to expand in specialized markets, (iii) the
opportunity to focus on customers rather than administration, (iv) national
name recognition, (v) increased liquidity and (vi) the opportunity for a
continued role in management. The Companies participate in professional
associations such as the IEC and Associated Builders and Contractors, and the
Company intends to continue these relationships, in part to assist in
identifying attractive acquisition candidates. Other key elements of the
Company's acquisition strategy are:
Enter New Geographic Markets. The Company pursues acquisitions that are
located in new geographic markets, are financially stable and have the
customer base necessary to integrate with or complement its existing
business. The Company also expects that increasing its geographic diversity
will allow it to better serve an increasingly nationwide base of
49
52
customers and further reduce the impact on the Company of local and regional
economic cycles, as well as weather- related or seasonal variations in
business.
Expand Within Existing Markets. Once the Company has entered a market, it
seeks to acquire other well-established electrical contracting and
maintenance businesses operating within that region, including "tuck-in"
acquisitions of smaller companies. The Company believes that tuck-in
acquisitions afford the opportunity to improve its overall cost structure
through the integration of such acquisitions into existing operations as
well as to increase revenues through access to additional specialized
markets, such as heavy industrial markets. Despite the integration
opportunities afforded by such tuck-in acquisitions, the Company maintains
existing business names and identities to retain goodwill for marketing
purposes.
COMPANY OPERATIONS
The Company offers a broad range of electrical contracting services,
including installation and design, for both new and renovation projects in the
commercial, industrial and residential markets. The Company also offers
long-term and per call maintenance services, which generally provide recurring
revenues that are relatively independent of levels of construction activity.
In certain markets the Company offers design-and-build expertise and
specialized services, which typically require specific skills and equipment and
provide higher margins than general electrical contracting and maintenance
services. The Company also acts as a subcontractor for a variety of national,
regional and local builders in the installation of electrical and other
systems.
Commercial and Industrial. New commercial and industrial work begins with
either a design request or engineer's plans from the owner or general
contractor. Initial meetings with the parties allow the contractor to prepare
preliminary and then more detailed design specifications, engineering drawings
and cost estimates. Once a project is awarded, it is conducted in scheduled
phases, and progress billings are rendered to the owner for payment, less a
retainage of 5% to 10% of the construction cost of the project. Actual field
work (ordering of equipment and materials, fabrication or assembly of certain
components, delivery of materials and components to the job site, scheduling of
work crews and inspection and quality control) is coordinated during these
phases. The Company generally provides the materials to be installed as a part
of these contracts, which vary significantly in size from a few hundred dollars
to several million dollars and vary in duration from less than a day to more
than a year.
Residential. New residential installations begin with a builder providing
architectural or mechanical drawings for the residences within the tract being
developed. The Company typically submits a bid or contract proposal for the
work. Company personnel analyze the plans and drawings and estimate the
equipment, materials and parts and the direct and supervisory labor required
for the project. The Company delivers a written bid or negotiates an
arrangement for the job. The installation work is coordinated by the Company's
field supervisors along with the builder's personnel. Payments for the project
are generally obtained within 30 days, at which time any mechanics' and
materialmen's liens securing such payments are released. Interim payments are
often obtained to cover labor and materials costs on larger projects.
50
53
Maintenance Services. The Company's maintenance services are supplied on a
long-term and per call basis. The Company's long-term maintenance services are
provided through service contracts that require the customer to pay an annual
or semiannual fee for periodic diagnostic services at a specific discount from
standard prices for repair and replacement services. The Company's per call
maintenance services are initiated when a customer requests emergency repair
service or the Company calls the client to schedule periodic maintenance work.
Service technicians are scheduled for the call or routed to the customer's
residence or business by the dispatcher. Service personnel work out of the
Company's service vehicles, which carry an inventory of equipment, tools, parts
and supplies needed to complete the typical variety of jobs. The technician
assigned to a service call travels to the residence or business, interviews the
customer, diagnoses the problem, prepares and discusses a price quotation,
performs the work and often collects payment from the customer. Most work is
warrantied for one year.
Major Customers. The Company has a diverse customer base, with no single
customer accounting for more than 5% of the Company's pro forma combined
revenues for the year ended September 30, 1997. As a result of emphasis on
quality and worker reliability, management and a dedicated sales and work force
at the Companies have been responsible for developing and maintaining
successful relationships with key customers. Customers of the Companies
generally include general contractors; developers; consulting engineers;
architects; owners and managers of large retail establishments, office
buildings, apartments and condominiums, theaters and restaurants; hotels and
casinos; manufacturing and processing facilities; arenas and convention
centers; hospitals; school districts; military and other government agencies;
airports; prisons and car lots. The Company intends to continue its emphasis on
developing and maintaining relationships with its customers by providing
superior, high-quality service.
Employee Screening, Training and Development. The Company is committed to
providing the highest level of customer service through the development of a
highly trained workforce. Employees are encouraged to complete a progressive
training program to advance their technical competencies and to ensure that
they understand and follow the applicable codes, the Company's safety practices
and other internal policies. The Company supports and funds continuing
education for its employees, as well as apprenticeship training for its
technicians under the Bureau of Apprenticeship and Training of the Department
of Labor and similar state agencies. Employees who train as apprentices for
four years may seek to become journeymen electricians and, after additional
years of experience, master electricians. The Company pays progressive
increases in compensation to employees who acquire such additional training,
and more highly trained employees serve as foremen, estimators and project
managers. The Company's master electricians are licensed in one or more cities
or other jurisdictions in order to obtain the permits required in the Company's
business, and certain master electricians have also obtained specialized
licenses in areas such as security systems and fire alarm installation. In some
areas, licensing boards have set continuing education requirements for
maintenance of licenses. Because of the lengthy and difficult training and
licensing process for electricians, the Company believes that the number,
skills and licenses of its employees constitute a competitive strength in the
industry.
The Company actively recruits and screens applicants for its technical
positions and has established programs in some locations to recruit apprentice
technicians directly from high
51
54
schools and vocational-technical schools. Prior to employment, the Company will
make an assessment of the technical competence level of all potential new
employees, confirm background references, conduct random drug testing and check
criminal and driving records.
Purchasing. As a result of economies of scale derived through the
acquisitions of the Companies and the Company's in- house supply operations,
the Company believes it will be able to purchase equipment, parts and supplies
at discounts to historical levels. In addition, as a result of the Company's
size, it believes it will also lower its costs for (i) the purchase or lease
and maintenance of vehicles; (ii) bonding, casualty and liability insurance;
(iii) health insurance and related benefits; (iv) retirement benefits
administration; (v) office and computer equipment; (vi) marketing and
advertising; (vii) long distance services and (viii) a variety of accounting,
financial management and legal services.
Substantially all the equipment and component parts the Company sells or
installs are purchased from manufacturers and other outside suppliers. The
Company is not materially dependent on any of these outside sources.
MANAGEMENT INFORMATION AND CONTROLS
The Company has centralized its consolidated accounting and financial
reporting activities at its operational headquarters in Houston, Texas, while
basic accounting activities are conducted at the operating level. The Company
believes that its current information systems hardware and software are
adequate to meet current needs for financial reporting, internal management
control and other necessary information and the needs of newly acquired
corporations.
PROPERTY AND EQUIPMENT
The Company operates a fleet of owned and leased service trucks, vans and
support vehicles. It believes these vehicles generally are adequate for the
Company's current operations.
At September 14, 1998, the Company maintained warehouses, sales facilities
and administrative offices at 76 locations. Substantially of the Company's
facilities are leased. The Company leases its corporate headquarters located in
Houston, Texas.
The Company believes that its properties are generally adequate for its
present needs. Furthermore, the Company believes that suitable additional or
replacement space will be available as required.
COMPETITION
The electrical contracting industry is highly fragmented and competitive.
Most of the Company's competitors are small, owner-operated companies that
typically operate in a limited geographic area. There are few public companies
focused on providing electrical contracting services. In the future,
competition may be encountered from new entrants, such as public
52
55
utilities and other companies attempting to consolidate electrical contracting
service companies. Competitive factors in the electrical contracting industry
include (i) the availability of qualified and licensed electricians, (ii)
safety record, (iii) cost structure, (iv) relationships with customers, (v)
geographic diversity, (vi) ability to reduce project costs, (vii) access to
technology, (viii) experience in specialized markets and (ix) ability to obtain
bonding. See "Risk Factors -- Competition."
REGULATIONS
The Company's operations are subject to various federal, state and local laws
and regulations, including (i) licensing requirements applicable to
electricians; (ii) building and electrical codes; (iii) regulations relating to
consumer protection, including those governing residential service agreements
and (iv) regulations relating to worker safety and protection of the
environment. The Company believes it has all required licenses to conduct its
operations and is in substantial compliance with applicable regulatory
requirements. Failure of the Company to comply with applicable regulations
could result in substantial fines or revocation of the Company's operating
licenses.
Many state and local regulations governing electricians require permits and
licenses to be held by individuals. In some cases, a required permit or license
held by a single individual may be sufficient to authorize specified activities
for all the Company's electricians who work in the state or county that issued
the permit or license. The Company intends to implement a policy to ensure
that, where possible, any such permits or licenses that may be material to the
Company's operations in a particular geographic region are held by at least two
Company employees within that region.
LITIGATION
Each of the Founding Companies has, from time to time, been a party to
litigation arising in the normal course of its business, most of which involves
claims for personal injury or property damage incurred in connection with its
operations. Management believes that none of these actions will have a material
adverse effect on the financial condition or results of operations of the
Company.
EMPLOYEES
At September 11, 1998, the Company had approximately 8,141 employees. The
Company is not a party to any collective bargaining agreements. The Company
believes that its relationship with its employees is satisfactory.
53
56
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth information concerning the Company's
directors, officers and certain key employees:
NAME AGE POSITION
-------------------- --- --------------------------------------------
C. Byron Snyder..... 50 Chairman of the Board of Directors
Jon Pollock......... 52 President, Chief Executive Officer and Director
Jerry Mills......... 57 Senior Vice President and Chief Operating
Officer -- Commercial and Industrial and Director
Ben L. Mueller...... 51 Senior Vice President and Chief Operating
Officer --
Residential and Director
Jim P. Wise ........ 54 Senior Vice President and Chief Financial Officer
John F. Wombwell.... 36 Senior Vice President, General Counsel and Secretary
D. Merril Cummings.. 37 Vice President -- Mergers and Acquisitions
J. Paul Withrow..... 33 Vice President and Chief Accounting Officer
Donald Paul Hodel... 62 Director
Richard Muth........ 50 President of Muth Electric, Inc., and Director
Alan R. Sielbeck.... 45 Director
Robert Stalvey...... 48 Vice President of Ace Electric, Inc., and Director
Richard L. Tucker... 63 Director
Bob Weik............ 62 President of BW Consolidated, Inc., and Director
Directors are elected at each annual meeting of stockholders. All officers
serve at the discretion of the Board of Directors, subject to terms of their
employment agreement terms. See "-- Employment Agreements."
C. Byron Snyder has been Chairman of the Board of Directors of the Company
since its inception. Mr. Snyder is owner and President of Relco Refrigeration
Co., a distributor of refrigerator equipment, which he acquired in 1992. Prior
to 1992, Mr. Snyder was the owner and Chief Executive Officer of Southwestern
Graphics International, Inc., a diversified holding company which owned Brandt
& Lawson Printing Co., a Houston-based general printing business, and Acco
Waste Paper Company, an independent recycling business. Brandt & Lawson
Printing Co. was sold to Hart Graphics in 1989, and Acco Waste Paper Company
was sold to Browning-Ferris Industries in 1991. Mr. Snyder is a director of
Carriage Services, Inc., a publicly held death care company.
Jon Pollock has been President, Chief Executive Officer and a director of
the Company since consummation of the Offering. Mr. Pollock has been the
president of Pollock Electric Inc., one of the Founding Companies, since he
founded that company in 1983. Mr. Pollock is a Registered Professional Engineer
in Texas and several other states and holds Master Electrician licenses from 50
different jurisdictions. Mr. Pollock received a bachelor of science in
electrical engineering from Washington University. Mr. Pollock is past National
President of the Independent Electrical Contractors Association and received
the IEC Electrical Man of the Year award in 1996. As National President of the
IEC, Mr. Pollock was responsible for overseeing the IEC's activities relating
to the development and execution of apprenticeship and safety training
programs, industry lobbying activities and the development of national
electrical code standards.
Jerry Mills has been Senior Vice President and Chief Operating Officer --
Commercial and Industrial and a director of the Company since consummation of
the Offering. Mr. Mills has been the President of Mills Electrical Contractors,
Inc., one of the founding companies, since he began that company in 1972. Mr.
Mills is a past board member of the Independent Electrical Contractors, the
Associated Builders and Contractors, the Associated General Contractors and
54
57
the Richardson Electrical Board. Prior to 1972, Mr. Mills was an officer and
part owner of Koegel Cash Consulting Engineers.
Ben L. Mueller has been Senior Vice President, Chief Operating Officer --
Residential and a director of the Company since consummation of the Offering.
Mr. Mueller has been the Executive Vice President of Houston-Stafford since
1993 and has served as vice president of Houston-Stafford since 1975. Mr.
Mueller is a past member of the board of the IEC, Houston Chapter, and has
served on the Electrical Board for the City of Sugar Land, Texas.
Jim P. Wise joined the Company in September 1997 as Senior Vice President and
Chief Financial Officer. From September 1994 to September 1997, he was Vice
President -- Finance and Chief Financial Officer at Sterling Chemicals, Inc., a
publicly held manufacturer of commodity petrochemicals and pulp chemicals. From
July 1994 to September 1994, he was Senior Vice President and Chief Financial
Officer of U.S. Delivery Systems, Inc., a delivery service consolidator. From
September 1991 to July 1994, he was Chairman and Chief Executive Officer of
Neostar Group, Inc., a private investment banking and financial advisory firm.
Mr. Wise was employed by Transco Energy Company as Executive Vice President,
Chief Financial Officer and was a member of the Board of Directors from
November 1982 until September 1991.
John F. Wombwell has been Senior Vice President, General Counsel and
Secretary of the Company since consummation of the Offering. Mr. Wombwell was a
partner at Andrews & Kurth L.L.P., where he practiced law in the area of
corporate and securities matters for more than five years.
D. Merril Cummings joined the Company as Vice President -- Mergers and
Acquisitions in October 1997. Mr. Cummings has served as a consultant to the
Company since its inception in June 1997. From February 1997 through June 1997
he served as a consultant to C. Byron Snyder and his privately owned
corporations. From 1992 through 1996, Mr. Cummings served as Vice President and
Chief Financial Officer for J A Interests, Inc., a private asset management
company, and its commonly owned affiliates, including Southern Jet Management,
Inc., a general aviation services and charter company. From 1982 through
January 1992, Mr. Cummings held various positions with Arthur Andersen LLP. Mr.
Cummings is a Certified Public Accountant.
J. Paul Withrow has served as Vice President and Chief Accounting Officer of
the Company since October 1997. From 1987 to 1997, Mr. Withrow held various
positions with Arthur Andersen LLP. Mr. Withrow is a Certified Public
Accountant.
Donald Paul Hodel has been a director of the Company since April 1998. Mr.
Hodel has served as President of the Christian Coalition since June 1997. He is
Managing Director of Summit Group International, Ltd,. an energy and natural
resources consulting firm he founded in 1989. Mr. Hodel served as Secretary of
the Interior from 1985 to 1989 and Secretary of Energy from 1982 to 1985. Mr.
Hodel has served as director of both publicly traded and privately held
companies and is the recipient of the Presidential Citizens Medal and honorary
degrees from three universities. Mr. Hodel serves on the board of directors of
Columbia Energy Group.
55
58
Richard Muth has been a director of the Company since consummation of the
Offering. Mr. Muth founded Muth Electric, Inc. in 1970 and has been the owner
and president since that time. Mr. Muth served on the South Dakota State
Electrical Commission from 1980 to 1991 and the Associated General Contractors
Associate Division Board. Mr. Muth also received the South Dakota Electrical
Council "Man of the Year" award in 1993. Mr. Muth holds electrical contractors'
licenses in South Dakota, Minnesota, Nebraska, Wyoming and Montana.
Alan R. Sielbeck has been a director of the Company since consummation of the
Offering. Mr. Sielbeck has served as Chairman of the Board and Chief Executive
Officer of Service Experts, Inc., a publicly traded heating, ventilation and
air conditioning service company, since its inception in March 1996. Mr.
Sielbeck has served as Chairman of the Board and President of AC Service and
Installation Co. Inc. and Donelson Air Conditioning Company, Inc. since 1990
and 1991, respectively. From 1985 to 1990, Mr. Sielbeck served as President of
RC Mathews Contractor, Inc., a commercial building general contractor, and
Chief Financial Officer of RCM Interests, Inc., a commercial real estate
development company.
Robert Stalvey has been a director of the Company since consummation of the
Offering. Mr. Stalvey has served as Vice President of Ace since 1976. Mr.
Stalvey will continue to serve in these positions following the consummation of
the Offerings.
Richard L. Tucker has been a director of the Company since consummation of
the Offering. Dr. Tucker holds the Joe C. Walter Jr. Chair in Engineering, is
Director of the Construction Industry Institute, and is Director of the Sloan
Program for the Construction Industry at the University of Texas at Austin. Dr.
Tucker has been on the faculty at the University of Texas since 1976. Dr.
Tucker is a registered engineer.
Bob Weik has been a director of the Company since consummation of the
Offering. Mr. Weik has served as President, Treasurer and a director of the
Bexar-Calhoun companies since their inception in 1958. Mr. Weik will continue
to serve in those positions following the consummation of the Offerings.
The Board of Directors has established an Audit Committee and a Compensation
Committee. The Audit Committee recommends the appointment of auditors and
oversees the accounting and audit functions of the Company. The Compensation
Committee will determines the salaries and bonuses of executive officers and
administers the 1997 Stock Plan. Messrs. Seilbeck, Tucker and Hodel serve as
members of the Company's Compensation Committee and Audit Committee. Any future
material transactions, including the issuance of securities other than through
the 1997 Stock Plan and the 1997 Directors Stock Plan, between the Company and
its management and affiliates will be subject to prior review and approval by
the members of the Board of Directors without an interest in such transaction.
The Board of Directors is divided into three classes of directors, with
directors serving staggered three-year terms, expiring at the annual meeting of
stockholders following the 1998 fiscal year, 1999 fiscal year and 2000 fiscal
year, respectively. At each annual meeting of stockholders, one class of
directors will be elected for a full term of three years to succeed that class
of directors whose terms are expiring.
56
59
C. Byron Snyder and trusts for the benefit of his children, as the holders of
all of the outstanding Restricted Common Stock, are be entitled to elect one
member of the Company's Board of Directors and to one-half of one vote for each
share held on all other matters. Holders of Restricted Common Stock are not
entitled to vote on the election of any other directors. Only the holders of
the Restricted Common Stock may remove the director such holders are entitled
to elect. See "Description of Capital Stock."
DIRECTOR COMPENSATION
Directors who are employees of the Company or a subsidiary do not receive
additional compensation for serving as directors. Each director who is not an
employee of the Company or a subsidiary will receive a fee of $2,000 for
attendance at each Board of Directors meeting and $1,000 for each committee
meeting (unless held on the same day as a Board of Directors meeting).
Directors of the Company will be reimbursed for reasonable out-of-pocket
expenses incurred in attending meetings of the Board of Directors or committees
thereof, and for other expenses reasonably incurred in their capacity as
directors of the Company. Each non-employee director will receive stock options
to purchase 5,000 shares of Common Stock upon initial election to the Board of
Directors and thereafter an annual grant of 5,000 options on each September 30
on which the non-employee director continues to serve. See "-- 1997 Directors
Stock Plan."
EXECUTIVE COMPENSATION
The Company was incorporated in June 1997 and, prior to the Offering, had not
conducted any operations other than activities related to the acquisitions of
the Founding Companies and the Offering. During 1998 the annualized base
salaries of its most highly compensated executive officers will be: Mr. Pollock
- -- $225,000, Mr. Mills -- $200,000, Mr. Mueller -- $200,000, Mr. Wise --
$190,000 and Mr. Wombwell -- $190,000.
57
60
EMPLOYMENT AGREEMENTS
The Company has entered into employment agreements with each executive
officer of the Company which prohibits such officer from disclosing the
Company's confidential information and trade secrets and generally restricts
these individuals from competing with the Company for a period of two years
after the date of the termination of employment with the Company. Each of the
agreements has an initial term of five years and provides for annual extensions
at the end of its initial term, subject to the parties' mutual agreement, and
is terminable by the Company for "cause" upon ten days' written notice and
without "cause" (i) by the employee upon thirty days' written notice or (ii) by
the Company upon approval of 51% of the Board of Directors. The employment
agreements provide that the Company shall pay each executive officer the annual
salary set forth above under "-- Executive Compensation," which salary may be
increased by the Board of Directors. Such agreements also provide that each
executive officer will be reimbursed for out-of-pocket business expenses and
shall be eligible to participate in all benefit plans and programs as are
maintained from time to time by the Company. All employment agreements provide
that if the officer's employment is terminated by the Company without "cause"
or is terminated by the officer for "good reason," the officer will be entitled
to receive a lump sum severance payment at the effective time of termination
equal to the base salary (at the rate then in effect) for the greater of (i)
the time period remaining under the term of the agreement or (ii) one year. In
addition, the time period during which such officer is restricted from
competing with the Company will be shortened from two years to one year.
The employment agreements contain certain provisions concerning a
change-in-control of the Company, including the following: (i) in the event the
officer's employment is terminated within two years following the change in
control by the Company other than for "cause" or by the officer for "good
reason," or the officer is terminated by the Company within three months prior
to the change in control at the request of the acquirer in anticipation of the
change in control, the officer will be entitled to receive a lump sum severance
amount equal to the greater of (i) three years' base salary or (ii) the base
salary for whatever period is then remaining on the initial term and the
provisions which restrict competition with the Company shall not apply; (ii) in
any change-of-control situation, the officer may elect to terminate his
employment by giving five business days' written notice prior to the closing of
the transaction giving rise to the change-in-control, which will be deemed a
termination of employment by the Company without "cause," and the provisions of
the employment agreement governing the same will apply, except that the
severance amount otherwise payable shall be doubled (but not to exceed six
times the officer's base pay) (if the successor does not give written notice of
its acceptance of the Company's obligations under the employment agreement at
least ten business days prior to the anticipated closing date, the severance
amount shall be tripled, but not to exceed nine times base salary) and
provisions which restrict competition with the Company shall not apply; and
(iii) if any payment to the officer is subject to the 20% excise tax on excess
parachute payments, the officer shall be made "whole" on a net aftertax basis.
A change in control is generally defined to occur upon (i) the acquisition by
any person of 20% or more of the total voting power of the outstanding
securities of the Company, (ii) the first purchase pursuant to a tender or
exchange offer for Common Stock, (iii) the approval of certain mergers, sale of
substantially all the assets, or dissolution of the Company or (iv) a change in
a majority of the members of the Company's Board of Directors.
58
61
In general, a "parachute payment" is any "payment" made by the Company in the
nature of compensation that is contingent on a change in control of the Company
and includes the present value of the accelerations of vesting and the payment
of options and other deferred compensation amounts upon a change in control. If
the aggregate present value of the parachute payments to certain individuals,
including officers, equals or exceeds three times that individual's "base
amount" (generally, the individual's average annual compensation from the
Company for the five calendar years ending before the date of the change in
control), then all parachute amounts in excess of the base amount are "excess"
parachute payments. An individual will be subject to a 20% excise tax on excess
parachute amounts and the Company will not be entitled to a tax deduction for
such payments.
1997 STOCK PLAN
The Company's 1997 Stock Plan was adopted by the Board of Directors and
stockholders in October 1997. The purpose of the 1997 Stock Plan is to provide
officers, employees and consultants with additional incentives by increasing
their ownership interests in the Company. Individual awards under the 1997
Stock Plan may take the form of one or more of: (i) either incentive stock
options ("ISOs") or non-qualified stock options ("NQSOs"); (ii) stock
appreciation rights; (iii) restricted or phantom stock; (iv) bonus stock
awards; (v) awards not otherwise provided for, the value of which is based in
whole or in part upon the value of the Common Stock and (vi) cash awards that
may or may not be based on the achievement of performance goals, including
goals related to one or more of the following: cash flow, return on equity,
sales, profit margin, earnings per share and stock price.
The Compensation Committee or the Company's President, to the extent such
duties are delegated to him by the Compensation Committee, will administer the
1997 Stock Plan and select the individuals who will receive awards and
establish the terms and conditions of those awards. The Compensation Committee
will not be eligible to receive awards under the plan, and the President will
not have the authority to make grants to officers or directors of the Company.
See "Management -- Directors and Executive Officers" for the composition of the
Compensation Committee following the consummation of the Offerings. The maximum
number of shares of Common Stock that may be subject to outstanding awards,
determined immediately after the grant of any award, may not exceed the greater
of 3,500,000 shares or 15% of the aggregate number of shares of Common Stock
outstanding; provided, however, that ISOs may not be granted with respect to
more than 1,000,000 shares. Shares of Common Stock which are attributable to
awards which have expired, terminated or been canceled or forfeited are
available for issuance or use in connection with future awards. The maximum
number of shares of Common Stock with respect to which any person may receive
options and stock appreciation rights in any year is 250,000 shares and the
maximum value of any other amount may not exceed $4 million as of the date of
its grant.
The 1997 Stock Plan will remain in effect for ten years, unless earlier
terminated by the Board of Directors. The 1997 Stock Plan may be amended by the
Board of Directors or the Compensation Committee without the consent of the
stockholders of the Company, except that any amendment will be subject to
stockholder approval if required by any federal or state law or
59
62
regulation or by the rules of any stock exchange or automated quotation system
on which the Common Stock may then be listed or quoted.
NQSOs to purchase 150,000 shares of Common Stock have been granted to each of
Mr. Wise and Mr. Wombwell. The options granted to Messrs. Wise and Wombwell
have an exercise price equal to 60% of the initial public offering price per
share in the offering. Each of these options will vest at the rate of 20% per
year, commencing on the first anniversary of grant and will expire at the
earliest of (i) ten years from the date of grant, (ii) three months following
termination of employment, other than due to death or disability or (iii) one
year following a termination of employment due to death or disability.
1997 DIRECTORS STOCK PLAN
The Company's 1997 Directors Stock Plan was adopted by the Board of Directors
and approved by the Company's stockholders in October 1997. The Directors Plan
provides for (i) the automatic grant to each non-employee director serving at
the consummation of the Offerings of an option to purchase 5,000 shares, (ii)
the automatic grant to each non-employee director of an option to purchase
5,000 shares upon such person's initial election as a director and (iii) an
automatic annual grant to each non-employee director of an option to purchase
5,000 shares on each September 30th on which such director remains a
non-employee director. All options will have an exercise price per share equal
to the fair market value of the Common Stock on the date of grant, will vest
over five years at the rate of 20% per year and will expire on the earliest of
(i) ten years from the date of grant, (ii) three months after termination of
service as a director, other than due to death or disability or (iii) one year
following a termination of employment due to death or disability. In addition,
options can be granted to a non-employee director upon such terms as the Board
determines, whenever it believes such additional grant is appropriate. The
maximum number of shares of Common Stock that may be subject to outstanding
awards determined immediately after the grant of any award is 250,000.
CERTAIN TRANSACTIONS
ORGANIZATION OF THE COMPANY
The Company was founded in June 1997 by C. Byron Snyder. In connection with
the formation of IES, IES issued to Mr. Snyder, the Snyder Children's Trust
and D. Merril Cummings a total of 2,329,600 shares of Common Stock for nominal
consideration. The shares issued to the Snyder Children's Trust were
subsequently transferred to two separate trusts, each for the benefit of one of
Mr. Snyder's children. Mr. Snyder is currently a director of the Company. The
trustees of the trusts are independent third parties not subject to control by
Mr. Snyder. In September 1997, IES issued an additional 442,589 shares to Mr.
Snyder and such trusts. The total value of the shares (based upon a value of
$9.75 per share) issued to Mr. Snyder and the trusts were recognized as
acquisition costs in connection with the Acquisitions. In
60
63
October 1997, Mr. Snyder and the trusts exchanged 2,655,709 shares of Common
Stock for an equal number of shares of Restricted Common Stock. Mr. Snyder
agreed to advance whatever funds were necessary to effect the Acquisitions and
the Offerings. As of September 30, 1997, Mr. Snyder had outstanding advances to
the Company in the aggregate amount of approximately $1.6 million at September
30, 1997. The initial $1 million of such advances bore interest at 8.5%, and
additional advances bore interest at LIBOR plus 1.5%. All of Mr. Snyder's
advances were repaid from the net proceeds of the Offering.
The Company has issued a total of 1,396,602 shares of Common Stock at $.01
per share to various members of management, including: Mr. Pollock -- 465,914
shares, Mr. Mills -- 232,957 shares, Mr. Mueller -- 232,957 shares, Mr. Wise --
100,000 shares, Mr. Wombwell -- 100,000 shares and other key employees --
264,774 shares. The Company also granted options to purchase 5,000 shares of
Common Stock under the 1997 Directors Stock Plan, effective upon the
consummation of the Offerings, to each of the non-employee directors of the
Company.
Simultaneously with the closing of the Offering, the Company acquired by
stock purchase all the issued and outstanding capital stock and other equity
interests of the Founding Companies, at which time each Founding Company became
a wholly owned subsidiary of the Company. The Acquisitions Consideration was
negotiated by the parties and was based primarily upon the pro forma adjusted
net income of each Founding Company. The Acquisitions Consideration consisted
of (i) approximately $53.4 million in cash and (ii) 12,313,025 shares of Common
Stock. In addition, the Company repaid historical indebtedness of the Founding
Companies. In connection with the Acquisitions, owners of certain of the
Founding Companies received distributions, as described below.
Individuals who are executive officers or directors of the Company received
the following portions of the Acquisitions Consideration for their interests in
the Founding Companies.
SHARES OF
COMPANY CASH COMMON STOCK
-------------------- ------------ ------------
Houston-Stafford
Ben Mueller....... $ 4,648,161 1,072,652
Mills
Jerry Mills ...... 9,306,722 2,147,705
Bexar-Calhoun
Bob Weik(a) ...... 6,174,713 1,424,935
Pollock
Jon Pollock ...... 985,493 319,729
Muth
Richard Muth(b) .. 1,939,750 447,635
Ace
Robert Stalvey ... 413,956 95,528
------------ ------------
Total ....... $ 23,468,795 5,508,184
============ ============
(a) Excludes cash of $322,989 and 74,536 shares of Common Stock received by two
related trusts in which Mr. Weik may be deemed to have an interest, as to
which Mr. Weik disclaims beneficial ownership.
(b) Excludes cash of $111,320 and 25,689 shares of Common Stock received by Mr.
Muth's wife, Darlene Muth, as to which he disclaims beneficial ownership.
61
64
The foregoing table does not include distributions to owners (based on
September 30, 1997 balances), as follows: $2.4 million received by Mr. Mueller,
$9.4 million received by Mr. Mills, $2.0 million received by Mr. Weik, $383,000
received by Mr. Pollock, $1.8 million received by Mr. Muth and $204,000
received by Mr. Stalvey.
TRANSACTIONS INVOLVING CERTAIN OFFICERS, DIRECTORS AND PRINCIPAL STOCKHOLDERS
During fiscal 1994, 1995 and 1996, Houston-Stafford made payments totaling
$174,000, $124,000 and $187,000, respectively, to the Brown-Mueller Joint
Venture, a general partnership of which Mr. Mueller is a member, for lease
payments on certain real properties used as electrical shops. For the year
ended September 30, 1997, such lease payments totaled $109,000. Mr. Mueller is
Senior Vice President, Chief Operating Officer -- Residential and a director of
the Company.
At December 31, 1996, Houston-Stafford owed Mr. Mueller $185,985 on a
promissory note, payable in monthly installments and maturing April 2001. Such
note was prepaid by Houston-Stafford in October 1997.
At December 31, 1996, Houston-Stafford owed Mr. Mueller $766,400 related to a
promissory note maturing August 2003 and secured by Mr. Mueller's stock in
Houston-Stafford, and such obligation and any related obligations shall be
terminated at the consummation of the Offerings. Mr. Mueller will receive
approximately $4.6 million and 1.1 million shares of Common Stock in connection
with the Acquisitions in exchange for such promissory note as well as 0.2
million shares for his new role as a member of IES management. Houston-Stafford
will recognize a non-cash, non-recurring compensation charge of approximately
$17.0 million related to the transfer of such cash and shares of Common Stock
to Mr. Mueller at the time of the Acquisitions.
Pursuant to a 5-year lease agreement effective November 1, 1997,
Houston-Stafford agreed to lease certain facilities owned by Mr. Mueller in
Spring, Texas. Such lease agreement provides for an annual rent of $20,000,
which the Company believes is not in excess of fair rental value for such
facilities.
During fiscal 1994, Mills derived contract revenues of $187,000 from CIMA
Services, Inc. ("CIMA"), an electrical services company of which Mr. Mills was
a part owner until October 1997. Additionally, during fiscal 1994, Mills paid
$2,900,000 to CIMA for material purchases. At December 31, 1994, Mills had
outstanding accounts receivable from CIMA of $145,000 and accounts payable to
CIMA of $294,000. Mr. Mills is Senior Vice President and Chief Operating
Officer -- Commercial and Industrial and a director of the Company.
During fiscal 1995, Mills derived contract revenues of $1.1 million from
CIMA. Additionally, during fiscal 1995, Mills paid $812,000 to CIMA for
material purchases. At December 31, 1995, Mills had outstanding accounts
receivable from CIMA of $2,000 and accounts payable to CIMA of $23,000.
62
65
During fiscal 1996, Mills derived contract revenues of $1.3 million from
CIMA. Additionally, during fiscal 1996, Mills paid $1.1 million to CIMA for
material purchases. At December 31, 1996, Mills had outstanding accounts
receivable from CIMA of $208,000 and accounts payable to CIMA of $633,000.
From January 1, 1997 to September 1, 1997, Mills derived contract revenues of
$776,000 from CIMA. Additionally, during this period of time, Mills paid $1.1
million to CIMA for material purchases. At August 31, 1997, Mills had
outstanding accounts receivable from CIMA of $314,000 and accounts payable to
CIMA of $119,000.
Mills leases certain real property from Mr. Mills. Amounts paid pursuant to
this lease were $26,000 for 1995, $156,000 for 1996 and $117,000 for the nine
months ended September 30, 1997.
During 1995, Mr. Weik incurred indebtedness from Bexar-Calhoun of which the
largest aggregate amount outstanding at any time was $647,000. All of such
indebtedness was repaid as of April 18, 1997. Mr. Weik is a director of the
Company.
During 1997, Mr. Weik incurred indebtedness from Bexar-Calhoun of which the
largest aggregate amount outstanding at any time was $533,525. All of such
indebtedness was repaid as of August 6, 1997.
Prior to the closing of the Acquisitions and the consummation of the
Offerings, Bexar-Calhoun will distribute all interest it owns, directly or
indirectly, in real property to Mr. Weik and his immediate family. It is
anticipated that such real estate will be leased to the Company for an annual
rent of approximately $150,000. The Company believes that such rent is not in
excess of fair rental value for such facilities.
Pollock leases certain real property from Mr. Pollock. Amounts paid pursuant
to this lease were $20,000 for fiscal 1995, $36,000 for fiscal 1996 and $36,000
for fiscal 1997.
Since January 1, 1996, Mr. Muth has from time to time incurred indebtedness
from Muth, of which the largest aggregate amount outstanding at any time was
$205,000. All amounts owed by Mr. Muth to Muth will be repaid prior to the
closing of the Offerings. Mr. Muth is a director of the Company.
Prior to the closing of the Acquisitions and the consummation of the
Offerings, certain assets of Muth will be purchased by Mr. Muth for $217,140.
From time to time in the past Muth has completed electrical contracts for
Muth Properties, L.L.C., a limited liability company of which Mr. Muth is a
member. Total electrical contracts completed by Muth for Muth Properties,
L.L.C. were $82,731 for 1995, $82,032 for 1996 and $120,915 for the six months
ended June 30, 1997. Prior to the closing of the Acquisitions and the
consummation of the Offerings, a final payment of $162,900 will be made by Muth
Properties, L.L.C. to Muth.
63
66
Prior to July 1, 1997, Muth leased certain real property from Mr. Muth, d/b/a
D & D Properties. Lease payments made by Muth to Mr. Muth totaled $80,725 for
1994, $95,180 for 1995, $118,088 for 1996 and $56,906 for the six months ended
June 30, 1997. Effective July 1, 1997, Muth Properties, L.L.C. became the
lessor of these properties. It is anticipated that annual rentals paid to Muth
Properties, L.L.C. by Muth will be approximately $120,000.
Stalvey Rentals, a general partnership of which Mr. Stalvey is a member, is
presently constructing a new facility to lease to Ace in Valdosta, Georgia and
an inducement letter has been executed regarding Ace's commitment to lease the
new facility for a period of 20 years beginning as soon as a certificate of
occupancy is obtained. Ace entered into a five year lease, with a five year
option period, with Mr. Stalvey and his brother. Initial annual rent on this
facility is $103,200, without respect to property taxes and insurance. Mr.
Stalvey is a director of the Company.
In addition to the transactions described above, certain of the Founding
Companies have entered into lease agreements with parties related to the
Company, for rents that the Company believes are not in excess of fair rental
value.
64
67
PRINCIPAL STOCKHOLDERS
The following table sets forth information with respect to beneficial
ownership of the Company's Common Stock, as of June 30, 1998, by (i) all
persons known to the Company to be the beneficial owner of 5% or more thereof,
(ii) each director and nominee for director, (iii) each executive officer and
(iv) all officers and directors as a group. Unless otherwise indicated, the
address of each such person is c/o Integrated Electrical Services, Inc., 515
Post Oak Blvd., Suite 450, Houston, Texas 77027. All persons listed have sole
voting and investment power with respect to their shares unless otherwise
indicated.
BENEFICIAL OWNERSHIP
AFTER OFFERINGS
--------------------------
SHARES PERCENT
--------- ---------
C. Byron Snyder(a) ............................ 2,655,709 8.6%
Jon Pollock(b) ................................ 785,743 2.5%
Jerry Mills ................................... 2,472,662 7.7%
Ben L. Mueller ................................ 1,310,359(c) 4.3%
Jim P. Wise ................................... 100,000 *
John F. Wombwell .............................. 100,000 *
Donald Paul Hodel(e) .......................... -- *
Richard Muth(d) ............................... 473,324 1.5%
Alan R. Sielbeck(e) ........................... -- *
Robert Stalvey ................................ 95,528 *
Richard L. Tucker(e) .......................... -- *
Bob Weik(f) ................................... 1,499,469 4.9%
Roy D. Brown(e) ............................... 1,608,979 5.2%
All executive officers and directors as a
group (15 persons)(g) ......................... 9,660,718 31.3%
__________
* Less than one percent.
(a) Includes 1,118,193 shares held by trusts for the benefit of Mr. Snyder's
children, as to which Mr. Snyder disclaims beneficial ownership. Consists
entirely of Restricted Common Stock, which represents all of the Restricted
Common Stock outstanding. The holders of Restricted Common Stock, voting
together as a single class, are entitled to elect one member of the
Company's Board of Directors and to one-half of one vote for each share
held on all other matters on which they are entitled to vote. Holders of
Restricted Common Stock are not entitled to vote on the election of any
other directors. Such shares may be converted to Common Stock in certain
circumstances. See "Description of Capital Stock."
(b) Includes 465,914 shares of Common Stock held by the Pollock Family
Partnership, Ltd.
(c) Includes 4,750 shares held by a trust for the benefit of Mr. Mueller's
daughter.
(d) Includes 25,689 shares of Common Stock owned by Mr. Muth's wife, as to
which Mr. Muth disclaims beneficial ownership.
(e) Mr. Hodel's address is Christian Coalition, 1801-L Sara Drive, Chesapeake,
VA 23320-2647. Mr. Sielbeck's address is Service Experts, Inc., 111
Westwood Place, Suite 420, Brentwood, TN 37027. Mr. Tucker's address is The
University of Texas at Austin, 3208 Red River Street, Suite 300, Austin, TX
78705-2697. Mr. Brown's address is Houston-Stafford Electric, Inc., 10203
Mula Circle, Stafford, Texas 77477.
(f) Includes 74,536 shares of Common Stock owned by two related trusts, as to
which Mr. Weik disclaims beneficial ownership.
(g) Includes 2,655,709 shares of Restricted Common Stock described in Note (a)
above.
65
68
DESCRIPTION OF CAPITAL STOCK
GENERAL
The Company's authorized capital stock consists of 100,000,000 shares of
Common Stock, par value $0.01 per share, 2,655,709 shares of Restricted Common
Stock, par value $0.01 per share, and 10,000,000 shares of preferred stock, par
value $0.01 per share. As of September 11, 1998, 30,756,875 shares of Common
Stock and Restricted Common Stock are issued and outstanding. The following
summary of the terms and provisions of the Company's capital stock does not
purport to be complete and is qualified in its entirety by reference to the
Company's Amended and Restated Certificate of Incorporation and Bylaws, which
have been filed as exhibits to the Company's registration statement, of which
this Prospectus is a part, and applicable law.
COMMON STOCK AND RESTRICTED COMMON STOCK
The holders of Common Stock are entitled to one vote for each share on all
matters voted upon by stockholders, including the election of directors. Such
holders are not entitled to vote cumulatively for the election of directors.
Holders of a majority of the shares of Common Stock entitled to vote in any
election of directors may elect all of directors standing for election.
The holders of Restricted Common Stock, voting together as a single class,
are entitled to elect one member of the Company's Board of Directors and to
one-half of one vote for each share held on all other matters on which they are
entitled to vote. Holders of Restricted Common Stock are not entitled to vote
on the election of any other directors. Only the holder of the Restricted
Common Stock may remove the director such holder is entitled to elect.
Subject to the rights of any then outstanding shares of preferred stock,
holders of Common Stock and Restricted Common Stock are together entitled to
participate pro rata in such dividends as may be declared in the discretion of
the Board of Directors out of funds legally available therefor. Holders of
Common Stock and Restricted Common Stock together are entitled to share ratably
in the net assets of the Company upon liquidation after payment or provision
for all liabilities and any preferential liquidation rights of any preferred
stock then outstanding. Holders of Common Stock and holders of Restricted
Common Stock have no preemptive rights to purchase shares of stock of the
Company. Shares of Common Stock are not subject to any redemption provisions
and are not convertible into any other securities of the Company. Shares of
Restricted Common Stock are not subject to any redemption provisions and are
convertible into Common Stock as described below. All outstanding shares of
Common Stock and Restricted Common Stock are, and the shares of Common Stock to
be issued pursuant to the Offering and the Acquisitions will be, upon payment
therefor, fully paid and non-assessable.
66
69
Each share of Restricted Common Stock will automatically convert to Common
Stock on a share-for-share basis in the event of a disposition of such share of
Restricted Common Stock by the holder thereof (other than a distribution by a
holder to its partners or beneficial owners, or a transfer to a related party
of such holders (as defined in Sections 267, 707, 318 and/or 4946 of the
Internal Revenue Code of 1986, as amended)).
The Common Stock is listed on the NYSE under the symbol "IEE." The Restricted
Common Stock is not listed on any exchange.
PREFERRED STOCK
The preferred stock may be issued from time to time by the Board of Directors
as shares of one or more classes or series. Subject to the provisions of the
Company's Amended and Restated Certificate of Incorporation and limitations
prescribed by law, the Board of Directors is expressly authorized to adopt
resolutions to issue the shares, to fix the number of shares and to change the
number of shares constituting any series, and to provide for or change the
voting powers, designations, preferences and relative, participating, optional
or other special rights, qualifications, limitations or restrictions thereof,
including dividend rights (including whether dividends are cumulative),
dividend rates, terms of redemption (including sinking fund provisions),
redemption prices, conversion rights and liquidation preferences of the shares
constituting any class or series of the preferred stock, in each case without
any further action or vote by the stockholders. The Company has no current
plans to issue any shares of preferred stock of any class or series.
One of the effects of undesignated preferred stock may be to enable the Board
of Directors to render more difficult or to discourage an attempt to obtain
control of the Company by means of a tender offer, proxy contest, merger or
otherwise, and thereby to protect the continuity of the Company's management.
The issuance of shares of preferred stock pursuant to the Board of Directors'
authority described above may adversely affect the rights of the holders of
Common Stock. For example, preferred stock issued by the Company may rank prior
to the Common Stock as to dividend rights, liquidation preference or both, may
have full or limited voting rights and may be convertible into shares of Common
Stock. Accordingly, the issuance of shares of preferred stock may discourage
bids for the Common Stock at a premium or may otherwise adversely affect the
market price of the Common Stock.
STATUTORY BUSINESS COMBINATION PROVISION
The Company is subject to the provisions of Section 203 of the Delaware
General Corporation Law ("Section 203"). Section 203 provides, with certain
exceptions, that a Delaware corporation may not engage in any of a broad range
of business combinations with a person or an affiliate, or associate of such
person, who is an "interested stockholder" for a period of three years from the
date that such person became an interested stockholder unless: (i) the
transaction resulting in a person becoming an interested stockholder, or the
business combination, is approved by the Board of Directors of the corporation
before the person becomes an interested stockholder, (ii) the interested
stockholder acquired 85% or more of the outstanding voting stock of the
corporation in the same transaction that makes such person an interested
stockholder (excluding
67
70
shares owned by persons who are both officers and directors of the corporation,
and shares held by certain employee stock ownership plans) or (iii) on or after
the date the person becomes an interested stockholder, the business combination
is approved by the corporation's board of directors and by the holders of at
least 66% of the corporation's outstanding voting stock at an annual or special
meeting, excluding shares owned by the interested stockholder. Under Section
203, an "interested stockholder" is defined as any person who is (i) the owner
of 15% or more of the outstanding voting stock of the corporation or (ii) an
affiliate or associate of the corporation and who was the owner of 15% or more
of the outstanding voting stock of the corporation at any time within the
three-year period immediately prior to the date on which it is sought to be
determined whether such person is an interested stockholder.
A corporation may, at its option, exclude itself from the coverage of Section
203 by including in its certificate of incorporation or bylaws by action of its
stockholders to exempt itself from coverage. The Company has not adopted such
an amendment to its Amended and Restated Certificate of Incorporation or
Bylaws.
LIMITATION ON DIRECTORS' LIABILITIES
Pursuant to the Company's Amended and Restated Certificate of Incorporation
and under Delaware law, directors of the Company are not liable to the Company
or its stockholders for monetary damages for breach of fiduciary duty, except
for liability in connection with a breach of the duty of loyalty, for acts or
omissions not in good faith or which involve intentional misconduct or a
knowing violation of law, for dividend payments or stock repurchases illegal
under Delaware law or any transaction in which a director has derived an
improper personal benefit. The Company has entered into indemnification
agreements with its directors and executive officers which indemnify such
person to the fullest extent permitted by its Amended and Restated Certificate
of Incorporation, its Bylaws and the Delaware General Corporation Law. The
Company also intends to obtain directors' and officers' liability insurance.
The foregoing provisions may extend to liabilities arising due to violations of
the federal securities laws. It is the position of the Securities and Exchange
Commission (the "Commission") that indemnification for liabilities under the
Securities Act is against public policy and is, therefore, unenforceable.
AMENDED AND RESTATED CERTIFICATE OF INCORPORATION AND BYLAW PROVISIONS
The Company's Amended and Restated Certificate of Incorporation and Bylaws
include provisions that may have the effect of discouraging, delaying or
preventing a change in control of the Company or an unsolicited acquisition
proposal that a stockholder might consider favorable, including a proposal that
might result in the payment of a premium over the market price for the shares
held by stockholders. These provisions are summarized in the following
paragraphs.
Classified Board of Directors. The Amended and Restated Certificate of
Incorporation provides for the Board of Directors to be divided into three
classes of directors serving staggered three-year terms. The classification of
the Board of Directors has the effect of requiring at least two annual
stockholder meetings, instead of one, to replace a majority of members of the
Board of Directors.
68
71
Supermajority Voting. The Amended and Restated Certificate of Incorporation
requires the approval of the holders of at least 75% of the then outstanding
shares of the Company's capital stock entitled to vote thereon and the approval
of the holders of at least 75% of the then outstanding shares of each class of
stock of the Company voting separately as a class on, among other things,
certain amendments to the Amended and Restated Certificate of Incorporation.
The Board of Directors may amend, alter, change or repeal any bylaws without
the assent or vote of the stockholders, but any such bylaws may be altered,
amended or repealed upon the affirmative vote of at least 66 2/3% of the stock
entitled to vote thereon.
Authorized but Unissued or Undesignated Capital Stock. The Company's
authorized capital stock will consist of 100,000,000 shares of Common Stock,
2,655,709 shares of Restricted Common Stock, and 10,000,000 shares of preferred
stock. Any authorized but unissued (and in the case of preferred stock,
undesignated) stock may be issued by the Board of Directors in one or more
transactions. In this regard, the Company's Amended and Restated Certificate of
Incorporation grants the Board of Directors broad power to establish the rights
and preferences of authorized and unissued preferred stock. The issuance of
shares of preferred stock pursuant to the Board of Directors' authority
described above could decrease the amount of earnings and assets available for
distribution to holders of Common Stock and adversely affect the rights and
powers, including voting rights, of such holders and may also have the effect
of delaying, deferring or preventing a change in control of the Company. The
Board of Directors does not currently intend to seek stockholder approval prior
to any issuance of preferred stock, unless otherwise required by law.
Special Meeting of Stockholders. The Bylaws provide that special meetings of
stockholders of the Company may only be called by the Chairman of the Board of
Directors upon the written request of the Board of Directors pursuant to a
resolution approved by a majority of the Board of Directors.
Stockholder Action by Written Consent. The Amended and Restated Certificate
of Incorporation and Bylaws generally provide that any action required or
permitted by the stockholders of the Company must be effected at a duly called
annual or special meeting of the stockholders and may not be effected by any
written consent of the stockholders.
Notice Procedures. The Bylaws establish advance notice procedures with regard
to stockholder proposals relating to the nomination of candidates for election
as director, the removal of directors and amendments to the Amended and
Restated Certificate of Incorporation or Bylaws to be brought before annual
meetings of stockholders of the Company. These procedures provide that notice
of such stockholder proposals must be timely given in writing to the Secretary
of the Company prior to the annual meeting. Generally, to be timely, notice
must be received at the principal executive offices of the Company not less
than 80 days prior to an annual meeting (or if fewer than 90 days' notice or
prior public disclosure of the date of the annual meeting is given or made by
the Company, not later than the tenth day following the date on which the
notice of the date of the annual meeting was mailed or such public disclosure
was
69
72
made). The notice must contain certain information specified in the Bylaws,
including a brief description of the business desired to be brought before the
annual meeting and certain information concerning the stockholder submitting
the proposal.
Charter Provisions Relating to Rights Plan. The Amended and Restated
Certificate of Incorporation authorizes the Board of Directors of the Company
to create and issue rights (the "Rights") entitling the holders thereof to
purchase from the Company shares of capital stock or other securities. The
times at which, and the terms upon which, the Rights are to be issued may be
determined by the Board of Directors and set forth in the contracts or
instruments that evidence the Rights. The authority of the Board of Directors
with respect to the Rights includes, but is not limited to, the determination
of (i) the initial purchase price per share of the capital stock or other
securities of the Company to be purchased upon exercise of the Rights, (ii)
provisions relating to the times at which and the circumstances under which the
Rights may be exercised or sold or otherwise transferred, either together with
or separately from, any other securities of the Company, (iii) antidilutive
provisions which adjust the number or exercise price of the Rights or amount or
nature of the securities or other property receivable upon exercise of the
Rights, (iv) provisions which deny the holder of a specified percentage of the
outstanding securities of the Company the right to exercise the Rights and/or
cause the Rights held by such holder to become void, (v) provisions which
permit the Company to redeem the Rights and (vi) the appointment of a rights
agent with respect to the Rights. If authorized by the Board of Directors, the
Rights would be intended to protect the Company's stockholders from certain
non-negotiated takeover attempts which present the risk of a change of control
on terms which may be less favorable to the Company's stockholder than would be
available in a transaction negotiated with and approved by the Board of
Directors. The Board of Directors believes that the interests of the
stockholders generally are best served if any acquisition of the Company or a
substantial percentage of the Company's Common Stock results from arm's-length
negotiations and reflects the Board of Directors' careful consideration of the
proposed terms of a transaction. In particular, the Rights if issued would be
intended to help (i) reduce the risk of coercive two-tiered, front-end loaded
or partial offers which may not offer fair value to all stockholders of the
Company, (ii) deter market accumulators who through open market or private
purchases may achieve a position of substantial influence or control without
paying to stockholders a fair control premium and (iii) deter market
accumulators who are simply interested in putting the Company "in play."
TRANSFER AGENT AND REGISTRAR
The Transfer Agent and Registrar for the Common Stock is Harris Trust and
Savings Bank.
SHARES ELIGIBLE FOR FUTURE SALE
The market price of the Common Stock could be adversely affected by the sale
of substantial amounts of Common Stock in the public market. As of September
11, 1998, 28,101,166 shares of Common Stock and 2,655,709 shares of Restricted
Common Stock were issued and outstanding. Of such shares, 13,923,675 shares of
Common Stock and all of the shares of Restricted Common Stock were issued in a
transaction not registered under the Securities Act,
70
73
and, accordingly, such shares may not be sold except in transactions registered
under the Securities Act or pursuant to an exemption from registration,
including the exemptions contained in Rules 144 and 701 under the Securities
Act.
In general, under Rule 144 as currently in effect, a person, or persons whose
shares are aggregated, who has beneficially owned his or her shares for at
least one year but not more than two years, or a person who may be deemed an
"affiliate" of the Company who has beneficially owned shares for at least one
year, would be entitled to sell within any three month period a number of
shares that does not exceed the greater of 1% of the then outstanding shares of
the Common Stock or the average weekly trading volume of the Common Stock
during the four calendar weeks preceding the date on which notice of the
proposed sale is sent to the Commission. Sales under Rule 144 are also subject
to certain manner of sale provisions, notice requirements and the availability
of current public information about the Company. A person who is not deemed to
have been an affiliate of the Company at any time for 90 days preceding a sale
and who has beneficially owned his shares for at least two years would be
entitled to sell such shares under Rule 144 without regard to the volume
limitations, manner of sale provisions, notice requirements or the availability
of current public information about the Company.
In general, under Rule 701 under the Securities Act, any employee, officer,
or director of or consultant to the Company who purchased his or her shares
pursuant to a written compensatory plan or contract is entitled to rely on the
resale provisions of Rule 701. Such provisions permit nonaffiliates to sell
their Rule 701 shares without having to comply with the public information,
holding period, volume limitation, or notice provisions of Rule 144 and permit
affiliates to sell their Rule 701 shares without having to comply with the Rule
144 holding period restrictions, in each case commencing 90 days after the
commencement of the Offerings.
Prior to the Offering, there was no established trading market for the Common
Stock, and no predictions can be made as to the effect that sales of Common
Stock under Rule 144, pursuant to a registration statement, or otherwise, or
the availability of shares of Common Stock for sale, will have on the market
price prevailing from time to time. Sales of substantial amounts of Common
Stock in the public market, or the perception that such sales could occur,
could depress the prevailing market price. Such sales may also make it more
difficult for the Company to issue or sell equity securities or equity-related
securities in the future at a time and price that it deems appropriate. See
"Risk Factors -- Shares Eligible for Future Sale."
Former stockholders of the Founding Companies, certain executive officers and
directors are entitled to certain rights with respect to the registration of
their shares of Common Stock under the Securities Act. In the aggregate, these
groups hold 16,365,336 shares of Common Stock and Restricted Common Stock. If
the Company proposes to register any of its securities under the Securities
Act, such stockholders are entitled to notice of such registration and are
entitled to include, at the Company's expense, all or a portion of their shares
therein, subject to certain conditions. These registration rights do not apply
to the registration statement containing this Prospectus or to any registration
statement filed with respect to employee benefit plans.
71
74
PLAN OF DISTRIBUTION
This Prospectus may be used by the Company for the offer and sale of up to
21,000,000 shares of Common Stock from time to time in connection with the
acquisition of other businesses, assets or securities in business combination
transactions. The consideration offered by the Company in such acquisitions, in
addition to any shares of Common Stock offered by this Prospectus, may include
assets, debt or other securities or assumption by the Company of liabilities of
the business being acquired, or a combination thereof. The terms of
acquisitions are typically determined by negotiations between the Company and
the owners of the businesses, assets or securities to be acquired, with the
Company taking into account the quality of management, the past and potential
earning power and growth of the businesses, assets or securities to be
acquired, and other relevant factors. Shares of Common Stock issued to the
owners of the businesses, assets or securities to be acquired are generally
valued at a price reasonably related to the market value of the shares of
Common Stock either at the time the terms of the acquisition are tentatively
agreed upon or at or about the time or times of added delivery of the shares of
Common Stock.
LEGAL MATTERS
Certain legal matters in connection with the Common Stock being offered
hereby will be passed upon for the Company by John F. Wombwell, Esq., Senior
Vice President, General Counsel and Secretary of the Company. Mr. Wombwell
owns 100,000 shares of Common Stock and options to purchase 150,000 shares of
Common Stock, subject to vesting.
ADDITIONAL INFORMATION
The Company has filed with the Commission a Registration Statement on Form
S-1 (together with all amendments, schedules and exhibits thereto the
"Registration Statement") under the Securities Act with respect to the Common
Stock offered hereby. This Prospectus, which is included as part of the
Registration Statement, does not contain all the information contained in the
Registration Statement, certain portions of which have been omitted in
accordance with the rules and regulations of the Commission. For further
information with respect to the Company and the Common Stock offered hereby,
reference is made to the Registration Statement and the exhibits and schedules
thereto. Statements made in the Prospectus as to the contents of any contract,
agreement or other document are not necessarily complete; with respect to each
such contract, agreement or other document filed as an exhibit to the
Registration Statement, reference is made to the exhibit for a more complete
description of the matter involved, and each such statement shall be deemed
qualified in its entirety by such reference. The Registration Statement and the
exhibits thereto may be inspected, without charge, at the public reference
facilities maintained by the Commission at Room 1024, Judiciary Plaza, 450
Fifth Street, N.W., Washington, D.C. 20549, and at the Commission's regional
offices at Citicorp Center, 500 West Madison Street, Room 1400, Chicago, IL
60661, and 7 World Trade Center, Suite 1300, New York, NY 10048 or on the
Internet at http://www.sec.gov. Copies of such material can also be
72
75
obtained from the Public Reference Section of the Commission at 450 Fifth
Street, N.W., Washington, D.C. 20549, at prescribed rates.
The Company intends to furnish its stockholders with annual reports
containing audited financial statements and such other reports as may be
required from time to time by law or the New York Stock Exchange.
73
76
INDEX TO FINANCIAL STATEMENTS
PAGE
----
INTEGRATED ELECTRICAL SERVICES, INC.
UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS
Introduction to Unaudited Pro Forma Combined Financial Statements .... F-4
Unaudited Pro Forma Combined Balance Sheet ........................... F-5
Unaudited Pro Forma Combined Statement of Operations ................. F-6
Notes to Unaudited Pro Forma Combined Financial Statements ........... F-8
INTEGRATED ELECTRICAL SERVICES, INC. AND SUBSIDIARIES
Report of Independent Public Accountants ............................. F-12
Consolidated Balance Sheets .......................................... F-13
Consolidated Statements of Operations ................................ F-14
Consolidated Statements of Cash Flows ................................ F-15
Consolidated Statements of Stockholders' Equity ...................... F-16
Notes to Consolidated Financial Statements ........................... F-17
FOUNDING COMPANIES:
INTEGRATED ELECTRICAL SERVICES, INC.
Report of Independent Public Accountants ............................. F-30
Balance Sheet ........................................................ F-31
Statements of Operations ............................................. F-32
Statements of Cash Flows ............................................. F-33
Statements of Stockholders' Equity ................................... F-34
Notes to Financial Statements ........................................ F-35
MILLS ELECTRICAL CONTRACTORS, INC. AND SUBSIDIARY
Report of Independent Public Accountants ............................. F-39
Consolidated Balance Sheets .......................................... F-40
Consolidated Statements of Operations ................................ F-41
Consolidated Statements of Cash Flows ................................ F-42
Consolidated Statements of Stockholders' Equity ...................... F-43
Notes to Consolidated Financial Statements ........................... F-44
BW CONSOLIDATED, INC. AND SUBSIDIARIES
Report of Independent Public Accountants ............................. F-51
Consolidated Balance Sheets .......................................... F-52
Consolidated Statements of Operations ................................ F-53
Consolidated Statements of Cash Flows ................................ F-54
Consolidated Statements of Stockholders' Equity ...................... F-55
Notes to Consolidated Financial Statements ........................... F-56
MUTH ELECTRIC, INC.
Report of Independent Public Accountants ............................. F-64
Balance Sheets ....................................................... F-65
Statements of Operations ............................................. F-66
Statements of Cash Flows ............................................. F-67
Statements of Stockholders' Equity ................................... F-68
Notes to Financial Statements ........................................ F-69
POLLOCK ELECTRIC, INC.
Report of Independent Public Accountants ............................. F-73
Balance Sheets ....................................................... F-74
Statements of Operations ............................................. F-75
Statements of Cash Flows ............................................. F-76
Statements of Stockholder's Equity ................................... F-77
Notes to Financial Statements ........................................ F-78
CHARLES P. BAGBY, CO., INC.
Report of Independent Public Accountants ............................. F-85
Balance Sheets ....................................................... F-86
Statements of Operations ............................................. F-87
Statements of Cash Flows ............................................. F-88
Statements of Stockholder's Equity ................................... F-89
Notes to Financial Statements ........................................ F-90
F-1
77
AMBER ELECTRIC, INC.
Report of Independent Public Accountants.............................. F-94
Balance Sheets........................................................ F-95
Statements of Operations.............................................. F-96
Statements of Cash Flows.............................................. F-97
Statements of Stockholder's Equity.................................... F-98
Notes to Financial Statements......................................... F-99
DANIEL ELECTRICAL CONTRACTORS, INC. AND DANIEL ELECTRICAL OF TREASURE COAST INC.
Report of Independent Public Accountants.............................. F-105
Combined Balance Sheets............................................... F-106
Combined Statements of Operations..................................... F-107
Combined Statements of Cash Flows..................................... F-108
Combined Statements of Stockholder's Equity........................... F-109
Notes to Combined Financial Statements................................ F-110
SUMMIT ELECTRIC OF TEXAS, INCORPORATED
Report of Independent Public Accountants.............................. F-116
Balance Sheets........................................................ F-117
Statements of Operations.............................................. F-118
Statements of Cash Flows.............................................. F-119
Statements of Stockholder's Equity.................................... F-120
Notes to Financial Statements......................................... F-121
THURMAN & O'CONNELL CORPORATION
Report of Independent Public Accountants.............................. F-128
Balance Sheets........................................................ F-129
Statements of Operations.............................................. F-130
Statements of Cash Flows.............................................. F-131
Statements of Stockholders' Equity.................................... F-132
Notes to Financial Statements......................................... F-133
RODGERS ELECTRIC COMPANY, INC.
Report of Independent Public Accountants.............................. F-139
Balance Sheets........................................................ F-140
Statements of Operations.............................................. F-141
Statements of Cash Flows.............................................. F-142
Statements of Stockholders' Equity.................................... F-143
Notes to Financial Statements......................................... F-144
SUBSEQUENT ACQUISITIONS:
MARK HENDERSON, INC. AND SUBSIDIARIES
Report of Independent Public Accountants.............................. F-149
Consolidated Balance Sheets........................................... F-150
Consolidated Statements of Income..................................... F-151
Consolidated Statements of Retained Earnings.......................... F-152
Consolidated Statements of Cash Flows................................. F-153
Notes to Consolidated Financial Statements............................ F-155
DAVIS ELECTRICAL CONSTRUCTORS, INC.
Report of Independent Public Accountants.............................. F-162
Balance Sheets........................................................ F-163
Statements of Income and Retained Earnings............................ F-164
Statements of Cash Flows.............................................. F-165
Notes to Financial Statements......................................... F-166
FLORIDA INDUSTRIAL ELECTRIC, INC.
Report of Independent Public Accountants.............................. F-171
Balance Sheet......................................................... F-172
Statements of Income and Retained Earnings............................ F-174
Statements of Cash Flows.............................................. F-175
Notes to Financial Statements......................................... F-176
GALBRAITH ACQUISITION COMPANY, INC. AND SUBSIDIARY
Report of Independent Public Accountants.............................. F-188
Consolidated Balance Sheet............................................ F-189
Consolidated Statements of Income and Retained Earnings............... F-190
Consolidated Statements of Cash Flows................................. F-191
Notes to Financial Statements......................................... F-192
F-2
78
ARC ELECTRIC, INCORPORATED
Report of Independent Public Accountants.............................. F-198
Balance Sheets........................................................ F-199
Statements of Income.................................................. F-201
Statements of Cash Flows.............................................. F-202
Statements of Stockholders' Equity.................................... F-203
Notes to Financial Statements......................................... F-204
BRINK ELECTRIC CONSTRUCTION CO.
Report of Independent Public Accountants.............................. F-212
Balance Sheets........................................................ F-213
Statements of Income.................................................. F-215
Statements of Changes in Stockholders' Equity......................... F-216
Statements of Cash Flows.............................................. F-217
Notes to Financial Statements......................................... F-218
GOSS ELECTRIC COMPANY, INC.
Report of Independent Public Accountants.............................. F-223
Balance Sheets........................................................ F-224
Statement of Revenues and Retained Earnings........................... F-226
Statements of Cash Flows.............................................. F-227
Notes to Financial Statements......................................... F-229
MID-STATES ELECTRIC COMPANY, INC.
Report of Independent Public Accountants.............................. F-234
Balance Sheets........................................................ F-235
Statements of Operations.............................................. F-237
Statements of Changes in Stockholders' Equity......................... F-238
Statements of Cash Flows.............................................. F-239
Notes to Financial Statements......................................... F-240
T & H ELECTRICAL CORPORATION
Report of Independent Public Accountants.............................. F-249
Balance Sheets........................................................ F-250
Statements of Income and Retained Earnings............................ F-252
Statements of Cash Flows.............................................. F-253
Notes to Financial Statements......................................... F-254
F-3
79
INTEGRATED ELECTRICAL SERVICES, INC.
UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS
BASIS OF PRESENTATION
The following unaudited pro forma combined financial statements give effect
to (i) the acquisitions by Integrated Electrical Services, Inc. (IES), of 16
companies and related entities engaged in all facets of electrical contracting
and maintenance services on January 30, 1998 (together, the Founding Companies),
and related transactions, (ii) IES's January 30, 1998, initial public offerings
in the United States and Canada and outside the United States and Canada
(including the underwriters exercise of the overallotment option for 1,050,000
shares) (the "Offering"), and (iii) the acquisitions of 19 additional electrical
contracting and maintenance businesses from April 1998 through September 11,
1998 (the "Post IPO Acquisitions"). Of these Post IPO Acquisitions, 18 were
accounted for using the purchase method of accounting and one was accounted for
using the pooling-of-interests method of accounting. The Founding Company
Acquisitions and the Post IPO Acquisitions are collectively referred to as the
"Companies". The Founding Company Acquisitions occurred simultaneously with the
closing of the Offering and were accounted for using the purchase method of
accounting. Pursuant to the Securities and Exchange Commission's ("SEC") Staff
Accounting Bulletin No. 97 (SAB97), Houston-Stafford Electric, Inc. ("HSE") is
for accounting purposes considered the entity which acquired the other Founding
Companies and IES (the "Accounting Acquirer"). As such, IES's consolidated
historical financial statements represent the financial position and results of
operations of (i) HSE as restated to include the financial position and results
of operations of the Pooled Company, and (ii) the other Founding Companies and
the Post IPO Acquisitions beginning on their respective dates of acquisition.
The unaudited pro forma combined balance sheet gives effect to the 8 Post
IPO Acquisitions which were acquired subsequent to June 30, 1998, and related
transactions as if they had occurred on June 30, 1998. The unaudited pro forma
combined statements of operations give effect to these transactions as if they
had occurred on October 1, 1996.
IES has preliminarily analyzed the savings that it expects to be realized
from reductions in salaries, bonuses and certain benefits to the owners. To the
extent the owners of the Companies have contractually agreed to prospective
changes in salary, bonuses, benefits and lease payments, these changes have been
reflected in the unaudited pro forma combined statement of operations.
The pro forma adjustments are based on preliminary estimates, available
information and certain assumptions that Company management deems appropriate
and may be revised as additional information becomes available. The pro forma
financial data do not purport to represent what IES's combined financial
position or results of operations would actually have been if such transactions
in fact had occurred on those dates and are not necessarily representative of
IES's combined financial position or results of operations for any future
period. Since the Companies were not under common control or management,
historical combined results may not be comparable to, or indicative of, future
performance. The unaudited pro forma combined financial statements should be
read in conjunction with the historical financial statements and notes thereto
included elsewhere in this Prospectus. See also "Risk Factors" included
elsewhere herein.
F-4
80
INTEGRATED ELECTRICAL SERVICES, INC.
UNAUDITED PRO FORMA COMBINED BALANCE SHEET
JUNE 30, 1998
(AMOUNTS IN THOUSANDS)
Davis Electrical Other
IES and Constructors, Insignificant Pro Forma
Subsidiaries Inc. Acquisitions Adjustments Pro Forma
------------ --------------- ------------- ----------- ---------
ASSETS
CURRENT ASSETS:
Cash $ 13,337 $ 3,652 $ 8,744 $ (5,469) $ 20,264
Receivables 110,541 10,240 20,489 (894) 140,376
Allowance for doubtful accounts (3,083) -- (122) (922) (4,127)
--------- --------- --------- --------- ---------
Receivables, net 107,458 10,240 20,367 (1,816) 136,249
Inventories 5,917 -- 688 (34) 6,571
Cost and estimated earnings
in excess of billings on
uncompleted contracts 7,671 2,459 2,788 -- 12,918
Prepaid Expenses 2,168 54 583 -- 2,805
--------- --------- --------- --------- ---------
Total current assets 136,551 16,405 33,170 (7,319) 178,807
GOODWILL, NET 208,699 -- -- 78,158 286,857
PROPERTY AND EQUIPMENT, NET 16,769 1,171 6,365 (607) 23,698
OTHER NONCURRENT ASSETS 1,478 3,612 1,091 (2,999) 3,182
--------- --------- --------- --------- ---------
Total Assets $ 363,497 $ 21,188 $ 40,626 $ 67,233 $ 492,544
--------- --------- --------- --------- ---------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current maturities of debt $ 516 $ -- $ 643 $ -- $ 1,159
Accounts payable and accrued expense 49,859 4,366 6,478 959 61,662
Billings in excess of costs and
estimated earnings on
uncompleted contracts 24,207 360 3,402 1,118 29,087
Income taxes payable 2,759 -- 1,315 -- 4,074
Other current liabilities 1,706 -- 211 -- 1,917
--------- --------- --------- --------- ---------
Total current liabilities 79,047 4,726 12,049 2,077 97,899
LONG-TERM BANK DEBT 20,000 -- 710 68,785 89,495
OTHER LONG-TERM DEBT, NET 8,628 -- 421 -- 9,049
OTHER NON-CURRENT LIABILITIES 440 2,907 163 (2,907) 603
--------- --------- --------- --------- ---------
Total liabilities 108,115 7,633 13,343 67,955 197,046
STOCKHOLDERS' EQUITY:
Common stock 253 62 467 (501) 281
Restricted common stock 27 -- -- -- 27
Additional paid in capital 252,445 130 2,743 37,215 292,533
Treasury stock -- -- (3,249) 3,249 --
Retained earnings 2,657 13,363 27,322 (40,685) 2,657
--------- --------- --------- --------- ---------
Total stockholders' equity 255,382 13,555 27,283 (722) 295,498
--------- --------- --------- --------- ---------
Total liabilities and stockholders'
equity $ 363,497 $ 21,188 $ 40,626 $ 67,233 $ 492,544
========= ========= ========= ========= =========
F-5
81
INTEGRATED ELECTRICAL SERVICES, INC.
UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS
FOR THE NINE MONTHS ENDED JUNE 30, 1998
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
Davis
Other Mark Electrical Other
IES and Founding Henderson, Constructors, Insignificant Pro Forma Pro Forma
Subsidiaries Companies Inc. Inc. Acquisitions Adjustments Total
------------ --------- ---------- ------------- ------------- ----------- ----------
REVENUES $ 219,620 $ 83,456 $ 47,985 $ 64,756 $ 137,538 $ -- $ 553,355
COST OF SERVICES 173,420 64,709 42,669 56,653 105,024 -- 442,475
--------- --------- --------- --------- --------- --------- ---------
GROSS PROFIT 46,200 18,747 5,316 8,103 32,514 -- 110,880
SELLING, GENERAL, AND
ADMINISTRATIVE EXPENSES 29,467 11,267 2,216 5,254 23,907 (15,255) 56,856
NON-CASH, NON-RECURRING
COMPENSATION CHARGE 17,036 -- -- -- -- (17,036) --
GOODWILL AMORTIZATION 1,743 -- -- -- -- 3,706 5,449
--------- --------- --------- --------- --------- --------- ---------
OPERATING INCOME (LOSS) (2,046) 7,480 3,100 2,849 8,607 28,585 48,575
OTHER INCOME (EXPENSE):
Interest expense (269) (408) (36) -- (219) (3,131) (4,063)
Interest income 288 181 35 102 220 (730) 96
Gain (loss) on sale of
assets 195 57 (5) -- 3 (94) 156
Other 134 (17) 20 -- 213 (234) 116
--------- --------- --------- --------- --------- --------- ---------
348 (187) 14 102 217 (4,189) (3,695)
INCOME BEFORE
INCOME TAXES (1,698) 7,293 3,114 2,951 8,824 24,396 44,880
INCOME TAX PROVISION 6,443 5,409 -- -- -- 7,022 18,874
--------- --------- --------- --------- --------- --------- ---------
NET INCOME (LOSS) $ (8,141) $ 1,884 $ 3,114 $ 2,951 $ 8,824 $ 17,374 $ 26,006
========= ========= ========= ========= ========= ========= =========
EARNINGS PER SHARE:
Basic $ .85
Diluted $ .84
Shares used in computing pro forma
earnings per share(1):
Basic 30,756,875
Diluted 31,114,124
- ----------
(1) Includes (a) 2,655,709 shares issued to the IES founder and chairman of the
board, (b) 1,396,602 shares issued to management of IES, (c) 12,313,025
shares issued to owners of the Founding Companies, (d) the 8,050,000 shares
sold in the Offering (including the underwriters exercise of the
overallotment option of 1,050,000 shares), and (e) 6,341,539 shares issued
to the owners of the Post IPO Acquisitions. Additionally, includes 357,249
shares computed under the treasury stock method related to 3,110,550 options
which are currently outstanding.
F-6
82
INTEGRATED ELECTRICAL SERVICES, INC.
UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED SEPTEMBER 30, 1997
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
Davis
IES Other Mark Electrical Other
and Founding Henderson, Constructors, Insignificant Pro Forma Pro Forma
Subsidiaries Companies Inc. Inc. Acquisitions Adjustments Total
------------ --------- ---------- ------------- ------------- ----------- ---------
REVENUES $ 117,111 $ 233,126 $ 55,541 $ 100,020 $ 199,236 $ -- $ 705,034
COST OF REVENUES 95,937 183,584 46,938 82,101 153,611 -- 562,171
--------- --------- --------- --------- --------- --------- ----------
GROSS PROFIT 21,174 49,542 8,603 17,919 45,625 -- 142,863
SELLING, GENERAL, AND
ADMINISTRATIVE EXPENSES 14,261 30,766 3,267 14,196 30,296 (19,885) 72,901
GOODWILL AMORTIZATION -- -- -- -- -- 7,154 7,154
--------- --------- --------- --------- --------- --------- ----------
OPERATING INCOME (LOSS) 6,913 18,776 5,336 3,723 15,329 12,731 62,808
OTHER INCOME (EXPENSE):
Interest expense (214) (639) (52) (2) (331) (4,369) (5,607)
Interest income 89 -- 165 290 285 (740) 89
Gain (loss) on sale of assets -- -- 13 -- 48 (61) --
Other 510 589 (423) -- 374 (434) 616
--------- --------- --------- --------- --------- --------- ----------
385 (50) (297) 288 376 (5,604) (4,902)
INCOME BEFORE
INCOME TAXES 7,298 18,726 5,039 4,011 15,705 7,127 57,906
INCOME TAX PROVISION 2,923 1,436 853 -- 1,890 17,299 24,401
--------- --------- --------- --------- --------- --------- ----------
NET INCOME (LOSS) $ 4,375 $ 17,290 $ 4,186 $ 4,011 $ 13,815 $ (10,172) $ 33,505
========= ========= ========= ========= ========= ========= ==========
EARNINGS PER SHARE:
Basic $ 1.09
Diluted $ 1.09
Shares used in computing pro forma
earnings per share (1):
Basic 30,756,875
Diluted 30,756,875
- ----------
(1) Includes (a) 2,655,709 shares issued to the IES founder and chairman of the
board, (b) 1,396,602 shares issued to management of IES, (c) 12,313,025
shares issued to owners of the Founding Companies, (d) the 8,050,000 shares
sold in the Offering (including the underwriters exercise of the
overallotment option of 1,050,000 shares), and (e) 6,341,539 shares issued
to the owners of the Post IPO Acquisitions.
F-7
83
INTEGRATED ELECTRICAL SERVICES, INC.
NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS
1. GENERAL:
Integrated Electrical Services, Inc. (IES), was founded to create a leading
national provider of electrical contracting and maintenance services to the
commercial, industrial and residential markets. See BASIS OF PRESENTATION for a
description of the Company's offering and acquisitions of the Companies and
related accounting treatment.
The historical financial statements of the other Founding Companies
(excluding HSE) included in the accompanying pro forma financial statements
reflect the results of operations of the Founding Companies for periods prior to
January 30, 1998, and were derived from the respective Founding Companies'
financial statements. The periods included in these financial statements for the
individual Founding Companies are for the year ended September 30, 1997, and the
period from October 1, 1997 to January 30, 1998. The audited historical
financial statements for the Founding Companies included elsewhere herein have
been included in accordance with Securities and Exchange Commission (SEC) Staff
Accounting Bulletin No. 80.
The historical financial statements of the Post IPO Acquisitions reflect the
financial position of the eight Post IPO Acquisitions which were acquired
subsequent to June 30, 1998, and the results of operations of the Post IPO
acquisitions accounted for using the purchase method of accounting for the year
ended September 30, 1997, and the current fiscal year from their respective
dates of acquisition.
2. ACQUISITION OF COMPANIES:
On January 30, 1998, the Company completed its initial public offering of its
stock, which involved the sale to the public of 7,000,000 shares of the
Company's common stock at $13.00 per share. The Company received net proceeds
from the Offering of approximately $78.8 million. Concurrent with the completion
of the Offering, IES acquired the Founding Companies for consideration
consisting of $53.4 million ($38.8 million excluding the cash paid to the
Accounting Acquirer) in cash and 12,313,025 shares (8,961,000 shares excluding
the shares issued to the owners of the Accounting Acquirer) of common stock.
Additionally, on February 5, 1998, the Company sold 1,050,000 shares of its
common stock pursuant to the overallotment option granted to the underwriters in
connection with the Offering for net proceeds of approximately $12.7 million.
The Company used approximately $7.6 million of the net proceeds from the
Offering to retire outstanding third party debt and approximately $16.0 million
to pay indebtedness incurred by the Founding Companies for distributions to the
owners prior to the Acquisitions. The Company used the remaining net proceeds to
fund a portion of the cash consideration for the Post IPO Acquisitions.
Subsequent to its IPO, and through June 30, 1998, the Company has acquired 11
additional electrical contracting and maintenance businesses for approximately
$30.9 million of cash and 3.5 million shares of common stock. Of these 11 Post
IPO Acquisitions, 10 were accounted for using the purchase method of accounting
and one was accounted for using the pooling-of-interests method of accounting.
Accordingly, the Company's historical financial statements have been restated to
include the historical financial statements of the Pooled Company.
Subsequent to June 30, 1998, and through September 11, 1998, the Company has
acquired eight additional electrical contracting and maintenance businesses for
approximately $63.6 million of cash (funded through borrowings under the
Company's $175 million bank credit facility) and 2.8 million shares of
common stock. All of those acquisitions were accounted for using the purchase
method of accounting.
In connection with the acquisitions of the Founding Companies and the Post IPO
Acquisitions, the Company has recorded approximately $288 million of excess
total consideration paid over the net tangible assets acquired has been recorded
as goodwill in the accompanying consolidated financial statements. The
accompanying balance sheets include allocations of the respective purchase
prices initially assigned to the assets acquired and liabilities assumed based
on preliminary estimates of fair value and may be revised as additional
information concerning the valuation of such assets and liabilities becomes
available.
F-8
84
INTEGRATED ELECTRICAL SERVICES, INC.
NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS - (CONTINUED)
3. UNAUDITED PRO FORMA COMBINED BALANCE SHEET ADJUSTMENTS:
(a) Records the transfer in connection with the Acquisitions of $4.2 million
of previously undistributed earnings and nonoperating assets, net of
liabilities to the owners of the eight Post IPO Acquisitions which
closed subsequent to June 30, 1998.
(b) Records the purchase of the eight Post IPO Acquisitions closed
subsequent to June 30, 1998 by IES consisting of cash of $63.6 million
and approximately 2,823,000 shares of Common Stock valued $42.9 for a
total purchase price of $106.5 million resulting in excess purchase
price of $78.1 million over the net assets acquired of $28.4 million.
The following tables summarize unaudited pro forma combined balance sheet
adjustments (in thousands):
ADJUSTMENTS
---------------------- PRO FORMA
(a) (b) ADJUSTMENTS
--------- --------- -----------
ASSETS
Current assets --
Cash and cash equivalents ................................ $ (5,469) $ -- $ (5,469)
Accounts receivable ...................................... (894) (922) (1,816)
Inventories .............................................. -- (34) (34)
-------- -------- --------
Total current assets ............................... (6,363) (956) (7,319)
Goodwill, net .............................................. -- 78,158 78,158
Property and equipment, net ................................ (607) -- (607)
Other assets ............................................... (2,999) -- (2,999)
-------- -------- --------
Total assets ....................................... $ (9,969) $ 77,202 $ 67,233
======== ======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities --
Accounts payable and accrued expenses .................... $ -- $ 959 $ 959
Billings in excess of estimated earnings on uncompleted
contracts .............................................. -- 1,118 1,118
-------- -------- --------
Total current liabilities .......................... -- 2,077 2,077
-------- -------- --------
Long-term debt, net of current maturities................... -- 68,785 68,785
Other non-current liabilities .............................. (5,722) 2,815 (2,907)
-------- -------- --------
Total liabilities .................................. (5,722) 73,677 67,955
-------- -------- --------
Stockholders' equity --
Common stock ............................................. -- (501) (501)
Additional paid-in capital ............................... (4,247) 41,462 37,215
Retained earnings ........................................ -- (40,685) (40,685)
Treasury stock ........................................... -- 3,249 3,249
-------- -------- --------
Total stockholders' equity ......................... (4,247) 3,525 (722)
-------- -------- --------
Total liabilities and stockholders' equity ......... $ (9,969) $ 77,202 $ 67,233
======== ======== ========
4. UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS ADJUSTMENTS FOR THE
NINE MONTHS ENDED JUNE 30, 1998:
(a) Reflects the reduction in salaries, bonuses and benefits and lease
payments to the owners of the Companies. These reductions in salaries,
bonuses and benefits and lease payments have been agreed prospectively
in accordance with the terms of employment agreements executed as part
of the acquisitions. Such employment agreements are primarily for five
years, contain restrictions related to competition and provide severance
for termination of employment in certain circumstances. Also reflects
the reversal of the $17.0 million non-recurring, non-cash compensation
charge recorded by HSE in connection with a note receivable and rights
held by an officer of HSE which was exchanged for cash and shares of IES
common stock in connection with the Founding Company acquisitions.
(b) Reflects the amortization of goodwill recorded as a result of these
acquisitions (based on a 40-year estimated life).
(c) Reflects additional interest expense on borrowings of $63.6 million to
fund the cash portion of the consideration paid for the eight
acquisitions which closed subsequent to June 30, 1998, net of reduction
on interest expense attributable to the $8.1
F-9
85
million of historical debt repaid using proceeds from the Offerings or
to be transferred to the owners of the Founding Companies. The
additional interest expense was calculated utilizing an assumed annual
effective interest rate of approximately 7.5%. Also, reflects
elimination of interest income.
(d) Reflects the incremental provision for federal and state income taxes at
a 38% overall tax rate, before non-deductible goodwill and other
permanent items, relating to the other statements of operations
adjustments and for income taxes on the pretax income of Companies that
have historically elected S Corporation tax status.
The following table summarizes unaudited pro forma combined statement of
operations adjustments (in thousands):
ADJUSTMENT
----------------------------------------------- PRO FORMA
(a) (b) (c) (d) ADJUSTMENTS
-------- -------- -------- -------- -----------
Selling, general and administrative .............. $(15,255) $ -- -- $ -- $(15,255)
expenses
Non-cash, non-recurring compensation charge ...... (17,036) -- -- -- (17,036)
Goodwill amortization ............................ -- 3,706 -- -- 3,706
-------- -------- -------- -------- --------
Income (loss) from operations .................. 32,291 (3,706) -- -- 28,585
Other income (expense) --
Interest expense ............................... -- -- (3,131) -- (3,131)
Interest income ................................ -- -- (730) -- (730)
Gain (loss) on sale of assets .................. -- -- (94) -- (94)
Other, net ..................................... -- -- (234) -- (234)
-------- -------- -------- -------- --------
Other income (expense), net .................... -- -- (4,189) -- (4,189)
-------- -------- -------- -------- --------
Income (loss) before income taxes .............. 32,291 (3,706) (4,189) -- 24,396
Provision for income taxes ....................... -- -- -- 7,022 7,022
-------- -------- -------- -------- --------
Net income (loss) ................................ $ 32,291 $ (3,706) $ (4,189) $ (7,022) $ 17,374
======== ======== ======== ======== ========
5. UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS ADJUSTMENTS FOR THE
YEAR ENDED SEPTEMBER 30, 1997:
(a) Reflects the reduction in salaries, bonuses and benefits and lease
payments to the owners of the Companies. These reductions in salaries,
bonuses and benefits and lease payments have been agreed prospectively
in accordance with the terms of employment agreements executed as part
of the acquisitions. Such employment agreements are primarily for five
years, contain restrictions related to competition and provide severance
for termination of employment in certain circumstances.
(b) Reflects the amortization of goodwill recorded as a result of these
acquisitions over a 40-year estimated life, as well as a reduction in
historical Founding Companies' minority interest expense attributable to
minority interests that were acquired as part of the transaction.
(c) Reflects additional interest expense on borrowings of $63.6 million to
fund the cash portion of the consideration paid for the eight
acquisitions which closed subsequent to June 30, 1998, net of reduction
on interest expense attributable to the $8.1 million of historical debt
repaid using proceeds from the Offerings or to be transferred to the
owners of the Founding Companies. The additional interest expense was
calculated utilizing an assumed annual effective interest rate of
approximately 7.5%. Also, reflects elimination of interest income.
(d) Reflects the incremental provision for federal and state income taxes at
a 38% overall tax rate, before non-deductible goodwill and other
permanent items, relating to the other statements of operations
adjustments and for income taxes on the pretax income of Companies that
have historically elected S Corporation tax status.
F-10
86
The following table summarizes unaudited pro forma combined statement of
operations adjustments (in thousands):
ADJUSTMENT
----------------------------------------------- PRO FORMA
(a) (b) (c) (d) ADJUSTMENTS
-------- -------- -------- -------- -----------
Selling, general and administrative $(19,885) $ -- $ -- $ -- $(19,885)
expenses
Goodwill amortization -- 7,154 -- -- 7,154
-------- -------- -------- -------- --------
Income (loss) from operations 19,885 (7,154) -- -- 12,731
Other income (expense) --
Interest expense -- -- (4,369) -- (4,369)
Interest income -- -- (740) -- (740)
Gain (loss) on sale of assets -- -- (61) -- (61)
Other, net -- 316 (750) -- (434)
-------- -------- -------- -------- --------
Other income (expense), net -- 316 (5,920) -- (5,604)
-------- -------- -------- -------- --------
Income (loss) before income
taxes 19,885 (6,838) (5,920) -- 7,127
Provision for income taxes -- -- -- 17,299 17,299
-------- -------- -------- -------- --------
Net income (loss) $ 19,885 $ (6,838) $ (5,920) $(17,299) $(10,172)
======== ======== ======== ======== ========
F-11
87
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Integrated Electrical Services, Inc.:
We have audited the accompanying consolidated balance sheets of
Integrated Electrical Services, Inc., a Delaware corporation, and subsidiaries
(see Note 1) as of December 31, 1996, and September 30, 1997, and the related
consolidated statements of operations, cash flows and stockholders' equity for
each of the two years in the period ended December 31, 1996, and for the year
ended September 30, 1997. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of Integrated
Electrical Services, Inc., and subsidiaries as of December 31, 1996, and
September 30, 1997, and the results of their operations and their cash flows for
each of the two years in the period ended December 31, 1996, and for the year
ended September 30, 1997, in conformity with generally accepted accounting
principles.
As discussed in Note 1, the accompanying consolidated financial
statements reflect the Company on a historical basis including Houston-Stafford
Electric, Inc., as the accounting acquirer restated for the effect of a
pooling-of-interests transaction.
ARTHUR ANDERSEN LLP
Houston, Texas
September 11, 1998
F-12
88
INTEGRATED ELECTRICAL SERVICES, INC., AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE INFORMATION)
(NOTE 1)
DECEMBER 31, SEPTEMBER 30, JUNE 30,
ASSETS 1996 1997 1998
------------ ------------ ------------
(UNAUDITED)
CURRENT ASSETS:
Cash and cash equivalents $ 4,301 $ 4,154 $ 13,337
Accounts receivable-
Trade, net of allowance of $459, $537 and $3,083,
respectively 9,638 14,287 86,247
Retainage 4,143 4,611 21,211
Inventories, net 346 2,878 5,917
Costs and estimated earnings in excess of billings on
uncompleted contracts 828 1,368 7,671
Prepaid expenses and other current assets 674 1,173 2,168
------------ ------------ ------------
Total current assets 19,930 28,471 136,551
------------ ------------ ------------
RECEIVABLES FROM RELATED PARTIES 338 309 --
OTHER RECEIVABLES 166 -- --
GOODWILL, net 13 970 208,699
OTHER NONCURRENT ASSETS 303 1,934 1,478
PROPERTY AND EQUIPMENT, net 2,962 4,110 16,769
------------ ------------ ------------
Total assets $ 23,712 $ 35,794 $ 363,497
============ ============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current maturities of long-term debt $ 553 $ 894 $ 516
Accounts payable and accrued expenses 7,990 14,669 49,859
Income taxes payable 201 1,540 2,759
Billings in excess of costs and estimated earnings on
uncompleted contracts 3,319 3,266 24,207
Other current liabilities 799 332 1,706
------------ ------------ ------------
Total current liabilities 12,862 20,701 79,047
------------ ------------ ------------
LONG-TERM BANK DEBT -- -- 20,000
OTHER LONG-TERM DEBT, net of current maturities 1,406 1,275 8,628
OTHER NON-CURRENT LIABILITIES 738 1,182 440
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Preferred stock, $.01 par value, 10,000,000 authorized, none
issued and outstanding -- -- --
Common stock, $.01 par value, 100,000 shares authorized,
4,492,039, 4,492,039 and 25,278,650 shares issued and
outstanding 45 45 253
Restricted common stock, $.01 par value, 2,655,709 shares
authorized, 2,655,709 shares issued and outstanding at June
30, 1998 -- -- 27
Additional paid-in capital 887 887 252,445
Retained earnings 7,774 11,704 2,657
------------ ------------ ------------
Total stockholders' equity 8,706 12,636 255,382
------------ ------------ ------------
Total liabilities and stockholders' equity $ 23,712 $ 35,794 $ 363,497
============ ============ ============
The accompanying notes are an integral part of these consolidated
financial statements.
F-13
89
INTEGRATED ELECTRICAL SERVICES, INC., AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(NOTE 1)
NINE MONTHS
YEAR ENDED NINE MONTHS ENDED
DECEMBER 31, ENDED YEAR ENDED JUNE 30,
---------------------------- SEPTEMBER 30, SEPTEMBER 30, ----------------------------
1995 1996 1997 1997 1997 1998
------------ ------------ ------------ ------------ ------------ ------------
(UNAUDITED) (UNAUDITED)
REVENUES $ 73,345 $ 101,431 $ 92,379 $ 117,111 $ 79,847 $ 219,620
COST OF SERVICES ( including
depreciation) 63,709 85,081 76,306 95,937 65,189 173,420
------------ ------------ ------------ ------------ ------------ ------------
Gross profit 9,636 16,350 16,073 21,174 14,658 46,200
SELLING, GENERAL AND
ADMINISTRATIVE EXPENSES 7,905 10,228 10,222 14,261 10,170 29,467
NON-CASH NON-RECURRING
COMPENSATION CHARGE IN
CONNECTION WITH THE FOUNDING
COMPANY ACQUISITIONS (Note 1) -- -- -- -- -- 17,036
GOODWILL AMORTIZATION -- -- -- -- -- 1,743
------------ ------------ ------------ ------------ ------------ ------------
Income (loss) from 1,731 6,122 5,851 6,913 4,488 (2,046)
------------ ------------ ------------ ------------ ------------ ------------
operations
OTHER INCOME (EXPENSE):
Interest expense (286) (171) (164) (214) (143) (269)
Other 104 185 456 599 187 617
------------ ------------ ------------ ------------ ------------ ------------
Other income (expense), net (182) 14 292 385 44 348
------------ ------------ ------------ ------------ ------------ ------------
INCOME (LOSS) BEFORE PROVISION FOR
INCOME TAXES 1,549 6,136 6,143 7,298 4,532 (1,698)
PROVISION FOR INCOME TAXES 563 2,471 2,408 2,923 1,847 6,443
------------ ------------ ------------ ------------ ------------ ------------
NET INCOME (LOSS) $ 986 $ 3,665 $ 3,735 $ 4,375 $ 2,685 $ (8,141)
============ ============ ============ ============ ============ ============
BASIC AND DILUTED EARNINGS (LOSS)
PER SHARE $ .22 $ .82 $ .83 $ .97 $ .60 $ (.49)
============ ============ ============ ============ ============ ============
SHARES USED IN THE COMPUTATION OF
BASIC AND DILUTED EARNINGS
(LOSS) PER SHARE (Note 2) 4,492,039 4,492,039 4,492,039 4,492,039 4,492,039 16,757,359
============ ============ ============ ============ ============ ============
The accompanying notes are an integral part of these consolidated
financial statements.
F-14
90
INTEGRATED ELECTRICAL SERVICES, INC., AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(NOTE 1)
YEAR ENDED NINE MONTHS NINE MONTHS ENDED
DECEMBER 31, ENDED YEAR ENDED JUNE 30,
----------------------- SEPTEMBER 30, SEPTEMBER 30, -----------------------
1995 1996 1997 1997 1997 1998
---------- ---------- ---------- ---------- ---------- ----------
(UNAUDITED) (UNAUDITED)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 986 $ 3,665 $ 3,735 $ 4,375 $ 2,685 $ (8,141)
Adjustment for change in fiscal year of
the pooled company -- -- 195 -- -- --
Non-cash non-recurring compensation charge -- -- -- -- -- 17,036
Adjustments to reconcile net income to net
cash provided by (used in) operating
activities-
Depreciation and amortization 219 304 319 398 342 2,918
Loss (gain) on sale of property and 1 3 (142) (140) (140) (195)
equipment
Changes in operating assets and liabilities-
(Increase) decrease in-
Accounts receivable (1,155) (4,157) (4,399) (3,886) (1,417) (7,004)
Inventories 315 (9) (1,400) (1,409) (1,062) 548
Costs and estimated earnings in
excess of billings on 791 (95) (540) (841) (461) (1,234)
uncompleted contracts
Prepaid expenses and other current assets 204 (91) (153) (286) 50 632
Increase (decrease) in-
Accounts payable and accrued expenses 761 1,675 2,613 2,379 542 (2,359)
Billings in excess of costs and
estimated earnings on uncompleted 962 1,609 (54) (747) (38) 5,882
contracts
Other current liabilities 249 906 688 272 (424) (216)
Other, net (11) (20) 190 210 63 2
---------- ---------- ---------- ---------- ---------- ----------
Net cash provided by operating activities 3,322 3,790 1,052 325 140 7,869
---------- ---------- ---------- ---------- ---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of property and equipment 132 22 70 84 30 686
Additions of property and equipment (409) (900) (1,025) (997) (771) (2,731)
Purchase of businesses, net of cash acquired -- -- (100) (100) -- (66,588)
Increase in note receivable -- -- -- -- (76) --
Collections of notes receivable -- -- 77 77 6 475
Other, net 6 -- -- 21 -- --
---------- ---------- ---------- ---------- ---------- ----------
Net cash used in investing activities (271) (878) (978) (915) (811) (68,158)
---------- ---------- ---------- ---------- ---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings of long-term debt 521 2,960 10,373 10,979 4,232 20,626
Payments of long-term debt (2,446) (3,408) (10,594) (11,545) (4,071) (24,909)
Distributions to stockholders (15) -- -- -- -- --
Distributions to accounting acquirer -- -- -- -- -- (17,758)
Proceeds from initial public offering -- -- -- -- -- 91,513
---------- ---------- ---------- ---------- ---------- ----------
Net cash provided by (used in) financing (1,940) (448) (221) (566) 161 69,472
---------- ---------- ---------- ---------- ---------- ----------
activities
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS 1,111 2,464 (147) (1,156) (510) 9,183
CASH AND CASH EQUIVALENTS, beginning of period 726 1,837 4,301 5,310 5,310 4,154
---------- ---------- ---------- ---------- ---------- ----------
CASH AND CASH EQUIVALENTS, end of period $ 1,837 $ 4,301 $ 4,154 $ 4,154 $ 4,800 $ 13,337
========== ========== ========== ========== ========== ==========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for-
Interest $ 286 $ 171 $ 160 $ 193 $ 63 $ 161
Income taxes 266 1,643 1,421 2,571 1,204 3,308
Non-cash property distribution -- -- -- -- -- 756
The accompanying notes are an integral part of these consolidated
financial statements.
F-15
91
INTEGRATED ELECTRICAL SERVICES, INC., AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE INFORMATION)
(NOTE 1)
RESTRICTED
COMMON STOCK COMMON STOCK ADDITIONAL TOTAL
----------------------- ----------------------- PAID-IN RETAINED STOCKHOLDERS'
SHARES AMOUNT SHARES AMOUNT CAPITAL EARNINGS EQUITY
---------- ---------- ---------- ---------- ---------- ---------- ----------
BALANCE, December 31, 1994 4,492,039 $ 45 -- $ -- $ 887 $ 3,123 $ 4,055
Net income -- -- -- -- -- 986 986
---------- ---------- ---------- ---------- ---------- ---------- ----------
BALANCE, December 31, 1995 4,492,039 45 -- -- 887 4,109 5,041
Net income -- -- -- -- -- 3,665 3,665
---------- ---------- ---------- ---------- ---------- ---------- ----------
BALANCE, December 31, 1996 4,492,039 45 -- -- 887 7,774 8,706
Net income -- -- -- -- -- 3,735 3,735
Adjustment for change in
fiscal year of
pooled company -- -- -- -- -- 195 195
---------- ---------- ---------- ---------- ---------- ---------- ----------
BALANCE, September 30, 1997 4,492,039 45 -- -- 887 11,704 12,636
Non-cash non-recurring
compensation charge -- -- -- -- 17,036 -- 17,036
(unaudited)
Initial public offering of
stock (unaudited) 8,050,000 80 -- -- 91,433 -- 91,513
Issuance of stock for
acquisitions (unaudited) 12,736,611 128 2,655,709 27 160,715 -- 160,870
Distribution to accounting
acquirer (unaudited) -- -- -- -- (17,626) (888) (18,514)
Net loss (unaudited) -- -- -- -- -- (8,141) (8,141)
Other (unaudited) -- -- -- -- -- (18) (18)
---------- ---------- ---------- ---------- ---------- ---------- ----------
BALANCE, June 30, 1998
(unaudited) 25,278,650 $ 253 2,655,709 $ 27 $ 252,445 $ 2,657 $ 255,382
========== ========== ========== ========== ========== ========== ==========
The accompanying notes are an integral part of these consolidated
financial statements.
F-16
92
INTEGRATED ELECTRICAL SERVICES, INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BUSINESS AND ORGANIZATION AND BASIS OF PRESENTATION:
Integrated Electrical Services, Inc. (the Company or IES), a Delaware
corporation, was founded in June 1997 to create a leading national provider and
consolidator of electrical contracting and maintenance services, focusing
primarily on the commercial, industrial and residential markets. On January 30,
1998, concurrent with the closing of its initial public offering (IPO or
Offering) of common stock, IES acquired, in separate transactions, for
consideration including $53.4 million of cash and 12,313,025 shares of common
stock, 16 companies and related entities engaged in all facets of electrical
contracting and maintenance services (collectively, the Founding Companies or
the Founding Company Acquisitions).
For financial statement presentation purposes, Houston-Stafford Electric, Inc.
(Houston-Stafford), one of the Founding Companies, has been identified as the
accounting acquirer. The acquisition of the remaining Founding Companies and IES
was accounted for using the purchase method of accounting. The allocation of
purchase prices to the assets acquired and liabilities assumed has been
initially assigned and recorded based on preliminary estimates of fair value and
may be revised as additional information concerning the valuation of such assets
and liabilities becomes available.
Subsequent to its IPO, and through June 30, 1998, the Company acquired 11
additional electrical contracting and maintenance businesses for approximately
$30.9 million of cash and 3,519,023 shares of common stock (the Post IPO
Acquisitions). Of these 11 Post IPO Acquisitions, 10 were accounted for using
the purchase method of accounting (the Purchased Companies) and one was
accounted for using the pooling-of-interests method of accounting (the Pooled
Company) resulting in a restatement of the Company's financial statements for
all periods presented (see Note 3).
The accompanying consolidated financial statements through January 30, 1998,
reflect the historical accounts of Houston-Stafford as the accounting acquirer.
The historical financial statements have been restated for all periods presented
for the effect of the acquisition accounted for as a pooling-of-interest. The
Founding Companies are included in the Company's results of operations beginning
February 1, 1998, and the Purchased Companies beginning on their respective
dates of acquisition. Houston-Stafford's results of operations through January
30, 1998, include a non-cash, non-recurring compensation charge of approximately
$17.0 million required by the Securities and Exchange Commission (SEC) in
connection with a note receivable and rights held by an officer of
Houston-Stafford which was exchanged for cash and shares of IES common stock in
connection with the Founding Company Acquisitions (see Note 10). The Company has
changed from a calendar to a September fiscal year.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Principles of Consolidation
The accompanying consolidated financial statements after January 30, 1998,
include the accounts of IES and its wholly owned subsidiaries. All significant
intercompany accounts and transactions have been eliminated in consolidation.
F-17
93
INTEGRATED ELECTRICAL SERVICES, INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Interim Financial Information
The interim financial statements for the nine months ended June 30, 1997 and
1998, and the nine months ended September 30, 1997, are unaudited and have been
prepared pursuant to the rules and regulations of the SEC. Accordingly, they do
not include all of the information and footnotes required by generally accepted
accounting principles for complete financial statements. In the opinion of the
Company's management, the unaudited interim financial statements contain all
adjustments (consisting of normal recurring adjustments) considered necessary
for a fair presentation. The results of operations for the interim periods are
not necessarily indicative of the results for the entire fiscal year.
Cash and Cash Equivalents
The Company considers all highly liquid investments purchased with an original
maturity of three months or less to be cash equivalents.
Inventories
Inventories consist of parts and supplies held for use in the ordinary course of
business and are valued by the Company at the lower of cost or market using the
first-in, first-out (FIFO) method.
Property and Equipment
Property and equipment are stated at cost, and depreciation is computed using
the straight-line method over the estimated useful lives of the assets.
Leasehold improvements are capitalized and amortized over the lesser of the life
of the lease or the estimated useful life of the asset. Depreciation expense was
approximately $219,000 and $304,000 for the years ended December 31, 1995 and
1996, and $391,000 for the year ended September 30, 1997, respectively.
Expenditures for repairs and maintenance are charged to expense when incurred.
Expenditures for major renewals and betterments, which extend the useful lives
of existing equipment, are capitalized and depreciated. Upon retirement or
disposition of property and equipment, the cost and related accumulated
depreciation are removed from the accounts and any resulting gain or loss is
recognized in the statements of operations.
Goodwill
Goodwill represents the excess of the aggregate of purchase price paid by the
Company in the acquisition of businesses accounted for as purchases over the
fair market value of the net assets acquired. Goodwill is amortized on a
straight-line basis over 40 years. As of September 30, 1997, accumulated
amortization was approximately $33,000.
The Company periodically evaluates the recoverability of intangibles resulting
from business acquisitions and measures the amount of impairment, if any, by
assessing current and future levels of income and cash flows as well as other
factors, such as business trends and prospects and market and economic
conditions.
Debt Issue Costs
Debt issue costs related to the Company's credit facility (see Note 6) are
included in other noncurrent assets and are amortized to interest expense over
the scheduled maturity of the debt.
F-18
94
INTEGRATED ELECTRICAL SERVICES, INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Revenue Recognition
The Company recognizes revenue when services are performed except when work is
being performed under a construction contract. Such contracts generally provide
that the customers accept completion of progress to date and compensate the
Company for services rendered measured in terms of hours expensed or some other
measure of progress. Revenues from construction contracts are recognized on the
percentage-of-completion method generally measured by the percentage of costs
incurred to date to total estimated costs for each contract. Contract costs
include all direct material and labor costs and those indirect costs related to
contract performance, such as indirect labor, supplies, tools, repairs and
depreciation costs. Provisions for total estimated losses on uncompleted
contracts are made in the period in which such losses are determined. Changes in
job performance, job conditions, estimated profitability and final contract
settlements may result in revisions to costs and income. The effects of these
revisions are recognized in the period in which the revisions are determined. An
amount equal to contract costs attributable to claims is included in revenues
when realization is probable and the amount can be reliably estimated.
The balances billed but not paid by customers pursuant to retainage provisions
in construction contracts will be due upon completion of the contracts and
acceptance by the customer. Based on the Company's experience with similar
contracts in recent years, the retention balance at each balance sheet date will
be collected within the subsequent fiscal year.
The current asset, "Costs and estimated earnings in excess of billings on
uncompleted contracts," represents revenues recognized in excess of amounts
billed. The current liability, "Billings in excess of costs and estimated
earnings on uncompleted contracts," represents billings in excess of revenues
recognized.
Warranty Costs
For certain contracts, the Company warrants labor for the first year after
installation of new electrical systems. The Company generally warrants labor for
30 days after servicing of existing electrical systems. A reserve for warranty
costs is recorded based upon the historical level of warranty claims and
management's estimate of future costs.
Accounts Receivable and Provision for Doubtful Accounts
Accounts receivable at December 31, 1996, and September 30, 1997, include
approved claims and change orders which were expected to be collected within the
fiscal year.
The Company provides an allowance for doubtful accounts based on a specified
percentage of outstanding receivables and the specific identification of
accounts receivable where collection is no longer probable.
Stock-Based Compensation
Statement of Financial Accounting Standards (SFAS) No. 123, "Accounting for
Stock-Based Compensation," allows entities to choose between a new fair value
method of accounting for employee stock options or similar equity instruments
and the current method of accounting prescribed by Accounting Principles Board
(APB) Opinion No. 25 under which compensation expense is recorded to the extent
that the fair market value of the related stock is in excess of the options
exercise price at date of grant. Entities electing to remain with the accounting
in APB Opinion No. 25 must make pro forma disclosures of net income and earnings
per share as if the fair value method of accounting prescribed in SFAS No. 123
had been applied. The Company will measure compensation expense attributable to
stock options based on the method prescribed in APB Opinion No. 25 and will
provide the required pro forma disclosure of net income and earnings per share,
as applicable, in the notes to future consolidated annual financial statements.
F-19
95
INTEGRATED ELECTRICAL SERVICES, INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Income Taxes
The Company follows the asset and liability method of accounting for income
taxes in accordance with SFAS No. 109. Under this method, deferred assets and
liabilities are recorded for future tax consequences of temporary differences
between the financial reporting and tax bases of assets and liabilities, and are
measured using enacted tax rates and laws.
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires the use of estimates and assumptions by
management in determining the reported amounts of assets and liabilities,
disclosures of contingent liabilities at the date of the financial statements
and the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates. Reference is made to the
"Revenue Recognition" section of this footnote and Note 13 for discussion of
significant estimates reflect in the Company financial statements.
New Accounting Pronouncements
Effective January 1, 1996, the Company adopted SFAS No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of."
Accordingly, in the event that facts and circumstances indicate that property
and equipment or other assets may be impaired, an evaluation of recoverability
would be performed. If an evaluation is required, the estimated future
undiscounted cash flows associated with the asset are compared to the asset's
carrying amount to determine if an impairment of such property is necessary. The
effect of any impairment would be to expense the difference between the fair
value of such property and its carrying value. Adoption of this standard did not
have a material effect on the consolidated financial position or results of
operations of the Company.
In June 1997, the Financial Accounting Standards Board (FASB) issued SFAS No.
131, "Disclosures about Segments of an Enterprise and Related Information,"
which establishes standards for the way public enterprises are to report
information about operating segments in annual financial statements and requires
the reporting of selected information about operating segments in interim
financial reports issued to shareholders. SFAS No. 131 is effective for the
Company for its year ended September 30, 1999, at which time the Company will
adopt the provision. The Company is currently evaluating the impact on the
Company's financial disclosures.
In February 1998, the FASB issued SFAS No. 132, "Employers Disclosures about
Pensions and Other Postretirement Benefits," which becomes effective for
financial statements for the year ended September 30, 1999. SFAS No. 132
requires revised disclosures about pension and other postretirement benefit
plans. The Company is currently assessing the impact of this statement on its
annual financial statements.
On June 1, 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities," which becomes effective for the Company for
its year ended September 30, 2000. SFAS No. 133 requires a company to recognize
all derivative instruments (including certain derivative instruments embedded in
other contracts) as assets or liabilities in its balance sheet and measure them
at fair value. The statement requires that changes in the derivatives fair value
be recognized currently in earnings unless specific hedge accounting criteria
are met. The Company is evaluating SFAS No. 133 and the impact on existing
accounting policies and financial reporting disclosures. However, the Company
has not to date engaged in activities or entered into arrangements normally
associated with derivative instruments.
F-20
96
INTEGRATED ELECTRICAL SERVICES, INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Earnings per Share
The Company has adopted SFAS No. 128, "Earning Per Share," which requires
restatement of all comparative per share amounts. Under the provisions of SFAS
No. 128, the presentation of primary earnings per share has been replaced with
earnings per share for potentially dilutive securities such as outstanding
options. All prior period earnings per share data have been restated.
For financial statement purposes as required by the rules and regulations of the
Securities Act, Houston-Stafford has been identified as the accounting acquirer
in the transaction with IES and its initial public offering. As such the shares
of IES beneficially owned by the shareholders of Houston-Stafford and the shares
issued in the pooling transaction have been used in the calculation of basic and
diluted earnings per share of the Company, for all periods prior to the IPO.
3. BUSINESS COMBINATIONS:
On January 30, 1998, concurrent with the closing of its IPO, IES acquired, in
separate transactions, for consideration including $53.4 million of cash and
12,313,025 shares of common stock, 16 companies and related entities engaged in
all facets of electrical contracting and maintenance services. Subsequent to its
IPO, and through June 30, 1998, the Company has acquired 11 additional
electrical contracting and maintenance businesses for approximately $30.9
million of cash and 3.5 million shares of common stock. Of these 11 Post IPO
Acquisitions, 10 were accounted for using the purchase method of accounting and
the Pooled Company was accounted for using the pooling-of-interests method of
accounting. Accordingly, the Company's historical financial statements have been
restated to include the historical financial statements of the Pooled Company.
Pooling
On June 1, 1998, IES completed the acquisition of all the capital stock of H.R.
Allen, Inc. (Allen), in a business combination accounted for as a
"pooling-of-interests" transaction in accordance with the requirements of APB
No. 16. Allen, headquartered in Charleston, South Carolina, provides electrical
contracting and maintenance services. IES issued 1,140,000 shares of common
stock in exchange for all of the capital stock of Allen. There were no
transactions between IES, or Allen during periods prior to the business
combination.
The following table summarizes the unaudited restated revenues, net income and
per share data of the Company after giving effect to the Pooled Company (in
thousands, except per share data).
YEAR ENDED DECEMBER 31, YEAR ENDED
----------------------------------------------------------- SEPTEMBER 30,
1995 1996 1997
--------------------------- ---------------------------- ---------------------------
NET NET NET
REVENUES INCOME REVENUES INCOME REVENUES INCOME
------------ ------------ ------------ ------------ ------------ ------------
Revenues and net income-
As previously reported $ 54,082 $ 731 $ 70,493 $ 3,047 $ 81,575 $ 3,316
Pooled Company 19,263 255 30,938 618 35,536 1,059
------------ ------------ ------------ ------------ ------------ ------------
As restated $ 73,345 $ 986 $ 101,431 $ 3,665 $ 117,111 $ 4,375
============ ============ ============ ============ ============ ============
Earnings per share-
As previously reported $ .22 $ .91 $ .99
Pooled Company -- (.09) (.02)
------------ ------------ ------------
As restated $ .22 $ .82 $ .97
============ ============ ============
F-21
97
INTEGRATED ELECTRICAL SERVICES, INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Purchases
The total consideration paid for the Purchased Companies through June 30, 1998,
was approximately $73.0 million (including assumed debt of approximately $5.2
million). The $53.7 million excess of the total consideration paid over the net
tangible assets acquired has been recorded as goodwill in the accompanying
consolidated financial statements. The accompanying June 30, 1998, consolidated
balance sheet includes allocations of the respective purchase prices to the
assets acquired and liabilities assumed based on preliminary estimates of fair
value and are subject to final adjustment.
The unaudited pro forma data presented below reflect the results of operations
for the Company, the Founding Companies and the Purchased Companies through June
30, 1998, assuming the transactions were completed on October 1, 1996:
NINE MONTHS
YEAR ENDED ENDED
SEPTEMBER 30, JUNE 30,
1997 1998
============ ============
Revenues $ 502,905 $ 303,077
============ ============
Net income $ 24,323 $ 16,063
============ ============
Basic earnings per share $ .95 $ .62
============ ============
Diluted earnings per share $ .95 $ .61
============ ============
The preceding pro forma adjustments include: (a) the reversal of
Houston-Stafford's non-cash, non-recurring compensation charge of approximately
$17.0 million, (b) certain reductions in salaries, bonuses, benefits and lease
payments to the former owners of the acquired companies which took effect as of
the effective date of their respective acquisitions, (c) amortization of
goodwill resulting from the acquisitions, and (d) elimination of interest income
and increased interest expense on borrowings of $6.4 million to fund certain S
corporation distributions.
Subsequent to June 30, 1998, the Company acquired eight companies for an
aggregate consideration of approximately 2,823,000 shares of common stock and
$63.6 million in cash, net of cash acquired. The cash portion of such
consideration was provided by borrowings under the Company's credit facility.
4. PROPERTY AND EQUIPMENT:
Property and equipment consists of the following (in thousands)::
ESTIMATED
USEFUL LIVES DECEMBER 31, SEPTEMBER 30,
IN YEARS 1996 1997
------------ ------------ ------------
Land N/A $ 1,465 $ 1,773
Buildings 5-32 486 686
Transportation equipment 3-5 1,582 2,158
Machinery and equipment 3-10 916 1,214
Building and leasehold improvements 5-32 251 273
Furniture and fixtures 5-7 326 563
------------ ------------
5,026 6,667
Less- Accumulated depreciation and amortization (2,064) (2,557)
------------ ------------
Property and equipment, net $ 2,962 $ 4,110
============ ============
F-22
98
INTEGRATED ELECTRICAL SERVICES, INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
5. DETAIL OF CERTAIN BALANCE SHEET ACCOUNTS:
Activity in the Company's allowance for doubtful accounts receivable consists of
the following (in thousands):
DECEMBER 31, SEPTEMBER 30,
1996 1997
------------ ------------
Balance at beginning of period $ 415 $ 459
Additions to costs and expenses 58 85
Deductions for uncollectible receivables written off and
recoveries (14) (7)
------------ ------------
Balance at end of period $ 459 $ 537
============ ============
Accounts payable and accrued liabilities consist of the following (in
thousands):
DECEMBER 31, SEPTEMBER 30,
1996 1997
------------ ------------
Accounts payable, trade $ 5,128 $ 9,033
Accrued compensation and other expenses 2,862 5,636
------------ ------------
$ 7,990 $ 14,669
============ ============
Electrical system installation contracts in progress are as follows (in
thousands):
DECEMBER 31, SEPTEMBER 30,
1996 1997
------------ ------------
Costs incurred on contracts in progress $ 35,780 $ 43,997
Estimated earnings 6,480 6,816
------------ ------------
42,260 50,813
Less- Billings to date $ (44,751) $ (52,711)
------------ ------------
$ (2,491) $ (1,898)
============ ============
Costs and estimated earnings in excess of billings on uncompleted
contracts $ 828 $ 1,368
Less- Billings in excess of costs and estimated earnings on
uncompleted contracts (3,319) (3,266)
------------ ------------
$ (2,491) $ (1,898)
============ ============
F-23
99
INTEGRATED ELECTRICAL SERVICES, INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. LONG-TERM DEBT:
Long-term debt consists of the following (in thousands):
DECEMBER 31, SEPTEMBER 30,
1996 1997
------------ ------------
Note payable to an officer, dated August 1996, payable in monthly
payments of $12 including interest at a rate of 8%, maturing
August 2003 and secured by stock (see Note 10) $ 766 $ 699
Note payable to a bank, dated October 1994, payable in monthly
payments of $21 plus interest at prime plus .75%, maturing
October 1998 and secured by trade receivables, inventory and
equipment 458 --
Line of credit with a bank with total borrowing capacity of
$3,100,000, bearing interest at prime plus 1/2 percent, repaid in
1998 with proceeds from the Company's credit facility -- 507
Notes payable to banks earning interest ranging from 8% to 8.25%,
repaid in 1998 with proceeds from the Company's credit facility 176 387
Note payable to an officer, bearing interest at 11%, repaid in 1998
with proceeds from the Company's credit facility 60 47
Mortgage payables to a bank and an individual bearing interest at 9%
and 10%, repaid in 1998 with proceeds from the Company's credit
facility 178 145
Capital lease obligations -- 65
Other 321 319
------------ ------------
1,959 2,169
Less- Current maturities 553 894
------------ ------------
Total long-term debt $ 1,406 $ 1,275
============ ============
Principal payments due on long-term debt at September 30, 1997, are as follows
(in thousands):
1998 $ 894
1999 305
2000 285
2001 204
2002 182
Thereafter 299
-------
Total $ 2,169
=======
Credit Facility
In January 1998, the Company obtained a credit facility from a commercial bank.
The credit facility is a three-year revolving credit facility of up to $65
million to be used for working capital, capital expenditures, other corporate
purposes and acquisitions. In August, the Company increased the credit facility
to $175.0 million. The credit facility matures July 30, 2001. Amounts borrowed
under the credit facility bear interest at an annual rate equal to either (a)
the London interbank offered rate (LIBOR) plus 1.0 percent to 2.0 percent, as
determined by the ratio of the Company's total funded debt to EBITDA (as defined
in the credit facility) or (b) the higher of (i) the bank's prime rate and (ii)
the Federal funds rate plus 0.5 percent plus up to an additional 5 percent, as
determined by the ratio of the Company's total funded debt to EBITDA. Commitment
fees of 0.25 percent to 0.375 percent, as determined by the ratio of the
Company's total funded debt to EBITDA, will be due on any unused borrowing
capacity under the credit facility. The Company's existing and future
subsidiaries
F-24
100
INTEGRATED ELECTRICAL SERVICES, INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
guarantee the repayment of all amounts due under the facility, and the facility
is secured by the capital stock of those subsidiaries and the accounts
receivable of the Company and those subsidiaries. The credit facility requires
the consent of the lenders for acquisitions exceeding a certain level of cash
consideration, prohibits the payment of cash dividends on the common stock,
restricts the ability of the Company to incur other indebtedness and requires
the Company to comply with various affirmative and negative covenants including
certain financial ratios. As of September 11, 1998, $42 million was borrowed
under the credit facility.
7. LEASES:
The Company leases various facilities, at which it conducts its operations,
under noncancelable operating leases. For a discussion of leases with certain
related parties see Note 10.
Future minimum lease payments under these noncancelable operating leases are as
follows in thousands):
YEAR ENDING SEPTEMBER 30-
1998 $ 204
1999 185
2000 160
2001 133
2002 122
Thereafter 287
--------
$ 1,091
========
Rental expense for the years ended December 31, 1995 and 1996, and September 30,
1997, was approximately $118,000, $155,000 and $206,000, respectively.
8. INCOME TAXES:
Federal and state income tax provisions are as follows (in thousands):
YEAR ENDED
DECEMBER 31, YEAR ENDED
----------------------------- SEPTEMBER 30,
1995 1996 1997
------------ ------------ ------------
Federal-
Current $ 482 $ 1,741 $ 2,691
Deferred 22 434 (149)
State-
Current 59 241 400
Deferred -- 55 (19)
------------ ------------ ------------
$ 563 $ 2,471 $ 2,923
============ ============ ============
F-25
101
INTEGRATED ELECTRICAL SERVICES, INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Actual income tax expense differs from income tax expense computed by applying
the U.S. federal statutory corporate rate of 35 percent to income before
provision for income taxes as follows (in thousands):
YEAR ENDED
DECEMBER 31, YEAR ENDED
------------------------------ SEPTEMBER 30,
1995 1996 1997
------------ ------------ ------------
Provision at the statutory rate $ 542 $ 2,148 $ 2,554
Increase resulting from-
Non-deductible expenses (25) 139 150
State income tax, net of benefit for federal deduction 46 184 219
------------ ------------ ------------
$ 563 $ 2,471 $ 2,923
============ ============ ============
Deferred income tax provisions result from temporary differences in the
recognition of income and expenses for financial reporting purposes and for tax
purposes. The tax effects of these temporary differences, representing deferred
tax assets and liabilities, result principally from the following (in
thousands):
DECEMBER 31, SEPTEMBER 30,
1996 1997
------------ ------------
Deferred income tax assets-
Bad debts $ 137 $ 162
Reserves and accrued expenses 365 564
------------ ------------
Total deferred income tax asset 502 726
------------ ------------
Deferred income tax liabilities-
Property and equipment (40) (112)
Deferred contract revenue (1,051) (1,012)
Accrued expenses -- (47)
Total deferred income tax liability (1,091) (1,171)
------------ ------------
Net deferred income tax liability $ (589) $ (445)
============ ============
The net deferred tax assets and liabilities are comprised of the following (in
thousands):
DECEMBER 31, SEPTEMBER 30,
1996 1997
------------ ------------
Current deferred tax asset $ 502 $ 726
============ ============
Deferred tax liabilities-
Current $ (1,051) $ (1,059)
Long-term (40) (112)
------------ ------------
Total $ (1,091) $ (1,171)
============ ============
F-26
102
INTEGRATED ELECTRICAL SERVICES, INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
9. STOCKHOLDERS' EQUITY:
Restricted Common Stock
In October 1997, the 2,655,709 shares of common stock held by the founder of IES
were converted into 2,655,709 shares of restricted common stock. The shares of
restricted common stock have rights similar to shares of common stock except
that such shares are entitled to elect one member of the board of directors and
are entitled to one-half of one vote for each share held on all other matters.
Each share of restricted common stock will convert into common stock upon
disposition by the holder of such shares.
Stock Plan
In September 1997, the Company's board of directors and stockholders approved
the Company's 1997 Stock Plan (the Plan), which provides for the granting or
awarding of incentive or nonqualified stock options, stock appreciation rights,
restricted or phantom stock and other incentive awards to directors, officers,
key employees and consultants of the Company. The number of shares authorized
and reserved for issuance under the Plan is the greater of 3.5 million shares or
15 percent of the aggregate number of shares of common stock outstanding. The
terms of the option awards will be established by the compensation committee of
the Company's board of directors. The Company has filed a registration statement
on Form S-8 under the Securities Act of 1933 registering the issuance of shares
upon exercise of options granted under this Plan. Options generally vest at the
rate of 20 percent per year, commencing on the first anniversary of the grant
date and will expire 10 years from the date of grant, three months following
termination of employment due to death or disability, or one year following
termination of employment by means other than death or disability.
Director's Stock Plan
In September 1997, the Company's board of directors and stockholders approved
the 1997 Directors' Stock Plan (the Directors' Plan), which provides for the
granting or awarding of stock options to nonemployee directors. The number of
shares authorized and reserved for issuance under the Directors' Plan is 260,000
shares. The directors' Plan provides for the automatic grant of options to
purchase 5,000 shares to each nonemployee director serving in such capacity at
the commencement of the Offerings.
Each nonemployee director was granted options to purchase an additional 5,000
shares at the time of an initial election of such director. In addition, each
director will be automatically granted options to purchase 5,000 shares annually
at each September 30, on which such director remains a director. All options
have an exercise price based on the fair market value at the date of grant and
vesting terms similar to options granted under the Stock Plan discussed above.
The Directors' Plan allows nonemployee directors to receive additional option
grants in amounts and at terms as deemed appropriate by the Company's board of
directors.
As of September 11, 1998, the Company had total outstanding options under these
Plans to purchase up to a total of approximately 3,110,550 shares of common
stock.
F-27
103
INTEGRATED ELECTRICAL SERVICES, INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Initial Public Offering
On January 30, 1998, the Company completed its initial public offering, issuance
to the public 7,000,000 shares of its common stock at a price of $13.00 per
share, resulting in net proceeds to the Company of $78.8 million after deducting
underwriting commissions and discounts. On February 5, 1998, the Company sold
1,050,000 shares of common stock pursuant to the overallotment option granted to
the underwriters. The Company realized net proceeds from the sale of $12.7
million.
10. RELATED-PARTY TRANSACTIONS:
The Company has transactions in the normal course of business with certain
affiliated companies. Amounts due from related parties at December 31, 1996, and
September 30, 1997, were $338,000 and $309,000.
The Company leases certain real properties from certain related parties. The
annual rentals for 1995, 1996 and for the year ended September 30, 1997,
approximated $210,000, $291,000 and $216,000, respectively.
In August 1996, the Company negotiated the purchase of the stock from an
officer. The selling price of the shares totaled $800,000. The Company signed an
installment promissory note that provided for the payout of $800,000 over seven
years at 8 percent interest, secured by the purchased stock. Subsequent to the
August 1996 transaction, the executive remained an officer of the Company and
was paid cash compensation of approximately $372,000 during the last four months
of 1996 and approximately $252,000 during the first nine months of 1997. These
amounts have been reflected as compensation expense in the accompanying income
statements for the applicable periods. At the closing of the IPO, the officer
exchanged the promissory note for cash and shares of IES common stock. In
connection therewith, the Company recorded a non-cash, non-recurring
compensation charge of approximately $17.0 million.
11. EMPLOYEE BENEFIT PLANS:
Certain subsidiaries of the Company provide various defined contributions
savings plans for their employees (the Plans). The Plans cover substantially all
full-time employees of such subsidiaries. Participants vest at varying rates
ranging from full vesting upon participation to those that provide for vesting
to begin after three years of service and are fully vested after seven years.
Certain plans provide for a deferral option that allows employees to elect to
contribute a portion of their pay into the plan and provide for a discretionary
profit sharing contribution by the individual subsidiary. Generally the
subsidiaries match a portion of the amount deferred by participating employees.
Contributions for the profit sharing portion of the plan are generally at the
discretion of the individual subsidiary board of directors. The aggregate
contributions to the Plans were $50,000, $75,000 and $100,000 for the years
ended December 31, 1995 and 1996, and September 30, 1997.
12. FINANCIAL INSTRUMENTS:
The Company's financial instruments consist of cash and cash equivalents,
accounts receivable, receivables from related parties, other receivables,
accounts payable, a line of credit, notes payable and long-term debt. The
Company believes that the carrying value of these instruments on the
accompanying balance sheets approximates their fair value.
F-28
104
INTEGRATED ELECTRICAL SERVICES, INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
13. COMMITMENTS AND CONTINGENCIES:
Litigation
Subsidiaries of the Company are involved in various legal proceeds that have
arisen in the ordinary course of business. While it is not possible to predict
the outcome of such proceedings with certainty, in the opinion of the Company's
management, all such proceedings are either adequately covered by insurance or,
if not so covered should not ultimately result in any liability which would have
a material adverse effect on the financial position, liquidity or results of
operations of the Company.
Insurance
The Company carries a broad range of insurance coverage, including business auto
liability, general liability, commercial property, workers' compensation and
general umbrella policy. The Company has not incurred significant uninsured
losses on any of these items.
14. RISK CONCENTRATION:
Financial instruments, which potentially subject the Company to concentrations
of credit risk consist principally of cash deposits and trade accounts
receivable. The Company grants credit, generally without collateral, to its
customers, which are generally contractors and home builders throughout the
United States. Consequently, the Company is subject to potential credit risk
related to changes in business and economic factors throughout the United States
within the construction and home-building market. However, the Company generally
is entitled to payment for work performed and has certain lien rights in that
work. Further, management believes that its contract acceptance, billing and
collection policies are adequate to minimize any potential credit risk.
The Company routinely maintains cash balances in financial institutions in
excess of federally insured limits.
F-29
105
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Integrated Electrical Services, Inc.:
We have audited the accompanying balance sheet of Integrated Electrical
Services, Inc., a Delaware corporation, as of September 30, 1997, and the
related statements of operations, cash flows and stockholders' equity for the
period from inception (June 26, 1997) through September 30, 1997 and for the
period from October 1, 1997 through January 30, 1998. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Integrated Electrical
Services, Inc. as of September 30, 1997, and the results of its operations and
its cash flows for the period from inception (June 26, 1997) through September
30, 1997 and for the period from October 1, 1997 through January 30, 1998, in
conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Houston, Texas
September 11, 1998
F-30
106
INTEGRATED ELECTRICAL SERVICES, INC.
BALANCE SHEET
(IN THOUSANDS, EXCEPT SHARE INFORMATION)
SEPTEMBER 30,
1997
--------
ASSETS
CASH AND CASH EQUIVALENTS ....................................... $ --
DEFERRED OFFERING COSTS ......................................... 1,560
--------
Total current assets .................................. 1,560
PROPERTY AND EQUIPMENT, NET ..................................... 6
--------
Total assets .......................................... $ 1,566
========
LIABILITIES AND STOCKHOLDERS' EQUITY
ACCOUNTS PAYABLE AND ACCRUED LIABILITIES ........................ $ --
AMOUNTS DUE TO STOCKHOLDER ...................................... 1,565
--------
Total current liabilities ............................. 1,565
STOCKHOLDERS' EQUITY:
Preferred stock, $.01 par value, 10,000,000 authorized,
none issued and outstanding .................................. --
Common stock, $.01 par value, 100,000,000 shares
authorized, 4,052,311 shares issued and outstanding .......... 41
Receivable from stockholders .................................. (40)
Additional paid-in capital .................................... 13,618
Retained deficit .............................................. (13,618)
--------
Total stockholders' equity ............................ 1
--------
Total liabilities and stockholders' equity ............ $ 1,566
========
- ----------
Reflects a 2,329.6-for-one stock split effected in October 1997.
The accompanying notes are an integral part of these financial statements.
F-31
107
INTEGRATED ELECTRICAL SERVICES, INC.
STATEMENTS OF OPERATIONS
(IN THOUSANDS)
PERIOD FROM
PERIOD FROM OCTOBER 1,
INCEPTION 1997
THROUGH THROUGH
SEPTEMBER 30, JANUARY 30,
1997 1998
-------- --------
REVENUES ...................................................... $ -- $ --
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES .................. 13,618 532
-------- --------
LOSS BEFORE INCOME TAXES ...................................... (13,618) (532)
PROVISION FOR INCOME TAXES .................................... -- --
-------- --------
NET LOSS ...................................................... $(13,618) $ (532)
======== ========
The accompanying notes are an integral part of these financial statements.
F-32
108
INTEGRATED ELECTRICAL SERVICES, INC.
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
PERIOD FROM
PERIOD FROM OCTOBER 1,
INCEPTION 1997
THROUGH THROUGH
SEPTEMBER 30, JANUARY 30,
1997 1998
-------- --------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss .................................................... $(13,618) $ (532)
Non-cash compensation charge ................................ 13,618 --
Adjustments to reconcile net loss to net cash used
in operating activities--
Changes in assets and liabilities--
Increase in deferred offering costs..................... (1,560) (2,868)
Increase in accounts payable and accrued liabilities ... -- 1,793
Increase in amounts due to stockholder ................. 1,565 1,629
-------- --------
Net cash provided by operating activities ........... 5 22
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital Expenditures ........................................ (6) (22)
-------- --------
Net cash used in investing activities ............... (6) (22)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Initial capitalization ...................................... 1 --
-------- --------
Net cash provided by financing activities ........... 1 --
-------- --------
NET INCREASE IN CASH AND CASH EQUIVALENTS ..................... -- --
CASH AND CASH EQUIVALENTS, beginning of period ................ -- --
-------- --------
CASH AND CASH EQUIVALENTS, end of period ...................... $ -- $ --
======== ========
The accompanying notes are an integral part of these financial statements.
F-33
109
INTEGRATED ELECTRICAL SERVICES, INC.
STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE PERIOD FROM INCEPTION
(JUNE 26, 1997) THROUGH DECEMBER 31, 1997
(IN THOUSANDS, EXCEPT SHARE INFORMATION)
COMMON STOCK RECEIVABLE ADDITIONAL TOTAL
------------------------ FROM PAID-IN RETAINED STOCKHOLDERS'
SHARES AMOUNT STOCKHOLDERS CAPITAL DEFICIT EQUITY
--------- --------- --------- --------- --------- ---------
INITIAL CAPITALIZATION, June
26, 1997 ........................ 2,329,600 $ 23 $ -- $ -- $ -- $ 23
ISSUANCE OF ADDITIONAL SHARES
TO MANAGEMENT ................... 1,722,711 18 -- -- -- 18
NET LOSS .......................... -- -- -- 13,618 (13,618) --
RECEIVABLE FROM STOCKHOLDERS
FOR STOCK ISSUED ................ -- -- (40) -- -- (40)
--------- --------- --------- --------- --------- ---------
BALANCE, September 30, 1997 ....... 4,052,311 41 (40) 13,618 (13,618) 1
NET LOSS .......................... -- -- -- -- (532) (532)
--------- --------- --------- --------- --------- ---------
BALANCE, January 30, 1998 ......... 4,052,311 $ 41 $ (40) $ 13,618 $ (14,150) $ (531)
========= ========= ========= ========= ========= =========
- ----------
Reflects a 2,329.6-for-one stock split effected in October 1997.
The accompanying notes are an integral part of these financial statements.
F-34
110
INTEGRATED ELECTRICAL SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS
1. BUSINESS AND ORGANIZATION:
Integrated Electrical Services, Inc., a Delaware corporation (IES or the
Company), was founded in June 1997 to create a leading national provider of
electrical contracting and maintenance services, focusing primarily on the
residential, commercial and industrial markets. IES intends to acquire certain
U.S. businesses (the Acquisitions), complete the consummation of the initial
public offerings in the United States and Canada and outside the United States
and Canada (the Offerings) of its common stock and, subsequent to the Offerings,
continue to acquire through merger or purchase similar companies to expand its
national and regional operations. The Company has elected a September fiscal
year.
IES has not conducted any operations, and all activities to date have
related to the Offerings and the Acquisitions. All expenditures of the Company
to date have been funded by its founder and current primary stockholder, on
behalf of the Company. The Company's founder and primary stockholder has also
committed to fund future organization expenses and offering costs. As of
September 30, 1997 and January 30, 1998, costs of approximately $1,560,000 and
$2,868,000, respectively, have been incurred in connection with the Offerings,
and such costs will be a reduction of the proceeds from the Offerings. IES has
treated these costs as deferred offering costs in the accompanying balance sheet
and statements of cash flows. IES utilized proceeds from the Offerings to
execute the Acquisitions and to repay its current primary stockholder for
funding deferred offering costs. The ability of IES to generate future operating
revenues is dependent upon the ability of the Company to manage the effect on
the combined companies of changes in demand for commercial and residential
construction, the effect of business growth, including the availability of
electricians, and the need for other key personnel. These risk factors are
discussed in more detail in "Risk Factors".
The financial statements for the period from October 1, 1997 through January
30, 1998 are presented for purposes of complying with certain reporting
requirements of the Securities and Exchange Commission's Staff Accounting
Bulletin No. 80 and are not necessarily indicative of the results to be expected
for the entire year.
2. STOCKHOLDERS' EQUITY:
Common Stock and Preferred Stock
In connection with the organization and initial capitalization of IES, the
Company issued 2,329,600 shares (as restated for the 2,329.6-for-one stock split
discussed below) of common stock at $.01 par value (Common Stock). IES
subsequently issued another 1,722,711 shares (as restated for the
2,329.6-for-one stock split discussed below) of Common Stock at $.01 par value
to certain management of IES. Consequently, as restated for the 2,329.6-for-one
stock split discussed below, the Company had issued a total of 2,655,709 shares
to its founder and Chairman of the Board, and certain trusts established for the
benefit of his children, and an aggregate of 1,396,602 shares to other executive
management of the Company. As a result of the issuance of shares to management
for nominal consideration, the Company recorded for financial statement
presentation purposes, a nonrecurring, noncash compensation charge of $13.6
million, calculated based on the fair value of such shares which has been
determined to be $9.10 and $9.80 per share (a discount of 35% and 30%,
respectively, from the estimated initial public offering price) for the shares
issued in June 1997 and September 1997, respectively. The fair value of such
shares was based on specific factors related to the Company and the transaction
including restrictions on transferability and sale, the time value of money
during the holding period and the substantive progress of the transaction at
each issuance date. The nonrecurring compensation charge discussed above does
not include any of the shares issued to the founder and chairman of the board,
and certain trusts established for the benefit of his children. The shares
issued to the founder and Chairman of the Board, and such trusts, will be
reflected as acquisition costs in connection with the Acquisitions.
IES effected a 2,329.6-for-one stock split in October 1997, for each share
of common stock of the Company then outstanding. In addition, the Company
increased the number of authorized shares of common stock to 100,000,000 and
increased the number of authorized shares of $.01 par value preferred stock to
10,000,000. The effects of the Common Stock split and the increase in the shares
of authorized common stock have been retroactively reflected on the balance
sheet, statement of stockholders' equity and in the accompanying notes.
Additionally, the difference between the initial capitalization and the par
value of Common Stock outstanding subsequent to the stock split has been
reflected as a receivable from stockholders, which is presented as a reduction
in stockholders' equity in the accompanying financial statements.
F-35
111
INTEGRATED ELECTRICAL SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS - CONTINUED
Restricted Common Stock
In October 1997, the 2,655,709 shares of Common Stock held by the founder of
IES were converted into 2,655,709 shares of restricted common stock. The shares
of restricted common stock have rights similar to shares of Common Stock, except
that such shares are entitled to elect one member of the board of directors and
are entitled to one-half of one vote for each share held on all other matters.
Each share of restricted common stock will convert into Common Stock upon
disposition by the holder of such shares.
Stock Plan
In September 1997, the Company's board of directors and stockholders
approved the Company's 1997 Stock Plan (the Plan), which provides for the
granting or awarding of incentive or nonqualified stock options, stock
appreciation rights, restricted or phantom stock, and other incentive awards to
directors, officers, key employees and consultants of the Company. The number of
shares authorized and reserved for issuance under the Plan is the greater of 3.5
million shares or 15% of the aggregate number of shares of Common Stock
outstanding. The terms of the option awards will be established by the
Compensation Committee of the Company's board of directors. The Company filed a
registration statement on Form S-8 under the Securities Act of 1933 registering
the issuance of shares upon exercise of options granted under this Plan. The
Company granted nonqualified stock options to purchase a total of approximately
2.3 million shares of Common Stock to key employees of the Company at the
initial public offering price upon consummation of the Offerings. These options
will vest at the rate of 20 percent per year, commencing on the first
anniversary of the grant date and will expire ten years from the date of grant,
three months following termination of employment due to death or disability, or
one year following termination of employment by means other than death or
disability. In September 1997, 300,000 options were granted to certain key
employees under the Plan with an exercise price equal to 60% of the initial
public offering price. These options vest at a rate of 20 percent per year,
commencing on the date of grant. The compensation expense recognized for these
options prior to September 30, 1997 was not material as they were not granted
until September 1997.
Directors' Stock Plan
In September 1997, the Company's board of directors and stockholders
approved the 1997 Directors' Stock Plan (the Directors' Plan), which provides
for the granting or awarding of stock options to nonemployee directors. The
number of shares authorized and reserved for issuance under the Directors' Plan
is 250,000 shares. The Directors' Plan provides for the automatic grant of
options to purchase 5,000 shares to each nonemployee director serving in such
capacity at the commencement of the Offerings.
Each nonemployee director will be granted options to purchase an additional
5,000 shares at the time of an initial election of such director. In addition,
each director will be automatically granted options to purchase 5,000 shares
annually at each September 30 on which such director remains a director. All
options will have an exercise price based on the fair market value at the date
of grant and have vesting terms similar to options granted under the Stock Plan
discussed above.
The Directors' Plan allows nonemployee directors to receive additional
option grants in amounts and at terms as deemed appropriate by the Company's
board of directors.
3. STOCK-BASED COMPENSATION:
Statement of Financial Accounting Standards (SFAS) No. 123, "Accounting for
Stock-Based Compensation," allows entities to choose between a new fair value
method of accounting for employee stock options or similar equity instruments
and the current method of accounting prescribed by Accounting Principles Board
(APB) Opinion No. 25 under which compensation expense is recorded to the extent
that the fair market value of the related stock is in excess of the options
exercise price at date of grant. Entities electing to remain with the accounting
in APB Opinion No. 25 must make pro forma disclosures of net income and earnings
per share as if the fair value method of accounting prescribed in SFAS No. 123
had been applied. The Company will measure compensation
F-36
112
INTEGRATED ELECTRICAL SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS - CONTINUED
expense attributable to stock options based on the method prescribed in APB
Opinion No. 25 and will provide the required pro forma disclosure of net income
and earnings per share, as applicable, in the notes to future consolidated
annual financial statements.
4. NEW ACCOUNTING PRONOUNCEMENTS:
SFAS No. 128 requires the presentation of basic earnings per share and
diluted earnings per share in financial statements of public enterprises rather
than primary and fully diluted earnings per share as previously required. Under
the provisions of this statement, basic earnings per share will be computed
based on weighted average shares outstanding and will exclude dilutive
securities such as options and warrants. Diluted earnings per share will be
computed including the impacts of all potentially dilutive securities. The
Company adopted this statement in December 1997, but does not anticipate that
the statement will have a material impact on the Company.
SFAS No. 129 will require additional disclosure of information about an
entity's capital structure, including information about dividend and liquidation
preferences, voting rights, contracts to issue additional shares, and conversion
and exercise prices. The Company adopted this statement in December 1997.
SFAS No. 130 requires the presentation of comprehensive income in an
entity's financial statements. Comprehensive income represents all changes in
equity of an entity during the reporting period, including net income and
charges directly to equity which are excluded from net income. This statement
did not have a material impact on the Company or its financial disclosures, as
the Company currently did not enter into any material transactions which result
in charges (or credits) directly to equity (such as additional minimum pension
liability changes, currency translation adjustments, and unrealized gains and
losses on available for sale securities).
5. FOUNDING COMPANY ACQUISITIONS:
IES acquired the following entities (the Founding Companies) on January 30,
1998 contemporaneously with the initial public offering. The entities acquired
are:
Ace Electric, Inc.
Amber Electric, Inc.
BW Consolidated, Inc. and Subsidiaries
Daniel Electrical Contractors, Inc. and Daniel Electrical of Treasure
Coast Inc.
Hatfield Electric, Inc.
Charles P. Bagby, Co., Inc. and General Partner, Inc.
Houston-Stafford Electric, Inc. and Stark Investments, Inc.
Mills Electrical Contractors, Inc.
Muth Electric, Inc.
Pollock Electric Inc.
Reynolds Electric Corp.
Rodgers Electric Company, Inc.
Summit Electric of Texas, Incorporated
Thomas Popp & Company
Thurman & O'Connell Corporation
The aggregate consideration that was paid by IES to acquire the Founding
Companies was approximately $53.4 million in cash and 12.3 million shares of
Common Stock. Additionally, approximately 3.9 million of the 4.1 million shares
issued to the IES founder and Chairman of the Board and certain trusts, and
certain other management, were reflected as acquisition costs as part of the
acquisition transactions.
F-37
113
INTEGRATED ELECTRICAL SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS - CONTINUED
In addition, the Company has entered into employment agreements with certain
key executives of the Founding Companies and the executive officers of IES.
These employment agreements generally prohibit such individuals from disclosing
confidential information and trade secrets, and restrict such individuals from
competing with the Company for a period of two years following termination of
employment. The initial term of these employment agreements is five years with
provisions for annual extensions at the end of the initial term.
6. BANK CREDIT FACILITY
The Company entered into a credit facility with a commercial bank. The
credit facility is a three-year revolving credit facility of up to $70 million
to be used for working capital, capital expenditures, other corporate purposes
and acquisitions.
On August 7, 1998, the Company increased its three-year revolving credit
facility with NationsBank of Texas, N.A. as agent (the "Credit Facility") from
$70.0 million to $175.0 million. The Credit Facility matures on July 30, 2001,
bears interest at the bank's prime rate or LIBOR, at the Company's option, plus
an applicable margin based on the ratio of debt to EBITDA (as defined). An
annual commitment fee from 0.25% to 0.375% is payable on any unused portion of
the Credit Facility. The Company's subsidiaries have guaranteed the repayment of
all amounts due under the facility, and the facility is secured by the capital
stock of the guarantors and the accounts receivable of the Company and the
guarantors.
The Credit Facility will be used to fund acquisitions, capital expenditures
and working capital requirements. Under the terms of the Credit Facility the
Company is required to comply with various affirmative and negative covenants
including: (i) the maintenance of certain financial ratios, (ii) restrictions on
additional indebtedness, and (iii) restrictions on liens, guarantees and
dividends.
F-38
114
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Mills Electrical Contractors, Inc.:
We have audited the accompanying consolidated balance sheets of Mills
Electrical Contractors, Inc., a Texas corporation, and Subsidiary as of December
31, 1995 and 1996 and September 30, 1997, and the related consolidated
statements of operations, cash flows and stockholders' equity for each of the
three years in the period ended December 31, 1996 and for the year ended
September 30, 1997 and for the period from October 1, 1997 through January 30,
1998. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Mills Electrical
Contractors, Inc. and Subsidiary as of December 31, 1995 and 1996 and September
30, 1997, and the results of their operations and their cash flows for each of
the three years in the period ended December 31, 1996 and for the year ended
September 30, 1997 and for the period from October 1, 1997 through January 30,
1998, in conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Houston, Texas
September 11, 1998
F-39
115
MILLS ELECTRICAL CONTRACTORS, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE INFORMATION)
DECEMBER 31,
----------------------- SEPTEMBER 30,
1995 1996 1997
-------- -------- -------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents ..................................... $ 1,808 $ 5,239 $ 833
Accounts receivable--
Trade, net of allowance of $148, $252
and $353, respectively ................................... 6,251 10,121 13,137
Retainage, net of allowance of $20, $74, $42
and $42, respectively .................................... 796 2,669 1,621
Related parties ............................................ 3 208 632
Other receivables .......................................... 307 1,055 27
Inventories, net .............................................. 69 49 93
Costs and estimated earnings in excess of
billings on uncompleted contracts .......................... 131 329 1,584
Prepaid expenses and other current assets ..................... 29 118 120
-------- -------- --------
Total current assets .................................. 9,394 19,788 18,047
PROPERTY AND EQUIPMENT, net ..................................... 912 1,675 2,397
GOODWILL, net ................................................... -- 180 173
OTHER ASSETS .................................................... 340 394 443
-------- -------- --------
Total assets .......................................... $ 10,646 $ 22,037 $ 21,060
======== ======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Line-of-Credit and current maturities of
long-term debt ............................................. $ 131 $ 294 $ 643
Accounts payable and accrued expenses--
Trade ...................................................... 4,439 8,886 7,672
Related parties ............................................ 23 633 --
Billings in excess of costs and estimated
earnings on uncompleted contracts .......................... 1,746 4,523 1,966
Unearned revenue and other current
liabilities ................................................ 98 -- --
-------- -------- --------
Total current liabilities ............................. 6,437 14,336 10,281
-------- -------- --------
LONG-TERM DEBT, net of current maturities ....................... 260 333 169
MINORITY INTEREST ............................................... -- 3 75
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Common stock, $1 par value, 1,000 shares
authorized, 855 shares issued and 727 shares
outstanding ................................................ 1 1 1
Additional paid-in capital .................................... 175 175 175
Retained earnings ............................................. 3,824 7,240 10,410
Treasury stock, 128 shares, at cost ........................... (51) (51) (51)
-------- -------- --------
Total stockholders' equity ............................ 3,949 7,365 10,535
-------- -------- --------
Total liabilities and stockholders' equity ............ $ 10,646 $ 22,037 $ 21,060
======== ======== ========
The accompanying notes are an integral part of these consolidated
financial statements.
F-40
116
MILLS ELECTRICAL CONTRACTORS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS)
PERIOD FROM
OCTOBER 1,
YEAR ENDED NINE MONTHS ENDED 1997
DECEMBER 31, SEPTEMBER 30, YEAR ENDED THROUGH
---------------------------------- --------------------- SEPTEMBER 30, JANUARY 30,
1994 1995 1996 1996 1997 1997 1998
-------- -------- -------- -------- -------- -------- --------
(Unaudited)
REVENUES .......................... $ 25,544 $ 35,250 $ 65,439 $ 43,684 $ 52,644 $ 74,399 $ 20,882
COST OF SERVICES (including
depreciation and
amortization) ................... 20,937 27,372 50,535 33,998 44,035 60,572 16,244
-------- -------- -------- -------- -------- -------- --------
Gross profit ............ 4,607 7,878 14,904 9,686 8,609 13,827 4,638
SELLING, GENERAL AND
ADMINISTRATIVE EXPENSES ......... 3,391 4,741 7,643 3,837 4,972 8,778 5,385
-------- -------- -------- -------- -------- -------- --------
Income (loss) from
operations ............ 1,216 3,137 7,261 5,849 3,637 5,049 (747)
-------- -------- -------- -------- -------- -------- --------
OTHER INCOME (EXPENSE):
Interest expense ................ (22) (56) (61) (34) (19) (46) (57)
Other ........................... 92 195 215 153 215 277 44
-------- -------- -------- -------- -------- -------- --------
Other income
(expense), net ........ 70 139 154 119 196 231 (13)
-------- -------- -------- -------- -------- -------- --------
INCOME (LOSS) BEFORE MINORITY
INTEREST AND PROVISION FOR
STATE INCOME TAXES .............. 1,286 3,276 7,415 5,968 3,833 5,280 (760)
Minority interest in net
(income) loss of subsidiary ..... -- -- (3) (5) -- 2 --
-------- -------- -------- -------- -------- -------- --------
INCOME (LOSS) BEFORE PROVISION
FOR STATE INCOME TAXES .......... 1,286 3,276 7,412 5,963 3,833 5,282 (760)
Provision for state income
taxes ........................... 52 131 309 182 147 274 84
-------- -------- -------- -------- -------- -------- --------
NET INCOME (LOSS) ................. $ 1,234 $ 3,145 $ 7,103 $ 5,781 $ 3,686 $ 5,008 $ (844)
======== ======== ======== ======== ======== ======== ========
The accompanying notes are an integral part of these consolidated
financial statements.
F-41
117
MILLS ELECTRICAL CONTRACTORS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
PERIOD FROM
NINE MONTHS OCTOBER 1,
YEAR ENDED ENDED 1997
DECEMBER 31, SEPTEMBER 30, YEAR ENDED THROUGH
------------------------------- ------------------- SEPTEMBER 30, JANUARY 30,
1994 1995 1996 1996 1997 1997 1998
------- ------- ------- ------- ------- ------- -------
(UNAUDITED)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) ......................... $ 1,234 $ 3,145 $ 7,103 $ 5,781 $ 3,686 $ 5,008 $ (844)
Adjustments to reconcile net income
to net cash provided by (used in)
operating activities --
Depreciation and amortization ........... 179 253 385 197 449 637 245
Loss (gain) on sale of property and
equipment ............................. (2) -- (20) (21) 5 6 3
Changes in operating assets and
liabilities --
(Increase) decrease in --
Accounts receivable ................. (2,107) (1,894) (6,997) (9,998) (1,364) 1,637 2,157
Inventories, net .................... 10 1 20 2 (45) (27) 47
Costs and estimated earnings in
excess of billings on
uncompleted contracts ............. (402) 386 (198) (307) (1,255) (1,146) (319)
Prepaid expenses and other
current assets .................... (46) 105 (89) (149) (2) 58 35
Increase (decrease) in --
Accounts payable and accrued
expenses .......................... 1,780 1,178 5,057 3,090 (1,846) 121 25
Billings in excess of costs and
estimated earnings on
uncompleted contracts ............. (353) 1,159 2,777 3,926 (2,556) (3,705) 415
Unearned revenue and other
current liabilities ............... -- 98 (98) (98) -- -- --
Other, net .............................. (64) (29) (52) (130) 22 100 3
------- ------- ------- ------- ------- ------- -------
Net cash provided by (used in)
operating activities .................. 229 4,402 7,888 2,293 (2,906) 2,689 1,767
------- ------- ------- ------- ------- ------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Increase in notes receivable .............. (12) (291) (75) (75) -- -- --
Collection of notes receivable ............ 140 141 377 377 -- -- --
Proceeds from sale of property and
equipment ............................... 8 15 44 44 8 8 5
Additions of property and
equipment ............................... (279) (255) (912) (538) (1,177) (1,551) (339)
------- ------- ------- ------- ------- ------- -------
Net cash used in investing
activities ........................ (143) (390) (566) (192) (1,169) (1,543) (334)
------- ------- ------- ------- ------- ------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings of long-term debt .............. -- -- -- -- 1,000 1,000 7,569
Payments of long-term debt ................ (19) (136) (204) (117) (815) (902) (90)
Distributions to stockholders ............. (147) (2,216) (3,687) (426) (516) (3,777) (8,844)
Sale of treasury stock .................... 181 -- -- -- -- -- --
------- ------- ------- ------- ------- ------- -------
Net cash provided by (used in)
financing activities .............. 15 (2,352) (3,891) (543) (331) (3,679) (1,365)
------- ------- ------- ------- ------- ------- -------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS .......................... 101 1,660 3,431 1,558 (4,406) (2,533) 68
CASH AND CASH EQUIVALENTS, beginning of
period .................................... 47 148 1,808 1,808 5,239 3,366 833
------- ------- ------- ------- ------- ------- -------
CASH AND CASH EQUIVALENTS, end of
period .................................... $ 148 $ 1,808 $ 5,239 $ 3,366 $ 833 $ 833 $ 901
======= ======= ======= ======= ======= ======= =======
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
Cash paid for --
Interest ................................ $ 22 $ 56 $ 61 $ 34 $ 19 $ 46 $ 48
Income Taxes ............................ $ -- $ 55 $ 93 $ 93 $ 105 $ 105 $ --
The accompanying notes are an integral part of these consolidated
financial statements.
F-42
118
MILLS ELECTRICAL CONTRACTORS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE INFORMATION)
COMMON STOCK ADDITIONAL TOTAL
-------------------- PAID-IN RETAINED TREASURY STOCKHOLDERS'
SHARES AMOUNT CAPITAL EARNINGS STOCK EQUITY
-------- -------- ---------- -------- -------- -------------
BALANCE, December 31, 1993 ............. 855 $ 1 $ 11 $ 1,808 $ (68) $ 1,752
Sale of 42 shares of treasury
stock ........................... -- -- 164 -- 17 181
Distributions to stockholders ..... -- -- -- (147) -- (147)
Net income ........................ -- -- -- 1,234 -- 1,234
-------- -------- -------- -------- -------- --------
BALANCE, December 31, 1994 ............. 855 1 175 2,895 (51) 3,020
Distributions to stockholders ..... -- -- -- (2,216) -- (2,216)
Net income ........................ -- -- -- 3,145 -- 3,145
-------- -------- -------- -------- -------- --------
BALANCE, December 31, 1995 ............. 855 1 175 3,824 (51) 3,949
Distributions to stockholders ..... -- -- -- (3,687) -- (3,687)
Net income ........................ -- -- -- 7,103 -- 7,103
-------- -------- -------- -------- -------- --------
BALANCE, December 31, 1996 ............. 855 1 175 7,240 (51) 7,365
Distributions to stockholders
(unaudited)...................... -- -- -- (516) -- (516)
Net income (unaudited) ............ -- -- -- 3,686 -- 3,686
-------- -------- -------- -------- -------- --------
BALANCE, September 30, 1997 ............ 855 1 175 10,410 (51) 10,535
Distributions to stockholders ..... -- -- -- (8,844) -- (8,844)
Net loss .......................... -- -- -- (844) -- (844)
-------- -------- -------- -------- -------- --------
BALANCE, January 30, 1998 .............. 855 $ 1 $ 175 $ 722 $ (51) $ 847
======== ======== ======== ======== ======== ========
The accompanying notes are an integral part of these consolidated
financial statements.
F-43
119
MILLS ELECTRICAL CONTRACTORS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BUSINESS AND ORGANIZATION:
The accompanying consolidated financial statements include the accounts of
Mills Electrical Contractors, Inc. (Mills), a Texas corporation, and its 89%
owned subsidiary, Fort Worth Regional Electrical Systems, L.L.C. (RES), a Texas
limited liability company (collectively, the Company). The subsidiary was formed
during 1996. In September 1997, Mills sold 10% of the capital stock of RES to an
officer of RES at net book value per share resulting in proceeds to the Company
of $71,000. Financial statements prior to 1996 reflect only the accounts of
Mills. All significant intercompany transactions have been eliminated in
consolidation.
The Company focuses on providing electrical system installation and repair
services primarily for mid-sized to large commercial facilities as well as
residential facilities. The Company performs the majority of its contract work
under fixed price contracts, with contract terms generally ranging from 12 to 36
months. The Company performs the majority of its work in the Dallas-Fort Worth,
Texas, area.
On January 30, 1998, concurrent with the closing of the initial public
offerings in the United States and Canada and outside the United States and
Canada (the Offerings) of additional common stock by Integrated Electrical
Services, Inc. (IES), the Company was acquired by IES. All outstanding shares of
the Company's common stock were exchanged for cash and shares of IES common
stock. In addition, the key executives of the Company entered into employment
agreements with the Company and IES which have an initial term of five years,
and generally restrict the disclosure of confidential information as well as
restrict competition with the Company and IES for a period of two years
following termination of employment. The Company has changed from a calendar to
a September fiscal year.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Interim Financial Information
The interim consolidated financial statements for the nine months ended
September 30, 1996 and 1997, are unaudited and have been prepared pursuant to
the rules and regulations of the Securities and Exchange Commission.
Accordingly, they do not include all of the information and footnotes required
by generally accepted accounting principles for complete financial statements.
In the opinion of the Company's management, the unaudited interim consolidated
financial statements contain all adjustments (consisting of normal recurring
adjustments) considered necessary for a fair presentation. The results of
operations for the interim periods are not necessarily indicative of the results
for the entire fiscal year.
The financial statements for the period from October 1, 1997 through January
30, 1998 are presented for purposes of complying with certain reporting
requirements of Securities and Exchange Commission's Staff Accounting Bulletin
No. 80 and are not necessarily indicative of the results to be expected for the
entire year.
Cash and Cash Equivalents
The Company considers all highly liquid investments purchased with an
original maturity of three months or less to be cash equivalents.
F-44
120
Supplemental Cash Flow Information (in thousands)
The Company had the following noncash investing and financing activities for
the years ended December 31, 1994, 1995, 1996 and September 1997 and the nine
months ended September 30, 1996 and 1997 and the period from October 1, 1997
through January 30, 1998:
PERIOD FROM
NINE MONTHS OCTOBER 1,
ENDED 1997
YEAR ENDED SEPTEMBER 30, THROUGH
SEPTEMBER 30, -------------------- JANUARY 30,
1994 1995 1996 1997 1996 1997 1998
-------- -------- -------- -------- -------- -------- --------
(UNAUDITED)
Property acquired in capital
lease transactions ..................... $ 290 $ 195 $ 254 $ 17 $ 237 $ -- $--
Goodwill recognized in purchase
transactions ......................... $ -- $ -- $ 185 $ -- $ 185 $ -- $--
Inventories
Inventories consist of parts and supplies held for use in the ordinary
course of business and are stated at the lower of cost, net of an allowance for
obsolescence, or market using the first-in, first-out (FIFO) method.
Property and Equipment
Property and equipment are stated at cost, and depreciation is computed
using the straight-line method over the estimated useful lives of the assets.
Leasehold improvements are capitalized and amortized over the lesser of the life
of the lease or the estimated useful life of the asset. Depreciation and
amortization expense was $179,000, $253,000, $385,000, $637,000 and $245,000 for
the years ended December 31, 1994, 1995 and 1996 and September 30, 1997 and for
the period from October 1, 1997 through January 30, 1998, respectively.
In June 1996, RES agreed to purchase a business, consisting of equipment in
a capital lease transaction and an agreement to lease a building under an
operating lease, as well as the purchase of the rights to the name "Regional
Electric Systems" from an individual who became an officer of RES. The acquired
assets were recorded at their estimated fair market value using the purchase
method of accounting. The transaction resulted in the recognition of goodwill of
approximately $185,000 which is being amortized over a 20 year period.
Expenditures for repairs and maintenance are charged to expense when
incurred. Expenditures for major renewals and betterments, which extend the
useful lives of existing equipment, are capitalized and depreciated. Upon
retirement or disposition of property and equipment, the cost and related
accumulated depreciation are removed from the accounts and any resulting gain or
loss is recognized in the statements of operations.
Revenue Recognition
The Company recognizes revenue when services are performed except when work
is being performed under a construction contract. Revenues from construction
contracts are recognized on the percentage-of-completion method measured by the
percentage of costs incurred to date to total estimated costs for each contract.
Such contracts generally provide that the customers accept completion of
progress to date and compensate the Company for services rendered measured in
terms of hours expensed or some other measure of progress. Contract costs
include all direct material and labor costs and those indirect costs related to
contract performance, such as indirect labor, supplies, tools and repairs.
Provisions for the total estimated losses on uncompleted contracts are made in
the period in which such losses are determined. Changes in job performance, job
conditions, estimated profitability and final contract settlements may result in
revisions to costs and income and their effects are recognized in the period in
which the revisions are determined. An amount equal to contract costs
attributable to claims is included in revenues when realization is probable and
the amount can be reliably estimated.
F-45
121
The balances billed but not paid by customers pursuant to retainage
provisions in construction contracts will be due upon completion of the
contracts and acceptance by the customer. Based on the Company's experience with
similar contracts in recent years, the retention balance at each balance sheet
date will be collected within the subsequent fiscal year.
The current asset, "Costs and estimated earnings in excess of billings on
uncompleted contracts," represents revenues recognized in excess of amounts
billed. The current liability, "Billings in excess of costs and estimated
earnings on uncompleted contracts," represents billings in excess of revenues
recognized.
Warranty Costs
For certain contracts, the Company warrants labor for the first year after
installation of new electrical systems. The Company generally warrants labor for
30 days after servicing of existing electrical systems. A reserve for warranty
costs is recorded based upon the historical level of warranty claims and
management's estimate of future costs.
Accounts Receivable and Provision for Doubtful Accounts
The Company provides an allowance for doubtful accounts based upon the
specific identification of accounts receivable where collection is no longer
probable and a general reserve based upon the total trade and retainage accounts
receivable balances.
Income Taxes
The Company has elected S Corporation status as defined by the Internal
Revenue Code, whereby the Company itself is not subject to taxation for federal
purposes. Under S Corporation status, the stockholders report their share of the
Company's taxable earnings or losses in their personal tax returns.
Consequently, the accompanying consolidated financial statements of the Company
include only a provision for state income taxes and do not include a provision
for current or deferred federal income taxes. The Company intends to terminate
its S Corporation status concurrently with the effective date of the Offerings.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires the use of estimates and assumptions by
management in determining the reported amounts of assets and liabilities,
disclosures of contingent liabilities at the date of the financial statements
and the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates. Reference is made to the
"Revenue Recognition" section of this footnote and Note 10 for discussion of
significant estimates reflected in the Company's consolidated financial
statements.
New Accounting Pronouncement
Effective January 1, 1996, the Company adopted Statement of Financial
Accounting Standards (SFAS) No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of." Accordingly, in
the event that facts and circumstances indicate that property and equipment or
other assets may be impaired, an evaluation of recoverability would be
performed. If an evaluation is required, the estimated future undiscounted cash
flows associated with the asset are compared to the asset's carrying amount to
determine if an impairment of such property is necessary. The effect of any
impairment would be to expense the difference between the fair value of such
property and its carrying value. Adoption of this standard did not have a
material effect on the consolidated financial position or results of operations
of the Company.
F-46
122
3. PROPERTY AND EQUIPMENT:
Property and equipment consists of the following (in thousands):
ESTIMATED DECEMBER 31,
USEFUL LIVES --------------------- SEPTEMBER 30,
IN YEARS 1995 1996 1997
------------ -------- -------- -------------
Transportation equipment ............... 3-5 $ 788 $ 1,031 $ 1,346
Machinery and equipment ................ 5 785 1,071 1,266
Leasehold improvements ................. 5-10 170 330 421
Furniture and fixtures ................. 5 591 901 1,439
Less -- Accumulated depreciation
and amortization ...................... (1,422) (1,658) (2,075)
-------- -------- --------
Property and equipment, net ....... $ 912 $ 1,675 $ 2,397
======== ======== ========
4. DETAIL OF CERTAIN BALANCE SHEET ACCOUNTS:
Activity in the Company's allowance for doubtful accounts receivable
consists of the following (in thousands):
YEAR ENDED
--------------------------------------------
DECEMBER 31,
-------------------------------- SEPTEMBER 30,
1994 1995 1996 1997
-------- -------- -------- -------------
Balance at beginning of period ................... $ 77 $ 128 $ 168 $ 432
Additions to/(reduction of) costs and
expenses ......................................... 51 40 158 (37)
-------- -------- -------- --------
Balance at end of period ......................... $ 128 $ 168 $ 326 $ 395
======== ======== ======== ========
Included as a component of other receivables at December 31, 1995, is a note
receivable from a corporation of $291,000 with interest at 10 percent per annum.
This note was collected during 1996.
Accounts payable and accrued expenses, trade consist of the following:
DECEMBER 31,
------------------------ SEPTEMBER 30,
1995 1996 1997
-------- -------- -------------
Accounts payable, trade ..................... $ 2,236 $ 4,922 $ 6,275
Accrued compensation and benefits ........... 1,608 3,423 1,017
Other accrued expenses ...................... 595 541 380
-------- -------- --------
$ 4,439 $ 8,886 $ 7,672
======== ======== ========
Electrical system installation contracts in progress are as follows:
DECEMBER 31,
------------------------- SEPTEMBER 30,
1995 1996 1997
-------- -------- -------------
Costs incurred on contracts in progress ............. $ 33,016 $ 55,954 $ 80,236
Estimated earnings, net of losses ................... 7,090 15,879 16,534
-------- -------- --------
40,106 71,833 96,770
Less -- Billings to date ............................. (41,721) (76,027) (97,152)
-------- -------- --------
$ (1,615) $ (4,194) $ (382)
======== ======== ========
Costs and estimated earnings in excess of
billings on uncompleted contracts ................. $ 131 $ 329 $ 1,584
Less -- Billings in excess of costs and
estimated earnings on uncompleted contracts ..... (1,746) (4,523) (1,966)
-------- -------- --------
$ (1,615) $ (4,194) $ (382)
======== ======== ========
5. LINE-OF-CREDIT DEBT:
The Company has a $2,000,000 line-of-credit agreement with a bank to be
drawn upon as needed, with variable interest at the bank's prime rate, as
defined, secured by accounts receivable, furniture, fixtures and equipment, an
assignment of a $500,000 life insurance policy on the president and the
president's personal guaranty. In June 1997, the line-of-credit agreement was
extended to
F-47
123
June of 1999. At September 30, 1997, there was an outstanding draw against this
line of credit in the amount of $400,000, which is due and payable within one
year.
The line-of-credit agreement with the bank contains various covenants
pertaining to working capital, certain financial ratios and net worth. At
September 30, 1997, the Company was in compliance with all such covenants.
LONG-TERM DEBT
Long-term debt consists primarily of capital leases for the purchase of
vehicles and construction equipment as discussed in Note 6.
The Company has a term note payable with a bank, secured by a Company
vehicle. The principal is payable monthly in the amount of $1,000 plus interest
at 9.75 percent. At December 31, 1996 and September 30, 1997, a balance of
$5,000 and $0 was due and payable within one year, respectively.
The Company has an obligation to a related party for the purchase of the
rights to the name "Regional Electric Systems" requiring monthly payments of
principal and interest, at 8.25 percent, of $6,000 through May 1999. At December
31, 1996 and September 30, 1997, a balance of $60,000 and $63,000 was due and
payable within one year, respectively.
The maturities of the line of credit and long-term debt as of September 30,
1997, are as follows (in thousands):
Year ending September 30--
1998 .............................. $ 643
1999 .............................. 143
2000 .............................. 26
--------
$ 812
========
6. LEASES:
Obligations Under Capital Leases
The Company leases certain vehicles and construction equipment under leases
classified as capital leases. The construction equipment lease is with an
officer of the Company. The following is a schedule showing the future minimum
lease payments under capital leases by years and the present value of the
minimum lease payments as of September 30, 1997 (in thousands):
Year ending September 30--
1998 ................................................ $ 212
1999 ................................................ 103
2000 ................................................ 5
--------
Total minimum lease payments ................ 320
Less -- Amounts representing interest ................. 17
--------
Present value of minimum lease payments ..... $ 303
========
Operating Leases
The Company leases a building which is owned by the principal stockholder of
the Company. The lease is classified as an operating lease and expires on
October 31, 1997. The rent paid under this related-party lease was approximately
$156,000, $156,000, $156,000 and $57,000 for the years ended December 31, 1995,
1996 and September 30, 1997 and for the period from October 1, 1997 through
January 30, 1998, respectively. The Company also leases a building which is
owned by an officer of the Company. This lease commenced during 1996. The lease
is classified as an operating lease and expires on May 31, 1999. The Company has
an option to renew the lease for one additional two-year term at a reduced lease
rate. The rent paid under this related-party lease was approximately $60,000 for
the year ended September 30, 1997. The Company also rents certain office
equipment and warehouse space under several operating lease agreements which
vary in length and terms. The rent paid under these lease agreements was
approximately $8,000, $45,000, $49,000 and $20,000 for the years ended December
31, 1995, 1996 and September 30, 1997 and for the period from October 1, 1997
through January 30, 1998, respectively.
F-48
124
Future minimum lease payments under these noncancelable operating leases are
as follows (in thousands):
Year Ended September 30--
1998 .............................. $ 138
1999 .............................. 67
2000 .............................. 38
Thereafter ........................ 71
--------
$ 314
========
7. RELATED-PARTY TRANSACTIONS:
The Company has entered into operating and capital lease transactions with
related parties as discussed in Note 6.
CIMA Services, Inc. (CIMA) and RES are related parties due to the ownership
by the Company's president of 49% and 1%, respectively, of these companies'
capital stock.
The related-party transactions and balances are as follows (in thousands):
DECEMBER 31,
------------------------ SEPTEMBER 30,
1995 1996 1997
-------- -------- -------------
Accounts receivable from CIMA .............................. $ 2 $ 208 $ 632
Accounts receivable from sale of subsidiary stock .......... -- -- 71
Interest receivable from CIMA and officer .................. 1 -- --
Accounts payable to CIMA ................................... 23 633 --
Contract revenues from CIMA ................................ 1,116 1,257 1,368
Purchases of material from CIMA ............................ 812 1,080 2,062
Interest income received from CIMA and officers ............ 38 14 1
Minority interest in net income of RES ..................... -- 3 (2)
Liability attributable to minority interest ................ -- 3 75
Capital lease obligation to an officer of RES .............. -- 116 82
Payments under capital lease obligation with
an officer of RES ......................................... -- 31 54
Payments under operating leases with officers
of the Company ............................................ 26 232 270
Contract revenues from CIMA were approximately $250,000 and payments under
operating leases with officers of the Company were approximately $78,000 for the
period from October 1, 1997 through January 30, 1998. Additionally, the Company
has guaranteed an officer note at a bank with an outstanding balance of
approximately $125,000 at September 30, 1997. The Company's property and
equipment has been cross-pledged as collateral.
8. EMPLOYEE BENEFIT PLAN:
The Company has a defined contribution profit-sharing plan that covers all
employees meeting certain age and service requirements. Company contributions to
the plan are at the discretion of the board of directors. Contributions to the
plan charged to operations in 1994, 1995, 1996 and the year ended September 30,
1997 and for the period from October 1, 1997 through January 30, 1998 were
$186,000, $450,000, $789,000, $789,000 and $275,000, respectively.
9. FINANCIAL INSTRUMENTS:
The Company's financial instruments consist of cash and cash equivalents,
accounts receivable, accounts payable, a line of credit, notes payable and
long-term debt. The Company believes that the carrying values of these
instruments on the accompanying consolidated balance sheets approximates their
fair values.
10. COMMITMENTS AND CONTINGENCIES:
Litigation
The Company is involved in disputes or legal actions arising in the ordinary
course of business. Management does not believe the outcome of such legal
actions will have a material adverse effect on the Company's consolidated
financial position or results of operations.
F-49
125
Insurance
The Company carries a broad range of insurance coverage, including workers'
compensation, business auto liability, commercial general liability, property
and an umbrella policy. The Company has not incurred significant uninsured
losses on any of these items.
11. MAJOR CUSTOMERS AND RISK CONCENTRATION:
The Company had sales greater than 10 percent of total sales to three major
customers (comprising approximately 20%, 12% and 11% of total sales), two major
customers (comprising approximately 15% and 13% of total sales), two major
customers (comprising approximately 20% and 18% of total sales) and one major
customer (comprising approximately 32% of total sales) during the years ended
December 31, 1994, 1995, 1996 and September 1997, respectively. The Company did
not have sales greater than 10 percent of total sales to any one customer during
the period from October 1, 1997 through January 30, 1998.
In addition, the Company grants credit, generally without collateral, to its
customers, which are usually general contractors located primarily in the
Dallas-Fort Worth, Texas area. Consequently, the Company is subject to potential
credit risk related to changes in business and economic factors within the
Dallas-Fort Worth, Texas, area. However, management believes that its contract
acceptance, billing and collection policies are adequate to minimize the
potential credit risk.
Cash and Cash Equivalents
The Company routinely maintains cash balances in financial institutions in
excess of federally insured limits.
12. BACKCHARGE CLAIMS:
It is the Company's policy to recognize income from backcharge claims only
when a definitive agreement has been reached and collection is reasonably
assured. In December 1996, the Company reached a settlement on one of its
backcharge claims related to prior periods for approximately $856,000 which is
reflected in the accompanying consolidated statement of operations for the year
ended December 31, 1996, as an increase in revenues and as a component of other
receivables in the accompanying consolidated balance sheet at December 31, 1996.
This amount was collected in 1997.
F-50
126
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To BW Consolidated, Inc. and Subsidiaries:
We have audited the accompanying consolidated balance sheets of BW
Consolidated, Inc., a Texas corporation, and Subsidiaries as of December 31,
1995 and 1996 and September 30, 1997, and the related consolidated statements of
operations, cash flows and stockholders' equity for each of the three years in
the period ended December 31, 1996 and for the year ended September 30, 1997 and
for the period from October 1, 1997 through January 30, 1998. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of BW Consolidated, Inc. and
Subsidiaries as of December 31, 1995 and 1996 and September 30, 1997, and the
results of their operations and their cash flows for each of the three years in
the period ended December 31, 1996 and for the year ended September 30, 1997 and
for the period from October 1, 1997 through January 30, 1998, in conformity with
generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Houston, Texas
September 11, 1998
F-51
127
BW CONSOLIDATED, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE INFORMATION)
ASSETS
DECEMBER 31,
------------------------- SEPTEMBER 30,
1995 1996 1997
-------- -------- -------------
CURRENT ASSETS:
Cash and cash equivalents .......................................... $ 1,180 $ 507 $ 1,275
Accounts receivable--
Trade, net of allowance of $82, $119 and $124, respectively ..... 3,178 4,718 4,835
Retainage ....................................................... 471 768 601
Other receivables ............................................... 62 53 71
Notes receivable from stockholders ................................. 42 -- --
Inventories, net of allowance of $24, $29,
$28 and $28, respectively ....................................... 461 557 541
Costs and estimated earnings in excess of billings ................. 186 182 224
Prepaid expenses and other current assets .......................... 5 10 29
-------- -------- --------
Total current assets ....................................... 5,585 6,795 7,576
PROPERTY AND EQUIPMENT, net .......................................... 3,925 4,609 5,206
NOTE RECEIVABLE FROM STOCKHOLDERS, net of current portion ............ 470 -- --
OTHER ASSETS ......................................................... 21 27 49
-------- -------- --------
Total assets ............................................... $ 10,001 $ 11,431 $ 12,831
======== ======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current maturities of long-term debt ............................... $ 214 $ 94 $ 96
Accounts payable and accrued expenses .............................. 2,318 2,131 2,400
Income taxes payable ............................................... 130 166 --
Billings in excess of costs and estimated
earnings ........................................................ 606 749 840
-------- -------- --------
Total current liabilities .................................. 3,268 3,140 3,336
-------- -------- --------
LONG-TERM DEBT, net of current maturities ............................ 951 861 842
DEFERRED TAXES ....................................................... 180 -- --
COMMITMENTS AND CONTINGENCIES
MINORITY INTEREST IN CONSOLIDATED SUBSIDIARY ......................... -- 209 1,302
STOCKHOLDERS' EQUITY:
Common stock, $1 par value, 2,000,000, 500,000, 500,000 and
500,000 shares authorized, respectively; 31,598, 20,000,
20,000 and 20,000 shares issued and outstanding, respectively.... 32 20 20
Additional paid-in capital ......................................... 566 205 205
Retained earnings .................................................. 5,965 6,996 7,126
Treasury stock, 5,088 shares, at cost .............................. (961) -- --
-------- -------- --------
Total stockholders' equity ................................. 5,602 7,221 7,351
-------- -------- --------
Total liabilities and stockholders' equity ................ $ 10,001 $ 11,431 $ 12,831
======== ======== ========
The accompanying notes are an integral part of these consolidated
financial statements.
F-52
128
BW CONSOLIDATED, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS)
NINE MONTHS
ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
------------------------------------------ -------------------------
1994 1995 1996 1996 1997
-------- -------- -------- -------- --------
(UNAUDITED)
REVENUES .................................... $ 23,168 $ 27,730 $ 33,023 $ 24,994 $ 24,136
COST OF SERVICES (including
depreciation) ............................. 17,967 20,964 25,017 18,909 18,868
-------- -------- -------- -------- --------
Gross profit ....................... 5,201 6,766 8,006 6,085 5,268
SELLING, GENERAL AND
ADMINISTRATIVE EXPENSES ................... 3,091 3,637 3,686 2,713 2,793
-------- -------- -------- -------- --------
Income from operations ............. 2,110 3,129 4,320 3,372 2,475
-------- -------- -------- -------- --------
OTHER INCOME (EXPENSE):
Interest expense .......................... (135) (120) (97) (73) (84)
Other ..................................... 97 263 174 137 158
-------- -------- -------- -------- --------
Other income (expense), net ........ (38) 143 77 64 74
-------- -------- -------- -------- --------
NET INCOME BEFORE INCOME TAX
AND MINORITY INTEREST ..................... 2,072 3,272 4,397 3,436 2,549
INCOME TAX EXPENSE (BENEFIT) ................ 772 1,238 (28) (67) 33
-------- -------- -------- -------- --------
NET INCOME BEFORE MINORITY
INTEREST .................................. 1,300 2,034 4,425 3,503 2,516
MINORITY INTEREST EXPENSE ................... -- -- 250 203 269
-------- -------- -------- -------- --------
NET INCOME .................................. $ 1,300 $ 2,034 $ 4,175 $ 3,300 $ 2,247
======== ======== ======== ======== ========
PERIOD FROM
OCTOBER 1,
1997
YEAR ENDED THROUGH
SEPTEMBER 30, JANUARY 30,
1997 1998
------------- ------------
REVENUES .................................... $ 32,165 $ 11,208
COST OF SERVICES (including
depreciation) ............................. 24,976 6,908
-------- --------
Gross profit ....................... 7,189 4,300
SELLING, GENERAL AND
ADMINISTRATIVE EXPENSES ................... 3,766 3,277
-------- --------
Income from operations ............. 3,423 1,023
-------- --------
OTHER INCOME (EXPENSE):
Interest expense .......................... (108) (18)
Other ..................................... 195 54
-------- --------
Other income (expense), net ........ 87 36
-------- --------
NET INCOME BEFORE INCOME TAX
AND MINORITY INTEREST ..................... 3,510 1,059
INCOME TAX EXPENSE (BENEFIT) ................ 72 --
-------- --------
NET INCOME BEFORE MINORITY
INTEREST .................................. 3,438 1,059
MINORITY INTEREST EXPENSE ................... 316 232
-------- --------
NET INCOME .................................. $ 3,122 $ 827
======== ========
The accompanying notes are an integral part of these consolidated
financial statements.
F-53
129
BW CONSOLIDATED, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
PERIOD FROM
OCTOBER 1,
NINE MONTHS ENDED 1997
YEAR ENDED DECEMBER 31, SEPTEMBER 30, YEAR ENDED THROUGH
----------------------------- ----------------- SEPTEMBER 30, JANUARY 30,
1994 1995 1996 1996 1997 1997 1998
------- ------- ------- ------- ------- ------------- -----------
(UNAUDITED)
CASH FLOWS FROM OPERATING
ACTIVITIES:
Net income ....................................... $ 1,300 $ 2,034 $ 4,175 $ 3,300 $ 2,247 $ 3,122 $ 827
Adjustments to reconcile net income to
net cash provided by operating
activities --
Depreciation and amortization .................. 292 329 426 296 404 534 185
Loss (gain) on sale of property and
equipment .................................... 9 (54) (17) (19) (5) (3) 2
Deferred tax benefit ........................... -- -- (180) (180) -- -- --
Minority interest expense ...................... -- -- 250 203 269 316 232
Changes in operating assets and liabilities --
(Increase) decrease in--
Accounts receivable........................... (459) (244) (1,828) (1,115) 50 (663) 432
Inventories .................................. (7) 131 (96) (109) 16 29 (104)
Costs and estimated earnings in excess
of billings on uncompleted contracts ....... 80 (13) 4 (194) (42) 156 104
Prepaid expenses and other current assets .... (3) 4 (5) (5) (19) (19) 15
Increase (decrease) in --
Accounts payable and accrued expenses ........ (153) 141 (187) 222 269 (140) (189)
Billings in excess of costs and estimated
earnings on uncompleted contracts .......... (51) 282 143 200 91 34 263
Other current liabilities .................... 34 41 36 (18) (166) (112) --
------- ------- ------- ------- ------- ------- -------
Net cash provided by operating activities .. 1,042 2,651 2,721 2,581 3,114 3,254 1,767
------- ------- ------- ------- ------- ------- -------
CASH FLOWS FROM INVESTING
ACTIVITIES:
Proceeds from sale of property and
equipment ...................................... 4 141 66 63 20 23 87
Stockholder receivable ........................... -- (512) 512 512 -- -- --
Other assets ..................................... 1 (3) (6) 3 (22) (31) 7
Additions of property and equipment .............. (485) (1,001) (1,160) (984) (892) (1,068) (411)
------- ------- ------- ------- ------- ------- -------
Net cash used in investing activities ...... (480) (1,375) (588) (406) (894) (1,076) (317)
------- ------- ------- ------- ------- ------- -------
CASH FLOWS FROM FINANCING
ACTIVITIES:
Borrowings of short-term debt ................... 643 515 1,832 632 800 2,000 932
Borrowings of long-term debt .................... -- -- 10 24 39 25 1,099
Repayments of short-term debt ................... (643) (515) (1,832) (632) (800) (2,000) --
Repayments of long-term debt .................... (377) (310) (219) (200) (198) (217) (941)
Stockholder distributions ....................... -- (32) (2,556) (2,222) (2,117) (2,451) (3,645)
Stockholder contributions ....................... -- -- -- -- -- -- 21
Minority interest contributions ................. -- -- 85 85 935 935 316
Minority interest distributions ................. -- -- (126) (72) (111) (165) (137)
Purchase of treasury stock ...................... -- (961) -- -- -- -- --
------- ------- ------- ------- ------- ------- -------
Net cash used in financing activities ..... (377) (1,303) (2,806) (2,385) (1,452) (1,873) (2,355)
------- ------- ------- ------- ------- ------- -------
NET INCREASE (DECREASE) IN CASH
AND CASH EQUIVALENTS ............................ 185 (27) (673) (210) 768 305 (905)
CASH AND CASH EQUIVALENTS,
beginning of period ............................. 1,022 1,207 1,180 1,180 507 970 1,275
------- ------- ------- ------- ------- ------- -------
CASH AND CASH EQUIVALENTS, end of
period .......................................... $ 1,207 $ 1,180 $ 507 $ 970 $ 1,275 $ 1,275 $ 370
======= ======= ======= ======= ======= ======= =======
SUPPLEMENTAL DISCLOSURE OF CASH
FLOW INFORMATION
Cash paid for --
Interest ...................................... $ 137 $ 119 $ 97 $ 73 $ 84 $ 108 $ 13
Income taxes .................................. $ 744 $ 1,197 $ 132 $ 128 $ 198 $ 202 $ --
The accompanying notes are an integral part of these consolidated
financial statements.
F-54
130
BW CONSOLIDATED, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE INFORMATION)
COMMON STOCK ADDITIONAL TOTAL
-------------------- PAID-IN RETAINED TREASURY STOCKHOLDERS'
SHARES AMOUNT CAPITAL EARNINGS STOCK EQUITY
------- ------- ------- -------- -------- -------------
BALANCE, December 31, 1993 ............. 31,151 $ 31 $ 512 $ 2,663 $ -- $ 3,206
Sale of common stock ................. 261 1 30 -- -- 31
Net income ........................... -- -- -- 1,300 -- 1,300
------- ------- ------- ------- ------- -------
BALANCE, December 31, 1994 ............. 31,412 32 542 3,963 -- 4,537
Sale of common stock ................. 186 -- 24 -- -- 24
Net income ........................... -- -- -- 2,034 -- 2,034
Dividends paid ....................... -- -- -- (32) -- (32)
Purchase of treasury stock ........... -- -- -- -- (961) (961)
------- ------- ------- ------- ------- -------
BALANCE, December 31, 1995 ............. 31,598 32 566 5,965 (961) 5,602
Shares retired upon merger ........... (26,510) (27) 154 (127) -- --
Treasury stock canceled .............. (5,088) (5) (515) (441) 961 --
Shares issued ........................ 1,000 10 -- (10) -- --
Stock split 20 to 1 and
recapitalization (Note 1) ........ 19,000 10 -- (10) -- --
Distributions to stockholders ........ -- -- -- (2,556) -- (2,556)
Net income ........................... -- -- -- 4,175 -- 4,175
------- ------- ------- ------- ------- -------
BALANCE, December 31, 1996 ............. 20,000 20 205 6,996 -- 7,221
Distributions to stockholders
(unaudited) ....................... -- -- -- (2,117) -- (2,117)
Net income (unaudited) ............... -- -- -- 2,247 -- 2,247
------- ------- ------- ------- ------- -------
BALANCE, September 30, 1997 ............ 20,000 20 205 7,126 -- 7,351
Stockholder contributions ............ -- -- 21 -- -- 21
Distributions to stockholders ........ -- -- -- (4,884) -- (4,884)
Net income ........................... -- -- -- 827 -- 827
------- ------- ------- ------- ------- -------
BALANCE, January 30, 1998 .............. 20,000 $ 20 $ 226 $ 3,069 $ -- $ 3,315
======= ======= ======= ======= ======= =======
The accompanying notes are an integral part of these consolidated
financial statements.
F-55
131
BW CONSOLIDATED, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BUSINESS, ORGANIZATION AND BASIS OF PRESENTATION:
BW Consolidated, Inc. (the Company), a Nevada S Corporation, and
Subsidiaries, two of which are Texas limited partnerships, focuses on providing
electrical system installation and repair services primarily for residential and
mid-sized to large commercial facilities. The Company performs the majority of
its contract work under fixed-price contracts with contract terms generally
ranging from three to 24 months. The Company performs the majority of its work
in Texas.
In January 1996, the original parent company, Bexar Enterprises, Inc., a
Nevada C Corporation, was merged with BW Investments, Inc., Bexar Electric
Company, Inc., and Calhoun Electric Company, Inc., all wholly owned
subsidiaries. The survivor of the merger was Calhoun Electric Company, Inc., a
Texas S Corporation, and its 90 percent owned subsidiary, Bexar Electric
Company, Ltd. (BEC), a Texas limited partnership. The 10 percent minority
interest in the partnership was purchased by employees of Bexar Electric
Company, Ltd. An additional 10 percent minority interest in Bexar Electric
Company, Ltd. (a Texas limited partnership), was purchased by employees of the
Company in January 1997.
In May 1997, Calhoun Electric Company, Inc., a Texas S Corporation,
transferred its assets and liabilities to Calhoun Electric Company, Ltd. (CEC),
a Texas limited partnership. Subsequent to this transfer, Calhoun Electric
Company, Inc., a Texas S Corporation, reorganized as a Nevada S Corporation and
changed its name to BW Consolidated, Inc.
The accompanying financial statements present BW Consolidated, Inc. (and its
predecessors), together with its majority-owned subsidiaries on a consolidated
basis. All significant intercompany activity has been eliminated in
consolidation. Additionally, minority interests in subsidiaries of BW
Consolidated, Inc. have been reflected as "Minority Interest in Consolidated
Subsidiary" in the accompanying consolidated financial statements.
On January 30, 1998, concurrent with the closing of the initial public
offerings in the United States and Canada and outside the United States and
Canada (the Offerings) of additional common stock by Integrated Electrical
Services, Inc. (IES), the Company was acquired by IES. All outstanding shares of
the Company's common stock were exchanged for cash and shares of IES common
stock. In addition, the key executives of the Company entered into employment
agreements with the Company and IES which have an initial term of five years,
and generally restrict the disclosure of confidential information as well as
restrict competition with the Company and IES for a period of two years
following termination of employment. Additionally, in October 1997, the majority
shareholder of the Company transferred 15 percent of its interest in CEC to a
former shareholder of Calhoun Electric Company, Inc. and current employee of
CEC. The Company has changed from a calendar to a September fiscal year.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Interim Financial Information
The interim financial statements for the nine months ended September 30,
1996 and 1997, are unaudited and have been prepared pursuant to the rules and
regulations of the Securities and Exchange Commission. Accordingly, they do not
include all of the information and footnotes required by generally accepted
accounting principles for complete financial statements. In the opinion of the
Company's management, the unaudited interim financial statements contain all
adjustments (consisting of normal recurring adjustments) considered necessary
for a fair presentation. The results of operations for the interim periods are
not necessarily indicative of the results for the entire fiscal year.
The financial statements for the period from October 1, 1997 through January
30, 1998 are presented for purposes of complying with certain reporting
requirements of the Securities and Exchange Commission's Staff Accounting
Bulletin No. 80 and are not necessarily indicative of the results to be expected
for the entire year.
F-56
132
Cash and Cash Equivalents
The Company considers all highly liquid debt instruments with an original
maturity of three months or less when purchased to be cash equivalents.
Supplemental Cash Flow Information (in thousands)
The Company had the following noncash investing and financing activities for
the years ended December 31, 1994, 1995, 1996, and for the year ended September
30, 1997, the nine months ended September 30, 1996 and 1997 and the period from
October 1, 1997 through January 30, 1998:
PERIOD FROM
NINE MONTHS OCTOBER 1,
SEPTEMBER 1997
YEAR ENDED 30, THROUGH
SEPTEMBER 30, ------------------- JANUARY 30,
1994 1995 1996 1997 1996 1997 1998
------- ------- ------- ------------- ------ ------- -------
(UNAUDITED)
Property and equipment purchased with
direct financing .......................... $ -- $ 25 $ -- $ 141 $ -- $ 141 $ --
Like-kind exchange of equipment ............. -- 15 6 6 -- 6 --
Employee Stock Option Plan contribution
through stock distribution ................ 30 25 -- -- -- -- --
Exchange of property and equipment for
note receivable ........................... -- -- -- 18 -- 18 --
Land distribution ........................... -- -- -- -- -- -- 2,205
Debt distribution ........................... -- -- -- -- -- -- (966)
Inventories
Inventories consist of parts and supplies held for use in the ordinary
course of business and are stated at the lower of cost or market using the
average cost method.
Property and Equipment
Property and equipment are stated at cost, and depreciation is computed
using the straight-line method over the estimated useful lives of the assets.
Leasehold improvements are capitalized and amortized over the lesser of the life
of the lease or the estimated useful life of the asset.
Expenditures for repairs and maintenance are charged to expense when
incurred. Expenditures for major renewals and betterments, which extend the
useful lives of existing equipment, are capitalized and depreciated. Upon
retirement or disposition of property and equipment, the cost and related
accumulated depreciation are removed from the accounts and any resulting gain or
loss is recognized in the consolidated statements of operations.
Revenue Recognition
The Company recognizes revenue when services are performed except when work
is being performed under a construction contract. Revenues from construction
contracts are recognized on the percentage-of-completion method measured by the
percentage of costs incurred to date to total estimated costs for each contract.
Such contracts generally provide that the customers accept completion of
progress to date and compensate the Company for services rendered measured in
terms of hours expensed or some other measure of progress. Contract costs
include all direct material and labor costs and those indirect costs related to
contract performance, such as indirect labor, supplies, tools, repairs and
depreciation costs. Provisions for the total estimated losses on uncompleted
contracts are made in the period in which such losses are determined. Changes in
job performance, job conditions, estimated profitability and final contract
settlements may result in revisions to costs and income and their effects are
recognized in the period in which the revisions are determined. An amount equal
to contract costs attributable to claims is included in revenues when
realization is probable and the amount can be reliably estimated.
F-57
133
The balances billed but not paid by customers pursuant to retainage
provisions in construction contracts will be due upon completion of the
contracts and acceptance by the customer. Based on the Company's experience with
similar contracts in recent years, the retention balance at each balance sheet
date will be collected within the subsequent fiscal year.
The current asset, "Costs and estimated earnings in excess of billings on
uncompleted contracts," represents revenues recognized in excess of amounts
billed. The current liability, "Billings in excess of costs and estimated
earnings on uncompleted contracts,"' represents billings in excess of revenues
recognized.
Warranty Costs
The Company warrants labor for the first year after installation of new
electrical systems and servicing of existing electrical systems. A reserve for
warranty costs is recorded based upon the historical level of warranty claims
and management's estimate of future costs.
Provision for Doubtful Accounts
The Company provides an allowance for doubtful accounts based upon the
specific identification of accounts receivable where collection is no longer
probable.
Income Taxes
The Company has elected S Corporation status effective January 1, 1996, as
defined by the Internal Revenue Code, whereby the Company itself is not subject
to taxation for federal purposes. Under S Corporation status, the stockholders
report their share of the Company's taxable earnings or losses in their personal
tax returns. Consequently, the accompanying financial statements of the Company
do not include a provision for current or deferred income taxes (see Note 7).
The Company intends to terminate its S Corporation status concurrently with the
effective date of the Offerings (see Note 1).
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires the use of estimates and assumptions by
management in determining the reported amounts of assets and liabilities,
disclosures of contingent liabilities at the date of the financial statements
and the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates. Reference is made to the
"Revenue Recognition" section of this footnote and Note 10 for discussion of
significant estimates reflected in the Company's financial statements.
New Accounting Pronouncements
Effective January 1, 1996, the Company adopted Statement of Financial
Accounting Standards (SFAS) No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of." Accordingly, in
the event that facts and circumstances indicate that property and equipment or
other assets may be impaired, an evaluation of recoverability would be
performed. If an evaluation is required, the estimated future undiscounted cash
flows associated with the asset are compared to the asset's carrying amount to
determine if an impairment of such property is necessary. The effect of any
impairment would be to expense the difference between the fair value of such
property and its carrying value. Adoption of this standard did not have a
material effect on the consolidated financial position or results of operations
of the Company.
F-58
134
3. PROPERTY AND EQUIPMENT:
Property and equipment consists of the following (in thousands):
ESTIMATED
USEFUL LIVES DECEMBER 31, SEPTEMBER 30,
IN YEARS 1995 1996 1997
------------ ------- ------- -------------
Transportation equipment .................... 10 $ 2,783 $ 3,446 $ 3,953
Machinery and equipment ..................... 5-10 709 673 684
Land and buildings .......................... 40 2,592 2,592 2,941
Furniture, fixtures and office
equipment ................................. 3-15 680 926 965
------- ------- -------
6,764 7,637 8,543
Less -- Accumulated depreciation and
amortization .............................. (2,839) (3,028) (3,337)
------- ------- -------
Property and equipment, net ............ $ 3,925 $ 4,609 $ 5,206
======= ======= =======
4. DETAIL OF CERTAIN CONSOLIDATED BALANCE SHEET ACCOUNTS:
Activity in the Company's allowance for doubtful accounts receivable
consists of the following (in thousands):
DECEMBER 31,
---------------------- SEPTEMBER 30,
1995 1996 1997
-------- -------- -------------
Balance at beginning of period .................................. $ 80 $ 82 $ 105
Additions to costs and expenses ................................. 27 127 49
Deductions for uncollectible receivables written off and
recoveries .................................................... (25) (90) (30)
-------- -------- --------
Balance at end of period ........................................ $ 82 $ 119 $ 124
======== ======== ========
Accounts payable and accrued expenses consist of the following (in
thousands):
DECEMBER 31,
--------------------- SEPTEMBER 30,
1995 1996 1997
-------- -------- -------------
Accounts payable, trade .............................. $ 1,134 $ 1,191 $ 1,441
Wages ................................................ 700 407 470
Insurance ............................................ 238 146 83
Contract costs ....................................... 141 207 208
Warranty reserve ..................................... 83 99 97
Other ................................................ 22 81 101
-------- -------- --------
Total accounts payable and accrued
expenses ................................. $ 2,318 $ 2,131 $ 2,400
======== ======== ========
Electrical system installation contracts in progress are as follows (in
thousands):
DECEMBER 31,
---------------------- SEPTEMBER 30,
1995 1996 1997
-------- -------- -------------
Amended contract amount ............................... $ 15,945 $ 18,918 $ 16,983
Revenue recognized to date ............................ 7,953 11,105 8,663
-------- -------- --------
Unearned contract amount, backlog ..................... $ 7,992 $ 7,813 8,320
======== ======== ========
Costs incurred on uncompleted contracts ............... $ 5,647 $ 8,298 6,433
Estimated earnings .................................... 2,306 2,807 2,230
-------- -------- --------
Total contract revenue earned to date ....... 7,953 11,105 8,663
Less-- Billings to date ............................... 8,403 11,711 9,278
-------- -------- --------
Net overbilled open contracts ......................... (450) (606) (615)
Unbilled completed contracts .......................... 30 39 (1)
-------- -------- --------
$ (420) $ (567) $ (616)
======== ======== ========
Costs and estimated earnings in excess of
billings ............................................ $ 186 $ 182 $ 224
Billings in excess of costs and estimated
earnings ............................................ (606) (749) (840)
-------- -------- --------
$ (420) $ (567) $ (616)
======== ======== ========
F-59
135
5. LONG-TERM DEBT:
Long-term debt consists of the following (in thousands):
DECEMBER 31,
------------------- SEPTEMBER 30,
1995 1996 1997
------- ------- -------------
Note payable to a bank, interest at prime plus .75
percent (prime rate at 8.50 percent at September 30,
1997, principal and interest due monthly of $10
maturing in March 2004, secured by certain real
estate ........................................................ $ 678 $ 632 $ 586
Note payable to a corporation, interest at 7 percent,
principal and interest due monthly of $2 maturing in
July 2004, secured by certain real estate ..................... 140 128 --
Note payable to a bank, interest at prime, principal
and interest due monthly of $3, maturing in November
2003, secured by certain real estate .......................... 205 190 179
Note payable to a bank, interest at prime plus .75
percent, principal and interest due monthly of $2
maturing in February 2007, secured by real estate ............. -- -- $ 173
Notes payable to manufacturers, interest at 7.9
percent, principal and interest due monthly of $3,
maturing in December 1996 and May 1997, secured by
certain equipment ............................................. 43 5 --
Notes payable to a bank, interest at 8.25 percent,
principal and interest due monthly of $6, maturing
in July and October 1996, secured by certain
vehicles and equipment ........................................ 50 -- --
Various notes payable to a bank, interest ranging from
7.9 percent to 8.25 percent, principal and interest
due monthly of $7, maturing in July through November
1996, secured by certain vehicles, machinery and
office equipment .............................................. 49 -- --
------- ------- -------
Total debt ............................................ 1,165 955 938
Less-- current maturities ....................................... 214 94 96
------- ------- -------
Long-term debt less current maturities .......................... $ 951 $ 861 $ 842
======= ======= =======
The maturities of long-term debt at September 30, 1997, are as follows (in
thousands):
1998 .................... $ 96
1999 .................... 112
2000 .................... 116
2001 .................... 126
2002 .................... 138
Thereafter .............. 350
-------
$ 938
=======
The Company had two lines of credit. The first line of credit for $750,000,
secured by BEC accounts receivable, inventory and equipment, requires monthly
payments of interest at 1 percent over the prime rate. At December 31, 1995 and
1996 and at September 30, 1997, respectively, there were no advances outstanding
against the line and the full $750,000 was available. The note maturity date was
April 1998. The second line of credit for $500,000, secured by CEC accounts
receivable, inventory, equipment and trucks, requires monthly payments of
interest at 1/2 percent over the prime rate. During the 1997, this line of
credit agreement was renewed and was increased from $300,000 to $500,000. At
December 31, 1995 and 1996, respectively, there were no advances outstanding
against the line and the full $300,000 was available. At September 30, 1997,
there was no advance outstanding against the line and the full $500,000 was
available. The note maturity date was May 1998.
The Company had an irrevocable letter of credit from a bank in the amount of
$199,000 in favor of the Company's workers' compensation carrier. The expiration
date was July 1, 1997. Security for this letter of credit consisted of the
assignment of $125,000 in certificates of deposit and a second lien on real
estate of the Company, and the personal guarantee of the major stockholder.
All of the long-term debt of the Company was paid off with the proceeds from
the initial public offering of IES concurrent with the acquisition of the
Company by IES. None of the debt instruments have been renewed.
F-60
136
6. LEASES:
The Company leased undeveloped property from the majority stockholder for
storage of equipment and trailers. The lease was entered into on July 1, 1994,
and expired on June 30, 1997, and was on a month-to-month basis. The
consideration for this lease was $8,000, $17,000, $19,000, $15,000 and $7,000
for the years ended December 31, 1994, 1995, 1996 and September 30, 1997 and the
period from October 1, 1997 through January 30, 1998, respectively.
7. INCOME TAXES (IN THOUSANDS):
Federal and state income taxes are as follows:
YEAR ENDED
DECEMBER 31,
-------------------
1994 1995
------- -------
Federal --
Current ............... $ 663 $ 1,118
Deferred .............. 26 (45)
State --
Current ............... 83 157
Deferred .............. -- 8
------- -------
$ 772 $ 1,238
======= =======
Actual income tax expense differs from income tax expense computed by
applying the U.S. federal statutory corporate rate of 34% to income before
provision for income taxes as follows:
YEAR ENDED
DECEMBER 31,
-------------------
1994 1995
------- -------
Provision at the statutory rate .......................... $ 704 $ 1,112
State income tax, net of benefit for federal deduction.... 54 107
Other .................................................... 14 19
------- -------
$ 772 $ 1,238
======= =======
Deferred income tax provisions result from temporary differences in the
recognition of income and expenses for financial reporting purposes and for tax
purposes. The tax effects of these temporary differences, representing deferred
tax assets and liabilities, result principally from the following:
DECEMBER 31,
1995
------------
Deferred income tax assets --
Allowance for bad debt .............................. $ 4
Accrued liabilities and expenses .................... 122
-------
Total deferred income tax asset ............. 126
-------
Deferred income tax liabilities --
Property and equipment .............................. (306)
-------
Total deferred income tax liability ......... (306)
-------
Net deferred income tax liability ........... $ (180)
=======
The net deferred tax assets and liabilities are comprised of the following:
DECEMBER 31,
1995
------------
Deferred tax assets --
Current .............................. $ 126
Long-term ............................ --
-------
Total ........................ $ 126
=======
Deferred tax liabilities --
Current .............................. $ --
Long-term ............................ (306)
-------
Total ........................ $ (306)
=======
F-61
137
Effective January 1, 1996, the Company elected S Corporation status for
Calhoun Electric and partnership status for Bexar Electric. The Company will no
longer be directly responsible for any deferred tax liability which might exist.
The removal of the deferred tax liability which existed as of December 31, 1995,
is recognized in the 1996 consolidated statement of operations (see Note 2).
8. RELATED-PARTY TRANSACTIONS:
Notes receivable from a stockholder consists of the following (in
thousands):
DECEMBER 31,
------------------- SEPTEMBER 30,
1995 1996 1997
------- ------- -------------
Note receivable, secured by a second lien on
real estate, interest at 7.5 percent, payable in 60 quarterly
installments of $3 ...................................................... $ 107 $ -- $ --
Note receivable, unsecured, interest at 7.45 percent,
payments due annually in January of 15 percent of
principal plus accrued interest, balance due in January
2000 .................................................................... 405 -- --
------- ------- -------
Total notes receivable from a stockholder ....................... 512 -- --
Current portion ........................................................... 42 -- --
------- ------- -------
Noncurrent portion ........................................................ $ 470 $ -- $ --
======= ======= =======
The Company recognized interest income from a stockholder of $0, $30,000,
$13,000, $5,000 and $0, in 1994, 1995, 1996 and for the year ended September
30, 1997 and for the period from October 1, 1997 through January 30, 1998,
respectively.
9. EQUITY:
In 1991, the Company adopted an employee stock ownership plan (ESOP) for the
benefit of the Company's employees. The plan covered substantially all employees
of the Company. The Company's contributions to the plan are at the discretion of
the board of directors, but may not exceed the maximum allowable deduction
permitted under the Internal Revenue Code at the time of the contribution. Under
this ESOP plan, employees cannot make contributions to the plan. The Company
made a contribution of $35,000 and $25,000 in 1994 and 1995, respectively.
Effective December 8, 1995, the Company has requested and received approval from
the Internal Revenue Service to terminate the ESOP plan. In accordance with the
termination of the ESOP, the Company repurchased as treasury stock 5,088 shares
for $961,000.
In 1996, the Company sold a minority interest in the limited partnership of
Bexar Electric to certain employees of the Company. The minority interest is
considered a limited partner; the minority interest held 10 percent and 20
percent at December 31, 1996 and September 30, 1997, respectively.
10. FINANCIAL INSTRUMENTS:
The Company's financial instruments consist of cash and cash equivalents,
accounts receivable, notes receivable from stockholders, accounts payable, a
line of credit, notes payable and long-term debt. The Company believes that the
carrying value of these instruments on the accompanying consolidated balance
sheets approximates their fair value.
11. COMMITMENTS AND CONTINGENCIES:
Litigation
The Company is involved in disputes or legal actions arising in the ordinary
course of business. Management does not believe the outcome of such legal
actions will have a material adverse effect on the Company's consolidated
financial position or results of operations.
F-62
138
Insurance
The Company carries a broad range of insurance coverage, including business
auto liability, general liability and an umbrella policy. The Company has not
incurred significant uninsured losses on any of these items.
12. MAJOR CUSTOMERS AND RISK CONCENTRATION:
The Company had sales of approximately 11 percent of total sales to one
major customer during the year ended December 31, 1996.
The Company had accounts receivable balances of approximately 15 percent and
14 percent of total accounts receivable from two major customers as of December
31, 1996, and approximately 10% due from one major customer for the year ended
September 30, 1997.
The Company had cash and cash equivalents in financial institutions which
exceeded the federally insured limits by $911,000, $269,000 and $858,000 at
December 31, 1995 and 1996, and September 30, 1997, respectively.
In addition, the Company grants credit, generally without collateral, to its
customers, which are primarily general contractors, located in Central and South
Texas. Consequently, the Company is subject to potential credit risk related to
changes in business and economic factors within the state of Texas. However,
management believes that its contract acceptance, billing and collection
policies are adequate to minimize the potential credit risk.
F-63
139
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Muth Electric, Inc.:
We have audited the accompanying balance sheets of Muth Electric, Inc., a
South Dakota corporation, as of December 31, 1995 and 1996 and September 30,
1997, and the related statements of operations, cash flows and stockholder's
equity for each of the three years in the period ended December 31, 1996 and for
the year ended September 30, 1997 and for the period from October 1, 1997
through January 30, 1998. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Muth Electric, Inc., as of
December 31, 1995 and 1996 and September 30, 1997, and the results of its
operations and its cash flows for each of the three years in the period ended
December 31, 1996 and for the year ended September 30, 1997 and for the period
from October 1, 1997 through January 30, 1998, in conformity with generally
accepted accounting principles.
ARTHUR ANDERSEN LLP
Houston, Texas
September 11, 1998
F-64
140
MUTH ELECTRIC, INC.
BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE INFORMATION)
DECEMBER 31, SEPTEMBER
--------------------- 30,
1995 1996 1997
-------- -------- --------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents .......................................... $ 53 $ 82 $ 81
Accounts receivable--
Trade, net of allowance of $55, $63 and $91, respectively ....... 1,718 2,556 3,154
Retainage ....................................................... 417 212 383
Related party ................................................... -- 74 246
Inventories ........................................................ 750 820 898
Costs and estimated earnings in excess of
billings on uncompleted contracts ............................... 545 436 675
Prepaid expenses and other current assets .......................... 150 140 135
-------- -------- --------
Total current assets ....................................... 3,633 4,320 5,572
PROPERTY AND EQUIPMENT, net .......................................... 946 1,140 1,133
-------- -------- --------
Total assets ............................................... $ 4,579 $ 5,460 $ 6,705
======== ======== ========
LIABILITIES AND STOCKHOLDER'S EQUITY
CURRENT LIABILITIES:
Notes payable ...................................................... $ -- $ 530 $ 540
Accounts payable and accrued expenses .............................. 1,621 1,680 2,177
Billings in excess of costs and estimated
earnings on uncompleted contracts ............................... 305 180 543
-------- -------- --------
Total current liabilities .................................. 1,926 2,390 3,260
-------- -------- --------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDER'S EQUITY:
Common stock, $100 par value, 3,000 shares
authorized, 737 shares issued and outstanding ................... 74 74 74
Retained earnings .................................................. 2,579 2,996 3,371
-------- -------- --------
Total stockholder's equity ................................. 2,653 3,070 3,445
-------- -------- --------
Total liabilities and stockholder's equity ................. $ 4,579 $ 5,460 $ 6,705
======== ======== ========
The accompanying notes are an integral part of these financial statements.
F-65
141
MUTH ELECTRIC, INC.
STATEMENTS OF OPERATIONS
(IN THOUSANDS)
PERIOD FROM
OCTOBER 1,
NINE MONTHS 1997
YEAR ENDED ENDED YEAR ENDED THROUGH
DECEMBER 31, SEPTEMBER 30, SEPTEMBER 30, JANUARY 30,
1994 1995 1996 1996 1997 1997 1998
-------- -------- -------- -------- -------- -------- --------
(UNAUDITED)
REVENUES .......................... $ 13,466 $ 16,012 $ 16,830 $ 12,517 $ 14,466 $ 18,779 $ 8,028
COST OF SERVICES (including
depreciation) ................... 9,805 12,189 12,834 9,751 11,428 14,511 6,164
-------- -------- -------- -------- -------- -------- --------
Gross profit .............. 3,661 3,823 3,996 2,766 3,038 4,268 1,864
SELLING, GENERAL AND ADMINISTRATIVE
EXPENSES ........................ 2,678 2,923 2,957 2,147 2,264 3,074 1,179
-------- -------- -------- -------- -------- -------- --------
Income from operations .... 983 900 1,039 619 774 1,194 685
-------- -------- -------- -------- -------- -------- --------
OTHER INCOME (EXPENSE):
Interest income (expense) ....... 6 11 (24) (17) (20) (27) (6)
Other ........................... (79) (95) 27 22 (4) 1 3
-------- -------- -------- -------- -------- -------- --------
Other income (expense),
net ..................... (73) (84) 3 5 (24) (26) (3)
-------- -------- -------- -------- -------- -------- --------
NET INCOME ........................ $ 910 $ 816 $ 1,042 $ 624 $ 750 $ 1,168 $ 682
======== ======== ======== ======== ======== ======== ========
The accompanying notes are an integral part of these financial statements.
F-66
142
MUTH ELECTRIC, INC.
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
NINE MONTHS
YEAR ENDED ENDED
DECEMBER 31, SEPTEMBER 30,
--------------------------------- --------------------
1994 1995 1996 1996 1997
------- ------- ------- ------- -------
(UNAUDITED)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income .......................................... $ 910 $ 816 $ 1,042 $ 624 $ 750
Adjustments to reconcile net income to net cash
provided by operating activities--
Depreciation and amortization ..................... 142 185 224 194 182
Loss (gain) on sale of property and
equipment ....................................... (6) 16 (28) (16) (14)
Changes in operating assets and
liabilities --
(Increase) decrease in --
Accounts receivable .......................... (260) 70 (674) (406) (941)
Inventories .................................. 31 (38) (70) (66) (78)
Costs and estimated earnings in excess of
billings on uncompleted contracts .......... 579 (291) 70 (44) (239)
Prepaid expenses and other current
assets ..................................... (41) 5 10 96 5
Increase (decrease) in--
Accounts payable and accrued expenses ........ (478) 525 59 105 497
Billings in excess of costs and estimated
earnings on uncompleted contracts .......... (252) (95) (119) 47 363
------- ------- ------- ------- -------
Net cash provided by operating activities .... 625 1,193 514 534 525
------- ------- ------- ------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of property and equipment ........ 11 5 53 34 23
Additions of property and equipment ................. (201) (560) (443) (401) (184)
------- ------- ------- ------- -------
Net cash provided by (used in)
investing activities ....................... (190) (555) (390) (367) (161)
------- ------- ------- ------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings (payments) or notes payable .......... -- -- 530 240 10
Payments on short-term borrowings ................... -- -- -- -- --
Payments of long-term loan receivable ............... 390 -- -- -- --
Distributions to stockholders ....................... (715) (722) (625) (375) (375)
------- ------- ------- ------- -------
Net cash used in financing activities ........ (325) (722) (95) (135) (365)
------- ------- ------- ------- -------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS ................................... 110 (84) 29 32 (1)
CASH AND CASH EQUIVALENTS,
beginning of period ................................ 27 137 53 53 82
------- ------- ------- ------- -------
CASH AND CASH EQUIVALENTS, end of period .............. $ 137 $ 53 $ 82 $ 85 $ 81
======= ======= ======= ======= =======
SUPPLEMENTAL DISCLOSURE OF CASH
FLOW INFORMATION:
Cash paid for --
Interest .......................................... $ 9 $ 4 $ 33 $ 25 $ 28
PERIOD FROM
OCTOBER 1,
YEAR 1997
ENDED THROUGH
SEPTEMBER 30, JANUARY 30,
------- -------
1997 1998
------- -------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income .......................................... $ 1,168 $ 682
Adjustments to reconcile net income to net cash
provided by operating activities--
Depreciation and amortization ..................... 212 91
Loss (gain) on sale of property and
equipment ....................................... (26) 1
Changes in operating assets and
liabilities --
(Increase) decrease in --
Accounts receivable .......................... (1,209) 1,653
Inventories .................................. (82) 16
Costs and estimated earnings in excess of
billings on uncompleted contracts .......... (125) (403)
Prepaid expenses and other current
assets ..................................... (81) (7)
Increase (decrease) in--
Accounts payable and accrued expenses ........ 451 (72)
Billings in excess of costs and estimated
earnings on uncompleted contracts .......... 197 11
------- -------
Net cash provided by operating activities .... 505 1,972
------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of property and equipment ........ 42 109
Additions of property and equipment ................. (226) (57)
------- -------
Net cash provided by (used in)
investing activities ....................... (184) 52
------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings (payments) or notes payable .......... 300 1,680
Payments on short-term borrowings ................... -- (1,070)
Payments of long-term loan receivable ............... -- --
Distributions to stockholders ....................... (625) (2,495)
------- -------
Net cash used in financing activities ........ (325) (1,885)
------- -------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS ................................... (4) 139
CASH AND CASH EQUIVALENTS,
beginning of period ................................ 85 81
------- -------
CASH AND CASH EQUIVALENTS, end of period .............. $ 81 $ 220
======= =======
SUPPLEMENTAL DISCLOSURE OF CASH
FLOW INFORMATION:
Cash paid for --
Interest .......................................... $ 36 $ 32
The accompanying notes are an integral part of these financial statements.
F-67
143
MUTH ELECTRIC, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE INFORMATION)
COMMON STOCK TOTAL
------------------- RETAINED STOCKHOLDER'S
SHARES AMOUNT EARNINGS EQUITY
------- ------- ------- -------------
BALANCE, December 31, 1993 ............. 737 $ 74 $ 2,290 $ 2,364
Distributions to stockholders ........ -- -- (715) (715)
Net income ........................... -- -- 910 910
------- ------- ------- -------
BALANCE, December 31, 1994 ............. 737 74 2,485 2,559
Distributions to stockholders ........ -- -- (722) (722)
Net income ........................... -- -- 816 816
------- ------- ------- -------
BALANCE, December 31, 1995 ............. 737 74 2,579 2,653
Distributions to stockholders ........ -- -- (625) (625)
Net income ........................... -- -- 1,042 1,042
------- ------- ------- -------
BALANCE, December 31, 1996 ............. 737 74 2,996 3,070
Distributions to stockholders
(unaudited) ........................ -- -- (375) (375)
Net income (unaudited) ............... -- -- 750 750
------- ------- ------- -------
BALANCE, September 30, 1997 ............ 737 $ 74 $ 3,371 $ 3,445
Distributions to stockholders ........ -- -- (2,495) (2,495)
Net income ........................... -- -- 682 682
------- ------- ------- -------
BALANCE, January 30, 1998 .............. 737 $ 74 $ 1,558 $ 1,632
======= ======= ======= =======
The accompanying notes are an integral part of these financial statements.
F-68
144
MUTH ELECTRIC, INC.
NOTES TO FINANCIAL STATEMENTS
1. BUSINESS AND ORGANIZATION:
Muth Electric, Inc. (the Company), a South Dakota corporation, focuses on
providing electrical system installation and repair services primarily for
residential and commercial facilities. The Company performs the majority of its
contract work under fixed-price contracts with contract terms generally ranging
from one to 12 months. The Company performs the majority of its work in South
Dakota and surrounding states.
On January 30, 1998, concurrent with the closing of the initial public
offerings in the United States and Canada and outside the United States and
Canada (the Offerings) of additional common stock by Integrated Electrical
Services, Inc. (IES), the Company was acquired by IES. All outstanding shares of
the Company's common stock were exchanged for cash and shares of IES common
stock. In addition, the key executives of the Company entered into employment
agreements with the Company and IES which have an initial term of five years,
and generally restrict the disclosure of confidential information as well as
restrict competition with the Company and IES for a period of two years
following termination of employment. The Company has changed from a calendar to
a September fiscal year.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Interim Financial Information
The interim financial statements for the nine months ended September 30,
1996 and 1997, are unaudited and have been prepared pursuant to the rules and
regulations of the Securities and Exchange Commission. Accordingly, they do not
include all of the information and footnotes required by generally accepted
accounting principles for complete financial statements. In the opinion of the
Company's management, the unaudited interim financial statements contain all
adjustments (consisting of normal recurring adjustments) considered necessary
for a fair presentation. The results of operations for the interim periods are
not necessarily indicative of the results for the entire fiscal year.
The financial statements for the period from October 1, 1997 through January
30, 1998 are presented for purposes of complying with certain reporting
requirements of the Securities and Exchange Commission's Staff Accounting
Bulletin No. 80 and are not necessarily indicative of the results to be expected
for the entire year.
Cash and Cash Equivalents
The Company considers all highly liquid investments purchased with an
original maturity of three months or less to be cash equivalents.
Inventories
Inventories consist of parts and supplies held for use in the ordinary
course of business and are stated at the lower of cost or market using the
first-in, first-out (FIFO) method.
Property and Equipment
Property and equipment are stated at cost, and depreciation is computed
using the straight-line method over the estimated useful lives of the assets.
Leasehold improvements are capitalized and amortized over the estimated useful
life of the asset. Depreciation expense was approximately $142,000, $185,000,
$224,000, $212,000 and $91,000 for the years ended December 31, 1994, 1995, 1996
and September 30, 1997 and the period from October 1, 1997 through January 30,
1998, respectively.
Expenditures for repairs and maintenance are charged to expense when
incurred. Expenditures for major renewals and betterments, which extend the
useful lives of existing equipment, are capitalized and depreciated. Upon
retirement or disposition of
F-69
145
property and equipment, the cost and related accumulated depreciation are
removed from the accounts and any resulting gain or loss is recognized in the
statements of operations.
Revenue Recognition
The Company recognizes revenue when services are performed except when work
is being performed under a construction contract. Revenues from construction
contracts are recognized on the percentage-of-completion method measured by the
percentage of costs incurred to date to total estimated costs for each contract.
Such contracts generally provide that the customers accept completion of
progress to date and compensate the Company for services rendered measured in
terms of hours expensed or some other measure of progress. Contract costs
include all direct material and labor costs and those indirect costs related to
contract performance, such as indirect labor and depreciation costs. Provisions
for the total estimated losses on uncompleted contracts are made in the period
in which such losses are determined. Changes in job performance, job conditions,
estimated profitability and final contract settlements may result in revisions
to costs and income and their effects are recognized in the period in which the
revisions are determined. An amount equal to contract costs attributable to
claims is included in revenues when realization is probable and the amount can
be reliably estimated.
The balances billed but not paid by customers pursuant to retainage
provisions in construction contracts will be due upon completion of the
contracts and acceptance by the customer. Based on the Company's experience with
similar contracts in recent years, the retention balance at each balance sheet
date will be collected within the subsequent fiscal year.
The current asset, "Costs and estimated earnings in excess of billings on
uncompleted contracts," represents revenues recognized in excess of amounts
billed. The current liability, "Billings in excess of costs and estimated
earnings on uncompleted contracts," represents billings in excess of revenues
recognized.
Warranty Costs
The Company warrants labor and materials for the first year after
installation of new electrical systems. A reserve for warranty costs is recorded
based upon the historical level of warranty claims and management's estimate of
future costs.
Accounts Receivable and Provision for Doubtful Accounts
The Company provides an allowance for doubtful accounts based upon the
specific identification of accounts receivable where collection is no longer
probable, as well as provides a general reserve for potential unknown
adjustments.
Income Taxes
The Company has elected S Corporation status as defined by the Internal
Revenue Code, whereby the Company itself is not subject to taxation for federal
purposes. Under S Corporation status, the stockholders report their share of the
Company's taxable earnings or losses in their personal tax returns.
Consequently, the accompanying financial statements of the Company do not
include a provision for current or deferred income taxes. The Company intends to
terminate its S Corporation status concurrently with the effective date of the
Offerings.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires the use of estimates and assumptions by
management in determining the reported amounts of assets and liabilities,
disclosures of contingent liabilities at the date of the financial statements
and the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates. Reference is made to the
"Revenue Recognition" section of this footnote and Note 9 for discussion of
significant estimates reflected in the Company's financial statements.
New Accounting Pronouncement
Effective November 1, 1996, the Company adopted SFAS No. 121, "Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed
Of." Accordingly, in the event that facts and circumstances indicate that
property and equipment
F-70
146
or other assets may be impaired, an evaluation of recoverability would be
performed. If an evaluation is required, the estimated future undiscounted cash
flows associated with the asset are compared to the asset's carrying amount to
determine if an impairment of such property is necessary. The effect of any
impairment would be to expense the difference between the fair value of such
property and its carrying value. Adoption of this standard did not have a
material effect on the financial position or results of operations of the
Company.
3. PROPERTY AND EQUIPMENT:
Property and equipment consists of the following (in thousands):
ESTIMATED DECEMBER 31,
USEFUL LIVES -------------------- SEPTEMBER 30,
IN YEARS 1995 1996 1997
------------ ------- ------- -------------
Transportation equipment .................... 5 $ 806 $ 868 $ 890
Machinery and equipment ..................... 7 466 635 707
Leasehold improvements ...................... 40 409 479 517
Furniture and fixtures ...................... 5 403 425 444
------- ------- -------
2,084 2,407 2,558
Less -- Accumulated depreciation and
amortization .............................. (1,138) (1,267) (1,425)
------- ------- -------
Property and equipment, net ....... $ 946 $ 1,140 $ 1,133
======= ======= =======
4. DETAIL OF CERTAIN BALANCE SHEET ACCOUNTS:
Activity in the Company's allowance for doubtful accounts receivable
consists of the following (in thousands):
DECEMBER 31,
-------------------- SEPTEMBER 30,
1995 1996 1997
------- ------- -------------
Balance at beginning of period ................... $ 60 $ 55 $ 63
Additions (deductions) to costs and expenses ..... (5) 8 28
------- ------- -------
Balance at end of period ......................... $ 55 $ 63 $ 91
======= ======= =======
Accounts payable and accrued expenses consist of the following (in
thousands):
DECEMBER 31,
------------------- SEPTEMBER 30,
1995 1996 1997
------- ------- -------------
Accounts payable, trade ................ $ 652 $ 757 $ 1,258
Accrued compensation and benefits ...... 376 520 435
Other accrued expenses ................. 593 403 484
------- ------- -------
$ 1,621 $ 1,680 $ 2,177
======= ======= =======
Electrical system installation contracts in progress are as follows (in
thousands):
DECEMBER 31,
---------------------- SEPTEMBER 30,
1995 1996 1997
-------- -------- -------------
Costs incurred on contracts in progress .......... $ 9,215 $ 7,159 $ 7,250
Estimated earnings, net of losses ................ 1,914 1,277 2,082
-------- -------- --------
11,129 8,436 9,332
Less-- Billings to date .......................... (10,889) (8,180) (9,200)
-------- -------- --------
$ 240 $ 256 $ 132
======== ======== ========
Costs and estimated earnings in excess of
billings on uncompleted contracts............... $ 545 $ 436 $ 675
Less: Billings in excess of costs and estimated
earnings on uncompleted contracts .............. (305) (180) (543)
-------- -------- --------
$ 240 $ 256 $ 132
======== ======== ========
F-71
147
5. LINE OF CREDIT:
The Company has three lines of credit with a bank totaling $1,140,000 of
available credit. The line of credit expires January 1998 and bears interest at
9 percent. The line of credit is unsecured. At September 30, 1997, borrowings
outstanding under the line of credit were $540,000.
6. EMPLOYEE BENEFIT PLAN:
The Company has a defined 401(k) contribution profit-sharing plan. The Plan
provides for the Company to match one-half of the first 5 percent contributed by
each employee. Total contributions by the Company under the plan were
approximately $83,000, $93,000, $85,000 and $28,000 for the years ending
December 31, 1995, 1996 and September 30, 1997 and the period from October 1,
1997 through January 30, 1998, respectively. The Company may also make
discretionary contributions. The Company declared discretionary contributions of
$70,000 and $65,000 for the years ended December 31, 1995 and 1996,
respectively, and had accrued approximately $74,000 at December 31, 1996,
relating to all contributions to be funded in the subsequent fiscal year.
7. RELATED-PARTY TRANSACTIONS:
The Company periodically will obtain loans from the stockholder to meet
current cash needs. The Company will also loan out excess funds to the
stockholder. Loans neither to nor from the stockholder are charged interest. A
total of $172,000 was due from a stockholder at September 30, 1997.
The Company has an outstanding trade receivable in the amount of $74,000 to
a company owned by a member of the stockholder's family.
The Company also provides real estate management services to a company owned
by the stockholder.
The Company leases facilities from the Company's stockholder. The leases
expire annually. The rent paid under these related-party leases was
approximately $95,000, $118,000, $115,000 and $41,000 for the years ended
December 31, 1995 and 1996 and September 30, 1997 and the period from October 1,
1997 through January 30, 1998, respectively.
8. FINANCIAL INSTRUMENTS:
The Company's financial instruments consist of cash and cash equivalents,
accounts receivable, accounts payable, lines of credit, notes payable and
long-term debt. The Company believes that the carrying value of these
instruments on the accompanying balance sheets approximates their fair value.
9. COMMITMENTS AND CONTINGENCIES:
Litigation
The Company is involved in disputes or legal actions arising in the ordinary
course of business. Management does not believe the outcome of such legal
actions will have a material adverse effect on the Company's financial position
or results of operations.
Insurance
The Company carries a broad range of insurance coverage, including business
auto liability, general liability, workers compensation and an umbrella policy.
The Company has not incurred significant uninsured losses on any of these items.
The Company is self-insured for medical claims up to $20,000 per year per
covered individual. Claims in excess of these amounts are covered by a stop-loss
policy. The Company has recorded reserves for its portion of self-insured claims
based on estimated claims incurred through December 31, 1995 and 1996 or 1997.
10. MAJOR CUSTOMERS AND RISK CONCENTRATION:
The Company did not have sales greater than 10 percent of total sales to any
one customer during the years ended December 31, 1994, 1995 and 1996 or
September 30, 1997 or the period from October 1, 1997 through January 30, 1998.
In addition, the Company grants credit, generally without collateral, to its
customers located primarily in the Midwest region. Consequently, the Company is
subject to potential credit risk related to changes in business and economic
factors within the Midwest. However, management believes that its contract
acceptance, billing and collection policies are adequate to minimize the
potential credit risk.
F-72
148
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Pollock Electric Inc.:
We have audited the accompanying balance sheets of Pollock Electric Inc., a
Texas corporation, as of October 31, 1995 and 1996 and September 30, 1997, and
the related statements of operations, cash flows and stockholder's equity for
the years then ended and for the period from October 1, 1997 through January 30,
1998. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Pollock Electric Inc. as of
October 31, 1995 and 1996 and September 30, 1997, and the results of its
operations and its cash flows for the years then ended and for the period from
October 1, 1997 through January 30, 1998, in conformity with generally accepted
accounting principles.
ARTHUR ANDERSEN LLP
Houston, Texas
September 11, 1998
F-73
149
POLLOCK ELECTRIC INC.
BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE INFORMATION)
OCTOBER 31,
-------------------- SEPTEMBER 30,
1995 1996 1997
------- ------- -------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents .................................... $ 302 $ 222 $ 347
Accounts receivable--
Trade, net of allowance of $96, $178 and $175,
respectively ............................................ 2,204 4,030 4,536
Retainage ................................................. 99 566 765
Other receivables ......................................... 40 4 13
Inventories, net ............................................. -- -- 18
Costs and estimated earnings in excess of
billings on uncompleted contracts ......................... 399 202 767
Deferred tax asset ........................................... 161 263 343
Prepaid expenses and other current assets .................... 49 115 198
------- ------- -------
Total current assets ................................. 3,254 5,402 6,987
PROPERTY AND EQUIPMENT, net .................................... 280 341 379
------- ------- -------
Total assets ......................................... $ 3,534 $ 5,743 $ 7,366
======= ======= =======
LIABILITIES AND STOCKHOLDER'S EQUITY
CURRENT LIABILITIES:
Notes payable and capital lease obligations .................. $ 28 $ 67 $ 167
Advances outstanding under line of credit .................... 625 1,350 1,610
Accounts payable and accrued expenses ........................ 1,378 3,013 3,335
Income taxes payable ......................................... 354 181 231
Billings in excess of costs and estimated
earnings on uncompleted contracts ......................... 234 317 889
Unearned revenue and other current liabilities ............... 14 13 146
------- ------- -------
Total current liabilities ............................ 2,633 4,941 6,378
------- ------- -------
CAPITAL LEASE OBLIGATIONS, net of current
portion ...................................................... 75 75 71
DEFERRED TAX LIABILITY ......................................... 20 20 21
COMMITMENTS AND CONTINGENCIES
STOCKHOLDER'S EQUITY:
Common stock, $1 par value, 1,000,000 shares
authorized, 1,000 shares issued and outstanding ........... 1 1 1
Additional paid-in capital ................................... 9 9 9
Retained earnings ............................................ 796 697 886
------- ------- -------
Total stockholder's equity ........................... 806 707 896
------- ------- -------
Total liabilities and stockholder's
equity ............................................. $ 3,534 $ 5,743 $ 7,366
======= ======= =======
The accompanying notes are an integral part of these financial statements.
F-74
150
POLLOCK ELECTRIC INC.
STATEMENTS OF OPERATIONS
(IN THOUSANDS)
PERIOD FROM
OCTOBER 1,
1997
YEAR ENDED ELEVEN MONTHS ENDED YEAR ENDED THROUGH
OCTOBER 31, SEPTEMBER 30, SEPTEMBER 30, JANUARY 30,
1995 1996 1996 1997 1997 1998
-------- -------- -------- -------- -------- --------
(UNAUDITED)
REVENUES .............................. $ 13,002 $ 15,816 $ 13,305 $ 17,780 $ 20,291 $ 8,984
COST OF SERVICES
(including depreciation) ............ 10,602 13,534 11,646 14,782 16,670 8,345
-------- -------- -------- -------- -------- --------
Gross profit ................. 2,400 2,282 1,659 2,998 3,621 639
SELLING, GENERAL AND
ADMINISTRATIVE
EXPENSES ............................ 2,149 2,463 2,083 2,515 2,895 1,644
-------- -------- -------- -------- -------- --------
Income (loss) from
operations ................. 251 (181) (424) 483 726 (1,005)
-------- -------- -------- -------- -------- --------
OTHER INCOME
(EXPENSE):
Interest expense .................... (77) (104) (87) (155) (172) (67)
Other ............................... -- 156 154 1 3 24
-------- -------- -------- -------- -------- --------
Other income
(expense), net ............. (77) 52 67 (154) (169) (43)
-------- -------- -------- -------- -------- --------
INCOME (LOSS) BEFORE
INCOME TAXES ........................ 174 (129) (357) 329 557 (1,048)
PROVISION (BENEFIT)
FOR INCOME TAXES .................... 82 (30) (104) 140 214 (393)
-------- -------- -------- -------- -------- --------
NET INCOME (LOSS) ..................... $ 92 $ (99) $ (253) $ 189 $ 343 $ (655)
======== ======== ======== ======== ======== ========
The accompanying notes are an integral part of these financial statements.
F-75
151
POLLOCK ELECTRIC INC.
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
PERIOD FROM
ELEVEN MONTHS OCTOBER 1,
YEAR ENDED ENDED 1997
OCTOBER 31, SEPTEMBER 30, YEAR ENDED THROUGH
------------------- -------------------- SEPTEMBER 30, JANUARY 30,
1995 1996 1996 1997 1997 1998
------- ------- ------- ------- ------- ---------
(UNAUDITED)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) ................................... $ 92 $ (99) $ (253) $ 189 $ 343 $ (655)
Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating
activities --
Depreciation and amortization ..................... 64 107 83 107 131 111
Deferred income taxes ............................. (141) (103) (146) (78) (35) (76)
Changes in operating assets and liabilities --
(Increase) decrease in --
Accounts receivable .......................... 577 (2,257) (1,492) (714) (1,479) (587)
Inventories .................................. -- -- -- (18) (18) --
Costs and estimated earnings in excess of
billings on uncompleted contracts .......... (164) 197 (134) (565) (234) 343
Prepaid expenses and other current assets .... (30) (41) (71) (83) (78) 83
Increase (decrease) in --
Accounts payable and accrued expenses ........ (546) 1,635 815 323 1,143 (237)
Income taxes payable ......................... 170 (172) (243) 49 120 (231)
Billings in excess of costs and estimated
earnings on uncompleted contracts .......... 9 83 636 572 19 281
Unearned revenue and other current
liabilities ................................ (31) (1) 29 133 103 (146)
------- ------- ------- ------- ------- -------
Net cash provided by (used in) operating
activities ................................. -- (651) (776) (85) 15 (1,114)
------- ------- ------- ------- ------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions of property and equipment ................. (77) (154) (112) (133) (175) (29)
------- ------- ------- ------- ------- -------
Net cash used in investing activities ........ (77) (154) (112) (133) (175) (29)
------- ------- ------- ------- ------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings under line of credit ................. 241 725 609 343 484 800
------- ------- ------- ------- ------- -------
Net cash provided by financing activities .... 241 725 609 343 484 800
------- ------- ------- ------- ------- -------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS ......................................... 164 (80) (279) 125 324 (343)
CASH AND CASH EQUIVALENTS, beginning of period ........ 138 302 302 222 23 347
------- ------- ------- ------- ------- -------
CASH AND CASH EQUIVALENTS, end of period .............. $ 302 $ 222 $ 23 $ 347 $ 347 $ 4
======= ======= ======= ======= ======= =======
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for --
Interest .......................................... $ 77 $ 104 $ 88 $ 155 $ 171 $ 37
Income taxes ...................................... $ 21 $ 245 $ 245 $ 38 $ 38 $ --
The accompanying notes are an integral part of these financial statements.
F-76
152
POLLOCK ELECTRIC INC.
STATEMENTS OF STOCKHOLDER'S EQUITY
(IN THOUSANDS, EXCEPT SHARE INFORMATION)
COMMON STOCK ADDITIONAL TOTAL
---------------------- PAID-IN RETAINED STOCKHOLDER'S
SHARES AMOUNT CAPITAL EARNINGS EQUITY
-------- -------- -------- -------- -------------
BALANCE, October 31, 1994 ......... 1,000 $ 1 $ 9 $ 704 $ 714
Net income ...................... -- -- -- 92 92
-------- -------- -------- -------- --------
BALANCE, October 31, 1995 ......... 1,000 1 9 796 806
Net loss ........................ -- -- -- (99) (99)
-------- -------- -------- -------- --------
BALANCE, October 31, 1996 ......... 1,000 1 9 697 707
Net income (unaudited) .......... -- -- -- 189 189
-------- -------- -------- -------- --------
BALANCE, September 30, 1997 ....... 1,000 $ 1 $ 9 $ 886 $ 896
Net loss ........................ -- -- -- (655) (655)
-------- -------- -------- -------- --------
BALANCE, January 30, 1998 ......... 1,000 $ 1 $ 9 $ 231 $ 241
======== ======== ======== ======== ========
The accompanying notes are an integral part of these financial statements.
F-77
153
POLLOCK ELECTRIC INC.
NOTES TO FINANCIAL STATEMENTS
1. BUSINESS AND ORGANIZATION:
Pollock Electric Inc., a Texas corporation (the Company), provides
electrical system installation, data and fiber optic cabling installation and
repair services primarily for mid-sized to large commercial facilities. The
Company performs the majority of its contract work under fixed-price contracts,
with contract terms generally ranging from one to 12 months. The Company
performs the majority of its work in the commercial and industrial markets in
Harris County, Texas, and surrounding areas.
On January 30, 1998, concurrent with the closing of the initial public
offerings in the United States and Canada and outside the United States and
Canada (the Offerings) of additional common stock by Integrated Electrical
Services, Inc. (IES), the Company was acquired by IES. All outstanding shares of
the Company's common stock were exchanged for cash and shares of IES common
stock. In addition, the key executives of the Company entered into employment
agreements with the Company and IES which have an initial term of five years,
and generally restrict the disclosure of confidential information as well as
restrict competition with the Company and IES for a period of two years
following termination of employment. The Company has changed from a calendar to
a September fiscal year.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Interim Financial Information
The interim financial statements for the eleven months ended September 30,
1996 and 1997, are unaudited and have been prepared pursuant to the rules and
regulations of the Securities and Exchange Commission. Accordingly, they do not
include all of the information and footnotes required by generally accepted
accounting principles for complete financial statements. In the opinion of the
Company's management, the unaudited interim financial statements contain all
adjustments (consisting of normal recurring adjustments) considered necessary
for a fair presentation. The results of operations for the interim periods are
not necessarily indicative of the results for the entire fiscal year.
The financial statements for the period from October 1, 1997 through January
30, 1998 are presented for purposes of complying with certain reporting
requirements of the Securities and Exchange Commission's Staff Accounting
Bulletin No. 80 and are not necessarily indicative of the results to be expected
for the entire year.
Cash and Cash Equivalents
The Company considers all highly liquid investments purchased with an
original maturity of three months or less to be cash equivalents.
Property and Equipment
Property and equipment are stated at cost, and depreciation is computed
using the straight-line method over the estimated useful lives of the assets.
Leasehold improvements are capitalized and amortized over the lesser of the life
of the lease or the estimated useful life of the asset. Depreciation expense was
approximately $64,000, $107,000, $131,000 and $111,000 for the years ended
October 31, 1995 and 1996 and September 30, 1997 and for the period from
October 1, 1997 through January 30, 1998, respectively.
Expenditures for repairs and maintenance are charged to expense when
incurred. Expenditures for major renewals and betterments, which extend the
useful lives of existing equipment, are capitalized and depreciated. Upon
retirement or disposition of property and equipment, the cost and related
accumulated depreciation are removed from the accounts and any resulting gain or
loss is recognized in the statements of operations.
F-78
154
Revenue Recognition
The Company recognizes revenue when services are performed except when work
is being performed under a construction contract. Revenues from construction
contracts are recognized on the percentage-of-completion method measured by the
percentage of costs incurred to date to total estimated costs for each contract.
Such contracts generally provide that the customers accept completion of
progress to date and compensate the Company for services rendered measured in
terms of hours expensed or some other measure of progress. Contract costs
include all direct material and labor costs and those indirect costs related to
contract performance, such as indirect labor, supplies, tools, repairs and
depreciation costs. Provisions for the total estimated losses on uncompleted
contracts are made in the period in which such losses are determined. Changes in
job performance, job conditions, estimated profitability and final contract
settlements may result in revisions to costs and income and their effects are
recognized in the period in which the revisions are determined. An amount equal
to contract costs attributable to claims is included in revenues when
realization is probable and the amount can be reasonably estimated.
The balances billed but not paid by customers pursuant to retainage
provisions in construction contracts will be due upon completion of the
contracts and acceptance by the customer. Based on the Company's experience with
similar contracts in recent years, the retention balance at each balance sheet
date will be collected within the subsequent fiscal year.
The current asset, "Costs and estimated earnings in excess of billings on
uncompleted contracts," represents revenues recognized in excess of amounts
billed. The current liability, "Billings in excess of costs and estimated
earnings on uncompleted contracts," represents billings in excess of revenues
recognized.
Warranty Costs
For certain contracts, the Company warrants labor and materials for the
first year after installation of new electrical systems. The Company generally
warrants labor for one year after servicing existing electrical systems. A
reserve for warranty costs is recorded based upon the historical level of
warranty claims and management's estimate of future costs.
Accounts Receivable and Provision for Doubtful Accounts
Accounts receivable at October 31, 1995 and 1996 and September 30, 1997,
include immaterial amounts of claims and unapproved change orders, however, the
Company generally does not recognize change orders until they are approved.
The Company provides an allowance for doubtful accounts based upon a
percentage of gross sales revenue. In addition, the Company reserves for
specific accounts when collection of such accounts is no longer probable.
Income Taxes
The Company follows the asset and liability method of accounting for income
taxes in accordance with Statement of Financial Accounting Standards (SFAS) No.
109. Under this method, deferred tax assets and liabilities are recorded for
future tax consequences of temporary differences between the financial reporting
and tax bases of assets and liabilities, and are measured using the enacted tax
rates and laws.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires the use of estimates and assumptions by
management in determining the reported amounts of assets and liabilities,
disclosures of contingent liabilities at the date of the financial statements
and the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates. Reference is made to the
"Revenue Recognition" section of this footnote and Note 11 for discussion of
significant estimates reflected in the Company's financial statements.
New Accounting Pronouncement
Effective November 1, 1996, the Company adopted SFAS No. 121, "Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed
Of." Accordingly, in the event that facts and circumstances indicate that
property and equipment or other assets may be impaired, an evaluation of
recoverability would be performed. If an evaluation is required, the estimated
future undiscounted cash flows associated with the asset are compared to the
asset's carrying amount to determine if an impairment
F-79
155
of such property is necessary. The effect of any impairment would be to expense
the difference between the fair value of such property and its carrying value.
Adoption of this standard did not have a material effect on the financial
position or results of operations of the Company.
3. PROPERTY AND EQUIPMENT:
Property and equipment consists of the following (in thousands):
ESTIMATED OCTOBER 31,
USEFUL LIVES ----------------------- SEPTEMBER 30,
IN YEARS 1995 1996 1997
-------- -------- -------- -------------
Transportation equipment .................. 4-5 $ 95 $ 132 $ 143
Machinery and equipment ................... 5-7 221 267 331
Computer and telephone equipment .......... 5 161 201 259
Leasehold improvements .................... 5-39 71 107 119
Furniture and fixtures .................... 5-7 15 24 24
-------- -------- --------
563 731 876
Less -- Accumulated depreciation and
amortization ............................ (283) (390) (497)
-------- -------- --------
Property and equipment, net ..... $ 280 $ 341 $ 379
======== ======== ========
4. DETAIL OF CERTAIN BALANCE SHEET ACCOUNTS:
Activity in the Company's allowance for doubtful accounts receivable
consists of the following (in thousands):
OCTOBER 31,
----------------------- SEPTEMBER 30,
1995 1996 1997
-------- -------- -------------
Balance at beginning of period .............. $ 68 $ 96 $ 178
Additions to costs and expenses ............. 59 108 26
Deductions for uncollectible receivables
written off and recoveries ................ (31) (26) (29)
-------- -------- --------
Balance at end of period .................... $ 96 $ 178 $ 175
======== ======== ========
Accounts payable and accrued expenses consist of the following (in
thousands):
OCTOBER 31,
---------------------- SEPTEMBER 30,
1995 1996 1997
-------- -------- -------------
Accounts payable, trade ................ $ 944 $ 2,553 $ 2,859
Accrued compensation and benefits ...... 301 344 302
Other accrued expenses ................. 133 116 174
-------- -------- --------
$ 1,378 $ 3,013 $ 3,335
======== ======== ========
Electrical system installation contracts in progress are as follows (in
thousands):
OCTOBER 31,
----------------------- SEPTEMBER 30,
1995 1996 1997
-------- -------- -------------
Costs incurred on contracts in progress ............... $ 1,300 $ 6,592 $ 9,484
Estimated earnings, net of losses ..................... 239 742 1,748
-------- -------- --------
1,539 7,334 11,232
Less -- Billings to date .............................. (1,374) (7,449) (11,354)
-------- -------- --------
$ 165 $ (115) $ (122)
======== ======== ========
Costs and estimated earnings in excess of billings
on uncompleted contracts ............................ $ 399 $ 202 $ 767
Less -- Billings in excess of costs and estimated
earnings on uncompleted contracts .................. (234) (317) (889)
-------- -------- --------
$ 165 $ (115) $ (122)
======== ======== ========
5. LINE OF CREDIT:
The Company has a $2,500,000 line of credit with a bank. At October 31, 1995
and 1996 and September 30, 1997, unpaid borrowings were $625,000, $1,350,000 and
$1,610,000, respectively. The line of credit expires February 28, 1998, and
bears interest
F-80
156
at the bank's prime lending rate plus 1 percent. The line of credit is
personally guaranteed by Jon Pollock, sole stockholder and president of the
Company, and is secured by all accounts, contract rights, chattel paper,
instruments, general intangibles, rights to payments of any kind, all interest
of the Company in any goods, and a blanket lien of all property and equipment.
The borrowing base is limited to 75 percent of eligible accounts receivable that
are outstanding less than 60 days from the invoice date.
Interest is computed monthly on the unpaid balance and is payable monthly.
The Company has restrictive and various financial covenants with which the
Company was in compliance at September 30, 1997.
6. LEASES:
The Company leases its office space from its sole stockholder and president
under a lease agreement with a primary lease term of one year beginning November
15, 1991. At the expiration of the primary lease term, the Company exercised its
option to extend the lease for an additional five-year period. Effective
November 1, 1995, the lease agreement was modified to include additional office
space. The basic rent was increased to $3,000 per month, and the expiration date
was extended to November 30, 1998.
In addition to the basic lease cost, the Company must pay insurance, actual
taxes, maintenance and other operating costs. The rent paid under this
related-party lease was approximately $20,000, $36,000, $36,000 and $12,000 for
the years ended October 31, 1995 and 1996 and September 30, 1997 and for the
period from October 1, 1997 through January 30, 1998, respectively.
Future minimum lease payments under this noncancelable operating lease are
as follows (in thousands):
OCTOBER SEPTEMBER
31, 30,
-------- --------
1997 ................... $ 36 $ --
1998 ................... 36 36
1999 ................... 3 6
-------- --------
$ 75 $ 42
======== ========
Certain vehicles and equipment have been leased under terms that constitute
capital leases. Accordingly, the costs of the assets (the lower of the cash
purchase price or the present value of the future minimum lease payments) were
recorded as an addition to property and the related liabilities were recorded as
lease obligations. The assets are amortized using the straight-line method, and
interest expense is recorded on the basis of the outstanding lease obligation.
The net present value of future minimum lease payments under the capital
leases as recorded in short-term and long-term debt at October 31, 1996 and
September 30, 1997, are as follows (in thousands):
Year ending October 31--
1997 ........................................... $ 54
1998 ........................................... 51
1999 ........................................... 32
--------
Total lease payments ............................. 137
Less -- Amounts representing interest ............ (16)
--------
Present value of minimum lease payments .......... $ 121
========
Year ending September 30--
1998 ........................................... $ 71
1999 ........................................... 54
2000 ........................................... 20
2001 ........................................... 7
--------
Total lease payments ............................. 152
Less -- Amounts representing interest ............ (19)
--------
Present value of minimum lease payments .......... $ 133
========
F-81
157
7. INCOME TAXES:
Federal and state income taxes are as follows (in thousands):
PERIOD FROM
OCTOBER 1,
YEAR ENDED 1997
OCTOBER 31, YEAR ENDED THROUGH
----------------------- SEPTEMBER 30, JANUARY 30,
1995 1996 1997 1998
-------- -------- ------------- -----------
Federal --
Current ............... $ 259 $ 72 $ 318 $ (210)
Deferred .............. (187) (99) (122) (137)
State --
Current ............... 35 10 39 --
Deferred .............. (25) (13) (21) (46)
-------- -------- -------- --------
$ 82 $ (30) $ 214 $ (393)
======== ======== ======== ========
Actual income tax expense differs from income tax expense computed by
applying the U.S. federal statutory corporate rate of 35 percent to income
(loss) for income taxes as follows (in thousands):
PERIOD FROM
OCTOBER 1,
YEAR ENDED 1997
OCTOBER 31, YEAR ENDED THROUGH
----------------------- SEPTEMBER 30, JANUARY 30,
1995 1996 1997 1998
-------- -------- ------------- -----------
Income tax expense (benefit) at the statutory rate .... $ 61 $ (45) $ 194 $ (367)
Increase (decrease) resulting from --
State income taxes, net of related tax effect ....... 6 (2) 12 (31)
Nondeductible expenses .............................. 15 17 8 5
-------- -------- -------- --------
$ 82 $ (30) $ 214 $ (393)
======== ======== ======== ========
Deferred income taxes result from temporary differences in the recognition
of income and expenses for financial reporting purposes and for tax purposes.
The tax effects of these temporary differences, representing deferred tax assets
and liabilities, result principally from the following (in thousands):
OCTOBER 31,
----------------------- SEPTEMBER 30,
1995 1996 1997
-------- -------- -------------
Deferred income tax assets --
Bad debt reserve ............................... $ 42 $ 51 $ 53
Warranty reserve ............................... 28 44 49
Contracts ...................................... 51 50 75
Accrued expenses ............................... 40 118 166
-------- -------- --------
Total deferred income tax assets ....... 161 263 343
-------- -------- --------
Deferred income tax liabilities --
Property and equipment ......................... (17) (17) (52)
State taxes .................................... (1) (4) (4)
Contracts ...................................... (116) (103) (208)
-------- -------- --------
Total deferred income tax liabilities .. (134) (124) (264)
-------- -------- --------
Net deferred income tax assets ......... $ 27 $ 139 $ 79
======== ======== ========
The net deferred tax assets and liabilities are comprised of the following
(in thousands):
OCTOBER 31,
----------------------- SEPTEMBER 30,
1995 1996 1997
-------- -------- -------------
Deferred tax assets --
Current ................................... $ 161 $ 263 $ 343
Long-term ................................. -- -- --
-------- -------- --------
Total ............................. 161 263 343
-------- -------- --------
Deferred tax liabilities --
Current ................................... (114) (104) (243)
Long-term ................................. (20) (20) (21)
-------- -------- --------
Total ............................. (134) (124) (264)
-------- -------- --------
Net deferred income tax assets .... $ 27 $ 139 $ 79
======== ======== ========
F-82
158
8. RELATED-PARTY TRANSACTIONS:
The Company leases its office space from its sole stockholder and president.
Total payments made under this lease agreement were approximately $20,000,
$36,000, $36,000 and $12,000 for the years ended October 31, 1995 and 1996 and
September 30, 1997 and for the period from October 1, 1997 through January 30,
1998, respectively. (See Note 6).
In 1995, the Company encouraged its employees to purchase personal computers
by making the down payments for the purchases. The employees are repaying the
Company through payroll deductions. The outstanding amounts are classified as
accounts receivable, other in the accompanying balance sheets.
9. EMPLOYEE BENEFIT PLANS:
Stock Appreciation Plan
On May 4, 1994, the Company adopted a stock appreciation rights plan titled
the Stock Unit Plan (the Plan). Under the Plan, stock rights or units were
awarded to employees valued at the book value of the Company's stock at that
date. Subsequent increases in the book value of the stock accrue to the benefit
of the officer or employee, while decreases in the book value reduce accrued
benefits. Payments of amounts accrued under the Plan are payable at retirement
or resignation from the Company, except for cases of termination with cause, at
which time the units and benefits are forfeited. Deferred compensation liability
accrued under the Plan totaled $11,500, $17,435 and $17,435 at October 31, 1995
and 1996 and September 30, 1997, respectively. The change in the value of the
stock appreciation rights under the Plan are recorded as compensation expense as
the Company's net book value fluctuates.
Stock Purchase Agreement
The Company has entered into various agreements with certain of its officers
to provide for business continuity in the event of the death of the Company's
president and sole stockholder. The agreements provide for the purchase of life
insurance on the Company's president through split-dollar arrangements and term
insurance to provide funds for the officers of the Company to acquire the
president's stock in the event of his death. All amounts advanced by the Company
to pay premiums that are not subject to reimbursement from the officers shall be
collectible by the Company from the net equity of the insurance policy or from
the proceeds paid thereon.
Profit-Sharing and 401(k) Plan
Effective November 1, 1994, the Company established a defined contribution
plan for its employees. Employees over the age of 21 are eligible to participate
after one year of service with the Company. Under this plan, employees may elect
to defer up to 15 percent of their salary, subject to Internal Revenue Code
limits. The Company may make a discretionary match as well as a discretionary
profit-sharing contribution. The Company's contribution for the years ended
October 31, 1995 and 1996, totaled $16,970 and $22,466, respectively, and the
Company has accrued approximately $21,500 at September 30, 1997, for
contributions to be funded in the subsequent fiscal year.
10. FINANCIAL INSTRUMENTS:
The Company's financial instruments consist of cash and cash equivalents,
accounts receivable, accounts payable, a line of credit and notes payable. The
Company believes that the carrying value of these instruments on the
accompanying balance sheets approximates their fair value.
F-83
159
11. COMMITMENTS AND CONTINGENCIES:
Litigation
The Company is involved in disputes or legal actions arising in the ordinary
course of business. Management does not believe the outcome of such legal
actions will have a material adverse effect on the Company's financial position
or results of operations.
Insurance
The Company carries a broad range of insurance coverage, including business
auto liability, workers' compensation, general liability and an umbrella policy.
The Company has not incurred significant uninsured losses on any of these items.
12. MAJOR CUSTOMERS AND RISK CONCENTRATION:
The Company had sales of approximately 16 percent of total sales to one
major customer during the years ended October 31, 1995 and 1996. During the year
ended September 30, 1997, the Company had sales of approximately 11% and 10% of
total sales to two major customers. During the period from October 1, 1997
through January 30, 1998, the Company had sales of approximately 25% and 12% of
total sales to two major customers.
In addition, the Company grants credit, generally without collateral, to its
customers, which are general contractors located primarily in Harris County,
Texas, and surrounding areas. Consequently, the Company is subject to potential
credit risk related to changes in business and economic factors within the
commercial and industrial markets in this geographic region. However, management
believes that its contract acceptance, billing and collection policies are
adequate to minimize the potential credit risk.
The Company routinely maintains cash balances in financial institutions in
excess of federally insured limits.
F-84
160
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Charles P. Bagby, Co., Inc.:
We have audited the accompanying balance sheets of Charles P. Bagby, Co.,
Inc., an Alabama S-Corporation, as of December 31, 1996 and September 30, 1997,
and the related statements of operations, cash flows and stockholder's equity
for the years ended December 31, 1996 and September 30, 1997 and for the nine
months ended September 30, 1997 and for the period from October 1, 1997 through
January 30, 1998. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Charles P. Bagby, Co., Inc.
as of December 31, 1996 and September 30, 1997, and the results of its
operations and its cash flows for the years ended December 31, 1996 and
September 30, 1997, and for the nine months ended September 30, 1997 and for the
period from October 1, 1997 through January 30, 1998, in conformity with
generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Houston, Texas
September 11, 1998
F-85
161
CHARLES P. BAGBY, CO., INC.
BALANCE SHEETS
(IN THOUSANDS)
ASSETS
DECEMBER 31, SEPTEMBER 30,
1996 1997
------------ -------------
CURRENT ASSETS:
Cash and cash equivalents ..................................... $ 624 $ 851
Accounts receivable --
Trade, net of allowance of $42 and $48,
respectively ............................................... 1,186 1,289
Retainage .................................................. 444 602
Notes receivable, related party ............................... 2 15
Costs and estimated earnings in excess of
billings on uncompleted contracts .......................... 167 755
Prepaid expenses and other current assets ..................... 359 323
-------- --------
Total current assets .................................. 2,782 3,835
PROPERTY AND EQUIPMENT, net ..................................... 221 246
-------- --------
Total assets .......................................... $ 3,003 $ 4,081
======== ========
LIABILITIES AND STOCKHOLDER'S EQUITY
CURRENT LIABILITIES:
Accounts payable and accrued expenses ......................... $ 1,402 $ 1,821
Billings in excess of costs and estimated
earnings on uncompleted contracts .......................... 66 366
-------- --------
Total current liabilities ............................. 1,468 2,187
-------- --------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDER'S EQUITY
Common stock, $1 par value, 1,000 shares
authorized and outstanding ................................. 1 1
Retained earnings ............................................. 1,534 1,893
-------- --------
Total stockholder's equity ............................ 1,535 1,894
-------- --------
Total liabilities and stockholder's equity ............ $ 3,003 $ 4,081
======== ========
The accompanying notes are an integral part of these financial statements.
F-86
162
CHARLES P. BAGBY, CO., INC.
STATEMENTS OF OPERATIONS
(IN THOUSANDS)
PERIOD FROM,
NINE MONTHS OCTOBER 1,
ENDED 1997
YEAR ENDED SEPTEMBER 30, YEAR ENDED THROUGH
DECEMBER 31, ---------------------- SEPTEMBER 30, JANUARY 30,
1996 1996 1997 1997 1998
------------ ----------- -------- ------------- ------------
(UNAUDITED)
REVENUES .......................... $ 7,634 $ 5,105 $ 9,243 $ 11,772 $ 2,623
COST OF SERVICES (including
depreciation) ................... 6,412 4,419 7,927 9,920 2,417
-------- -------- -------- -------- --------
Gross profit ............ 1,222 686 1,316 1,852 206
SELLING, GENERAL AND
ADMINISTRATIVE EXPENSES ......... 680 364 824 1,140 (6)
-------- -------- -------- -------- --------
Income from
operations ............ 542 322 492 712 212
-------- -------- -------- -------- --------
OTHER INCOME (EXPENSE):
Other ........................... 39 37 (4) (2) 4
-------- -------- -------- -------- --------
Other income
(expense), net ........ 39 37 (4) (2) 4
-------- -------- -------- -------- --------
NET INCOME ........................ $ 581 $ 359 $ 488 $ 710 $ 216
======== ======== ======== ======== ========
The accompanying notes are an integral part of these financial statements.
F-87
163
CHARLES P. BAGBY, CO., INC.
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
PERIOD FROM
OCTOBER 1,
NINE MONTHS 1997
YEAR ENDED ENDED SEPTEMBER 30, YEAR ENDED THROUGH
DECEMBER 31, ------------------------ SEPTEMBER 30, JANUARY 30,
1996 1996 1997 1997 1998
------------ ----------- -------- ------------- -------------
(UNAUDITED)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income .......................................... $ 581 $ 359 $ 488 $ 710 $ 216
Adjustments to reconcile net income to net
cash provided by (used in) operating
activities --
Depreciation and amortization ..................... 21 15 17 23 6
Changes in operating assets and
liabilities -- (Increase) decrease in --
Accounts receivable ........................... (764) (159) (274) (879) 484
Costs and estimated earnings in excess
of billings on uncompleted
contracts ................................... (15) 94 (588) (697) 579
Prepaid expenses and other current
assets ...................................... (136) (183) 36 83 17
Increase (decrease) in --
Accounts payable and accrued expenses ......... 130 (582) 419 1,131 (1,097)
Billings in excess of costs and
estimated earnings on uncompleted
contracts ................................... 51 37 301 315 (259)
Other, net .................................... 30 20 2 12 19
-------- -------- -------- -------- --------
Net cash provided by (used in) operating
activities .................................. (102) (399) 401 698 (35)
-------- -------- -------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions of property and equipment ................. (20) (16) (54) (48) (1)
-------- -------- -------- -------- --------
Net cash used in investing activities ......... (20) (16) (54) (48) (1)
-------- -------- -------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Short-term borrowings ............................... -- -- 230 230 650
Payments on short-term borrowings ................... -- -- (230) (230) --
Distributions to shareholders ....................... (360) (10) (120) (480) (1,408)
-------- -------- -------- -------- --------
Net cash used in financing activities ......... (360) (10) (120) (480) (758)
-------- -------- -------- -------- --------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS ......................................... (482) (425) 227 170 (794)
CASH AND CASH EQUIVALENTS, beginning of
period .............................................. 1,106 1,106 624 681 851
-------- -------- -------- -------- --------
CASH AND CASH EQUIVALENTS, end of
period .............................................. $ 624 $ 681 $ 851 $ 851 $ 57
======== ======== ======== ======== ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
Cash paid for --
Interest .......................................... $ 1 $ 1 $ 10 $ 10 $ --
The accompanying notes are an integral part of these financial statements.
F-88
164
CHARLES P. BAGBY, CO., INC.
STATEMENTS OF STOCKHOLDER'S EQUITY
(IN THOUSANDS, EXCEPT SHARE INFORMATION)
COMMON STOCK TOTAL
---------------------- RETAINED STOCKHOLDER'S
SHARES AMOUNT EARNINGS EQUITY
-------- -------- -------- -------------
BALANCE, December 31, 1995 ............. 1,000 $ 1 $ 1,283 $ 1,284
Distributions to shareholder ......... -- -- (360) (360)
Net unrealized gains ................. -- -- 30 30
Net income ........................... -- -- 581 581
-------- -------- -------- --------
BALANCE, December 31, 1996 ............. 1,000 1 1,534 1,535
Distributions to shareholder ......... -- -- (120) (120)
Net unrealized losses ................ -- -- (9) (9)
Net income ........................... -- -- 488 488
-------- -------- -------- --------
BALANCE, September 30, 1997 ............ 1,000 1 1,893 1,894
Distributions to shareholders ........ -- -- (1,886) (1,886)
Net Income ........................... -- -- 216 216
-------- -------- -------- --------
BALANCE, January 30, 1998 .............. 1,000 $ 1 $ 223 $ 224
======== ======== ======== ========
The accompanying notes are an integral part of these financial statements.
F-89
165
CHARLES P. BAGBY, CO., INC.
NOTES TO FINANCIAL STATEMENTS
1. BUSINESS AND ORGANIZATION:
Charles P. Bagby, Co., Inc. (an Alabama S-Corporation), and its
majority-owned subsidiary, Haymaker Electric, Ltd. (collectively, the
"Company"), focuses on providing electrical system installation and repair
services primarily for mid-sized to large commercial facilities. The Company
performs the majority of its contract work under cost-plus-fee contracts and
fixed price contracts, with contract terms generally ranging from two to 18
months. The Company performs the majority of its work in the state of Alabama.
All significant intercompany activity has been eliminated in consolidation.
On January 30, 1998, concurrent with the closing of the initial public
offerings in the United States and Canada and outside the United States and
Canada (the Offerings) of additional common stock by Integrated Electrical
Services, Inc. (IES), the Company was acquired by IES. All outstanding shares of
the Company's common stock were exchanged for cash and shares of IES common
stock. In addition, the key executives of the Company entered into employment
agreements with the Company and IES which have an initial term of five years,
and generally restrict the disclosure of confidential information as well as
restrict competition with the Company and IES for a period of two years
following termination of employment. The Company has changed from a calendar to
a September fiscal year.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Interim Financial Information
The interim financial statements for the nine months ended September 30,
1996, are unaudited and have been prepared pursuant to the rules and regulations
of the Securities and Exchange Commission. Accordingly, they do not include all
of the information and footnotes required by generally accepted accounting
principles for complete financial statements. In the opinion of the Company's
management, the unaudited interim financial statements contain all adjustments
(consisting of normal recurring adjustments) considered necessary for a fair
presentation. The results of operations for the interim periods are not
necessarily indicative of the results for the entire fiscal year.
The financial statements for the period from October 1, 1997 through January
30, 1998 are presented for purposes of complying with certain reporting
requirements of the Securities and Exchange Commission's Staff Accounting
Bulletin No. 80 and are not necessarily indicative of the results to be expected
for the entire year.
Cash and Cash Equivalents
The Company considers all highly liquid debt instruments with an original
maturity of three months or less when purchased to be cash equivalents.
Supplemental Cash Flow Information (in thousands)
The Company had the following noncash investing and financing activities
for the period from October 1, 1997 through January 30, 1998:
PERIOD FROM
OCTOBER 1,
1997
THROUGH
JANUARY 30,
1998
-----------
Property distributions............................................. $ 176
Marketable securities distribution................................. 265
Life insurance policy cash surrender value distribution............ 37
F-90
166
Property and Equipment
Property and equipment are stated at cost, and depreciation is computed
using the straight-line method over the estimated useful lives of the assets.
Leasehold improvements are capitalized and amortized over the lesser of the life
of the lease or the estimated useful life of the asset. Depreciation expense was
approximately $21,000, $23,000 and $6,000 for the years ended December 31, 1996
and September 30, 1997 and the period from October 1, 1997 through January 30,
1998, respectively.
Expenditures for repairs and maintenance are charged to expense when
incurred. Expenditures for major renewals and betterments, which extend the
useful lives of existing equipment, are capitalized and depreciated. Upon
retirement or disposition of property and equipment, the cost and related
accumulated depreciation are removed from the accounts and any resulting gain or
loss is recognized in the statements of operations.
Revenue Recognition
The Company recognizes revenue when services are performed except when work
is being performed under a construction contract. Revenues from construction
contracts are recognized on the percentage-of-completion method measured by the
percentage of costs incurred to date to total estimated costs for each contract.
Such contracts generally provide that the customers accept completion of
progress to date and compensate the Company for services rendered measured in
terms of hours expensed or some other measure of progress. Contract costs
include all direct material and labor costs and those indirect costs related to
contract performance, such as indirect labor, supplies, tools, repairs and
depreciation costs. Provisions for the total estimated losses on uncompleted
contracts are made in the period in which such losses are determined. Changes in
job performance, job conditions, estimated profitability and final contract
settlements may result in revisions to costs and income and their effects are
recognized in the period in which the revisions are determined. An amount equal
to contract costs attributable to claims is included in revenues when
realization is probable and the amount can be reliably estimated.
The balances billed but not paid by customers pursuant to retainage
provisions in construction contracts will be due upon completion of the
contracts and acceptance by the customer. Based on the Company's experience with
similar contracts in recent years, the retention balance at each balance sheet
date will be collected within the subsequent fiscal year.
The current asset, "Costs and estimated earnings in excess of billings on
uncompleted contracts," represents revenues recognized in excess of amounts
billed. The current liability, "Billings in excess of costs and estimated
earnings on uncompleted contracts," represents billings in excess of revenues
recognized.
Warranty Costs
For certain contracts, the Company warrants labor for the first year after
installation of new electrical systems. The Company generally warrants labor for
30 days after servicing of existing electrical systems. A reserve for warranty
costs is recorded based upon the historical level of warranty claims and
management's estimate of future costs.
Provision for Doubtful Accounts
The Company provides an allowance for doubtful accounts based upon the
specific identification of accounts receivable where collection is no longer
probable.
Income Taxes
The Company is an Alabama sub-chapter S corporation and is not subject to
federal income tax. The earnings of the Company are taxable to the individual
stockholder.
F-91
167
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires the use of estimates and assumptions by
management in determining the reported amounts of assets and liabilities,
disclosures of contingent liabilities at the date of the financial statements
and the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates. Reference is made to the
"Revenue Recognition" section of this footnote and Note 10 for discussion of
significant estimates reflected in the Company's financial statements.
New Accounting Pronouncement
Effective November 1, 1996, the Company adopted Statement of Financial
Accounting Standards (SFAS) No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of." Accordingly, in
the event that facts and circumstances indicate that property and equipment or
other assets may be impaired, an evaluation of recoverability would be
performed. If an evaluation is required, the estimated future undiscounted cash
flows associated with the asset are compared to the asset's carrying amount to
determine if an impairment of such property is necessary. The effect of any
impairment would be to expense the difference between the fair value of such
property and its carrying value. Adoption of this standard did not have a
material effect on the financial position or results of operations of the
Company.
3. PROPERTY AND EQUIPMENT:
Property and equipment consists of the following (in thousands):
ESTIMATED
USEFUL LIVES DECEMBER 31, SEPTEMBER 30,
IN YEARS 1996 1997
------------ ------------ -------------
Transportation equipment ................ 5-6 $ 52 $ 84
Machinery and equipment ................. 5-10 33 33
Buildings and leasehold improvements .... 40 208 208
Furniture and fixtures .................. 3-10 83 93
----- -----
376 418
Less -- Accumulated depreciation
and amortization ...................... (155) (172)
----- -----
Property and equipment, net ... $ 221 $ 246
===== =====
4. DETAIL OF CERTAIN BALANCE SHEET ACCOUNTS:
Activity in the Company's allowance for doubtful accounts receivable
consists of the following (in thousands):
DECEMBER 31, SEPTEMBER 30,
1996 1997
------------ -------------
Balance at beginning of period ......... $22 $26
Additions to costs and expenses ........ 20 22
--- ---
Balance at end of period ............... $42 $48
=== ===
Accounts payable and accrued expenses consist of the following (in
thousands):
DECEMBER 31, SEPTEMBER 30,
1996 1997
------------ -------------
Accounts payable, trade ................ $ 685 $1,120
Accrued compensation and benefits ...... 175 624
Other accrued expenses ................. 542 77
------ ------
$1,402 $1,821
====== ======
F-92
168
Electrical system installation contracts in progress are as follows (in
thousands):
DECEMBER 31, SEPTEMBER 30,
1996 1997
------------ -------------
Costs incurred on contracts in progress ................. $ 4,304 $ 5,937
Estimated earnings, net of losses ....................... 546 1,321
------- -------
4,850 7,258
Less -- Billings to date................................. (4,749) (6,869)
------- -------
$ 101 $ 389
======= =======
Costs and estimated earnings in excess of billings on
uncompleted contracts ................................. $ 167 $ 755
Less -- Billings in excess of costs and
estimated earnings on uncompleted contracts ........... (66) (366)
------- -------
$ 101 $ 389
======= =======
5. LONG-TERM DEBT:
The Company had a $650,000 line of credit with a bank. The line of credit
expired June 30, 1998, and bore interest at 1 percent over the prime lending
rate. The line of credit was secured by a stockholder of a partner corporation.
No borrowings were outstanding under this line of credit at December 31, 1996 or
September 30, 1997. The line of credit was not renewed.
6. EMPLOYEE BENEFIT PLAN:
The Company has a defined contribution profit-sharing plan. The plan
provides for the Company to match 3 percent of the gross salary of each employee
subject to certain limitations. All participants are immediately fully vested.
Total contributions by the Company under the plan were approximately $51,000,
$106,000 and $23,000 for the years ended December 31, 1996 and September 30,
1997 and the period from October 1, 1997 through January 30, 1998, respectively.
7. FINANCIAL INSTRUMENTS:
The Company's financial instruments consist of cash and cash equivalents,
accounts receivable, notes receivable, accounts payable, a line of credit and
short-term borrowings. The Company believes that the carrying value of these
instruments on the accompanying balance sheets approximates their fair value.
8. COMMITMENTS AND CONTINGENCIES:
Litigation
The Company is involved in disputes or legal actions arising in the ordinary
course of business. Management does not believe the outcome of such legal
actions will have a material adverse effect on the Company's financial position
or results of operations.
Insurance
The Company carries a broad range of insurance coverage, including business
auto liability, general liability and an umbrella policy. The Company has not
incurred significant uninsured losses on any of these items.
9. MAJOR CUSTOMERS AND RISK CONCENTRATION:
The Company had sales comprising approximately 10%, 11% and 11% of total sales
to three major customers during the years ended December 31, 1996 and September
30, 1997, respectively. The Company had sales comprising approximately 18%, 17%,
15% and 10% of total sales to four major customers during the period from
October 1, 1997 through January 30, 1998.
F-93
169
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Amber Electric, Inc.:
We have audited the accompanying balance sheets of Amber Electric, Inc., a
Florida corporation, as of December 31, 1995 and 1996 and September 30, 1997,
and the related statements of operations, cash flows and stockholder's equity
for the years then ended and for the period from October 1, 1997 through January
30, 1998. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Amber Electric, Inc. as of
December 31, 1995 and 1996 and September 30, 1997, and the results of its
operations and its cash flows for the years then ended and for the period from
October 1, 1997 through January 30, 1998, in conformity with generally accepted
accounting principles.
ARTHUR ANDERSEN LLP
Houston, Texas
September 11, 1998
F-94
170
AMBER ELECTRIC, INC.
BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE INFORMATION)
ASSETS
DECEMBER 31,
-------------------- SEPTEMBER 30,
1995 1996 1997
------- ------- -------------
CURRENT ASSETS:
Cash and cash equivalents ..................................... $ 83 $ 565 $ 988
Accounts receivable--
Trade, net of allowance of $28, $40 and $51,
respectively ........................................... 1,159 1,382 2,365
Retainage .................................................. 468 518 470
Inventories ................................................... 39 28 25
Costs and estimated earnings in excess of billings
on uncompleted contracts ................................... 25 151 119
Employee advances (Note 8) .................................... 2 29 4
Note receivable, related party (Note 8) ....................... -- -- 123
Deferred tax asset ............................................ 36 65 63
Prepaid expenses and other current assets ..................... 22 -- 54
------- ------- -------
Total current assets .................................. 1,834 2,738 4,211
PROPERTY AND EQUIPMENT, net ..................................... 284 380 516
NOTE RECEIVABLE, related party (Note 8) ......................... 37 58 --
------- ------- -------
Total assets .......................................... $ 2,155 $ 3,176 $ 4,727
======= ======= =======
LIABILITIES AND STOCKHOLDER'S EQUITY
CURRENT LIABILITIES:
Current maturities of long-term debt .......................... $ 96 $ 133 $ 179
Line of credit ................................................ 101 -- --
Accounts payable and accrued expenses ......................... 696 1,157 1,276
Income taxes payable .......................................... 3 244 676
Billings in excess of costs and estimated earnings
on uncompleted contracts ................................... 355 408 196
Note payable, related party (Note 8) .......................... -- 100 --
Other ......................................................... 129 97 122
------- ------- -------
Total current liabilities ............................. 1,380 2,139 2,449
------- ------- -------
LONG-TERM DEBT, net of current maturities ....................... 573 538 568
DEFERRED TAX LIABILITY .......................................... 38 45 52
COMMITMENTS AND CONTINGENCIES (Note 11)
STOCKHOLDER'S EQUITY:
Common stock, $1 par value, 7,500 shares
authorized, 1,100 shares issued and
outstanding ................................................ 1 1 1
Retained earnings ............................................. 597 887 2,091
Treasury stock, 539 shares, at cost ........................... (434) (434) (434)
------- ------- -------
Total stockholder's equity ............................ 164 454 1,658
------- ------- -------
Total liabilities and stockholder's
equity .............................................. $ 2,155 $ 3,176 $ 4,727
======= ======= =======
The accompanying notes are an integral part of these financial statements.
F-95
171
AMBER ELECTRIC, INC.
STATEMENTS OF OPERATIONS
(IN THOUSANDS)
PERIOD FROM
OCTOBER 1,
YEAR ENDED NINE MONTHS ENDED 1997
DECEMBER 31, SEPTEMBER 30, YEAR ENDED THROUGH
------------------- -------------------- SEPTEMBER 30, JANUARY 30,
1995 1996 1996 1997 1997 1998
------- ------- ------- ------- ------------- ------------
(UNAUDITED)
REVENUES................................. $ 9,728 $13,878 $10,572 $13,080 $16,386 $ 6,677
COST OF SERVICES (including
depreciation).......................... 8,635 12,215 8,710 9,910 13,415 5,182
------- ------- ------- ------- ------- -------
Gross profit ................... 1,093 1,663 1,862 3,170 2,971 1,495
SELLING, GENERAL AND
ADMINISTRATIVE EXPENSES................ 957 1,160 978 1,197 1,379 2,132
------- ------- ------- ------- ------- -------
Income (loss) from Operations... 136 503 884 1,973 1,592 (637)
------- ------- ------- ------- ------- --------
OTHER INCOME (EXPENSE):
Interest expense....................... (65) (51) (51) (45) (45) (99)
Other.................................. 24 36 10 43 69 18
------- ------- ------- ------- ------- -------
Other income (expense), Net..... (41) (15) (41) (2) 24 (81)
------- ------- ------- ------- ------- --------
INCOME (LOSS) BEFORE PROVISION FOR
INCOME TAXES........................... 95 488 843 1,971 1,616 (718)
PROVISION (BENEFIT) FOR INCOME TAXES..... 36 198 333 767 632 (276)
------- ------- ------- ------- ------- --------
NET INCOME (LOSS)........................ $ 59 $ 290 $ 510 $ 1,204 $ 984 $ (442)
======= ======= ======= ======= ======= ========
The accompanying notes are an integral part of these financial statements.
F-96
172
AMBER ELECTRIC, INC.
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
PERIOD FROM
NINE MONTHS OCTOBER 1,
YEAR ENDED ENDED 1997
DECEMBER 31, SEPTEMBER 30, YEAR ENDED THROUGH
------------------ ------------------ SEPTEMBER 30, JANUARY 30,
1995 1996 1996 1997 1997 1998
------- ------- ------- ------- ------------- -----------
(UNAUDITED)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) ...................................... $ 59 $ 290 $ 510 $ 1,204 $ 984 $ (442)
Adjustments to reconcile net income (loss) to
net cash
Provided by (used in) operating activities--
Depreciation and amortization ........................ 62 87 61 146 172 46
Bad debt expense ..................................... 17 35 9 11 37 5
(Gain) Loss on sale of property and equipment ........ -- 5 4 (1) -- --
Increase in cash surrender value of life insurance
Policy ............................................. (14) -- -- -- -- --
Deferred income taxes ................................ (41) 24 (31) 34 89 (24)
Changes in operating assets and liabilities --
(Increase) decrease in --
Accounts receivable ............................. (299) (308) (112) (946) (1,142) (1,633)
Inventories ..................................... 15 11 3 3 11 (25)
Costs and estimated earnings in excess of
billings on uncompleted contracts ............. (6) (126) (129) 32 35 (12)
Employee advances ............................... 14 (27) (15) 25 13 4
Prepaid expenses and other current assets ....... (7) 22 (19) (54) (13) 41
Note receivable, related party .................. -- (21) (21) (65) (65) 123
Increase (decrease) in --
Accounts payable and accrued expenses ........... 20 461 188 119 392 1,107
Billings in excess of costs and estimated
earnings on uncompleted contracts ............. 304 53 (171) (212) 12 448
Income taxes payable ............................ 49 163 377 432 218 (295)
Other, net ........................................... 4 1 -- (7) (6) --
------- ------- ------- ------- ------- -------
Net cash provided by (used in) operating
activities .................................... 177 670 654 721 737 (657)
------- ------- ------- ------- ------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of property and equipment ........... 5 2 2 8 8 --
Additions of property and equipment .................... (155) (190) (157) (290) (323) (142)
------- ------- ------- ------- ------- -------
Net cash used in investing activities ........... (150) (188) (155) (282) (315) (142)
------- ------- ------- ------- ------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Note payable, related party ............................ -- 100 -- (100) -- --
Borrowings of line of credit ........................... 101 -- -- -- -- --
Payments of line of credit ............................. (125) (101) (101) -- -- --
Borrowings of long-term debt ........................... 104 131 95 200 236 707
Payments of long-term debt ............................. (74) (130) (83) (116) (163) (64)
------- ------- ------- ------- ------- -------
Net cash provided by (used in) financing
activities .................................... 6 -- (89) (16) 73 643
------- ------- ------- ------- ------- -------
NET INCREASE (DECREASE) IN CASH
AND CASH EQUIVALENTS ................................... 33 482 410 423 495 (156)
CASH AND CASH EQUIVALENTS, beginning of period ........... 50 83 83 565 493 988
------- ------- ------- ------- ------- -------
CASH AND CASH EQUIVALENTS, end of period ................. $ 83 $ 565 $ 493 $ 988 $ 988 $ 832
======= ======= ======= ======= ======= =======
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for --
Interest ............................................. $ 65 $ 51 $ 51 $ 45 $ 45 $ 99
Income taxes ......................................... $ 27 $ 10 $ 8 $ 301 $ 303 $ 44
The accompanying notes are an integral part of these financial statements.
F-97
173
AMBER ELECTRIC, INC.
STATEMENTS OF STOCKHOLDER'S EQUITY
(IN THOUSANDS, EXCEPT SHARE INFORMATION)
COMMON STOCK TOTAL
----------------- RETAINED TREASURY STOCKHOLDER'S
SHARES AMOUNT EARNINGS STOCK EQUITY
------ ------- -------- -------- -------------
BALANCE, December 31, 1994............. 1,100 $ 1 $ 538 $ (434) $ 105
Net income........................... -- -- 59 -- 59
----- ------- ------- ------ -------
BALANCE, December 31, 1995............. 1,100 1 597 (434) 164
Net income........................... -- -- 290 -- 290
----- ------- ------- ------ -------
BALANCE, December 31, 1996............. 1,100 1 887 (434) 454
Net income (unaudited)............... -- -- 1,204 -- 1,204
----- ------- ------- ------ -------
BALANCE, September 30, 1997............ 1,100 1 2,091 (434) 1,658
Net loss.............................. -- -- (442) -- (442)
----- ------- -------- ------ -------
BALANCE, January 30, 1998.............. 1,100 $ 1 $ 1,649 $ (434) $ 1,216
===== ======= ======= ====== =======
The accompanying notes are an integral part of these financial statements
F-98
174
AMBER ELECTRIC, INC.
NOTES TO FINANCIAL STATEMENTS
1. BUSINESS AND ORGANIZATION:
Amber Electric, Inc. (the Company), a Florida corporation, focuses on
providing electrical system installation and repair services primarily for
residential and mid-sized to large commercial facilities. The Company performs
the majority of its contract work under fixed price contracts, with contract
terms generally ranging from two to 12 months. The Company performs the majority
of its work in central Florida.
On January 30, 1998, concurrent with the closing of the initial public
offerings in the United States and Canada and outside the United States and
Canada (the Offerings) of additional common stock by Integrated Electrical
Services, Inc. (IES), the Company was acquired by IES. All outstanding shares of
the Company's common stock were exchanged for cash and shares of IES common
stock. In addition, the key executives of the Company entered into employment
agreements with the Company and IES which have an initial term of five years,
and generally restrict the disclosure of confidential information as well as
restrict competition with the Company and IES for a period of two years
following termination of employment. The Company has changed from a calendar to
a September fiscal year.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Interim Financial Information
The interim financial statements for the nine months ended September 30,
1996 and 1997, are unaudited and have been prepared pursuant to the rules and
regulations of the Securities and Exchange Commission. Accordingly, they do not
include all of the information and footnotes required by generally accepted
accounting principles for complete financial statements. In the opinion of the
Company's management, the unaudited interim financial statements contain all
adjustments (consisting of normal recurring adjustments) considered necessary
for a fair presentation. The results of operations for the interim periods are
not necessarily indicative of the results for the entire fiscal year.
The financial statements for the period from October 1, 1997 through January
30, 1998 are presented for purposes of complying with certain reporting
requirements of the Securities and Exchange Commission's Staff Accounting
Bulletin No. 80 and are not necessarily indicative of the results to be expected
for the entire year.
Cash and Cash Equivalents
The Company considers all highly liquid investments purchased with an
original maturity of three months or less to be cash equivalents.
Inventories
Inventories consist of parts and supplies held for use in the ordinary
course of business and are stated at the lower of cost or market using the
first-in, first-out (FIFO) method.
Property and Equipment
Property and equipment are stated at cost, and depreciation is computed
using the straight-line and declining-balance methods over the estimated useful
lives of the related assets. Leasehold improvements are capitalized and
amortized over the estimated useful life of the asset. Depreciation and
amortization expense was approximately $62,000, $87,000, $172,000 and $46,000
for the years ended December 31, 1995, 1996, and September 30, 1997, and for the
period from October 1, 1997 through January 30, 1998, respectively.
F-99
175
Expenditures for repairs and maintenance are charged to expense when
incurred. Expenditures for major renewals and betterments, which extend the
useful lives of existing equipment, are capitalized and depreciated. Upon
retirement or disposition of property and equipment, the cost and related
accumulated depreciation are removed from the accounts and any resulting gain or
loss is recognized in the statements of operations.
Revenue Recognition
The Company recognizes revenue when services are performed except when work
is being performed under a construction contract. Revenues from construction
contracts are recognized on the percentage-of-completion method measured by the
percentage of costs incurred to date to total estimated costs for each contract.
Such contracts generally provide that the customers accept completion of
progress to date and compensate the Company for services rendered measured in
terms of hours expensed or some other measure of progress. Contract costs
include all direct material and labor costs and those indirect costs related to
contract performance, such as indirect labor, supplies, tools, repairs and
depreciation costs. Provisions for the total estimated losses on uncompleted
contracts are made in the period in which such losses are determined. Changes in
job performance, job conditions, estimated profitability and final contract
settlements may result in revisions to costs and income and their effects are
recognized in the period in which the revisions are determined. An amount equal
to contract costs attributable to claims is included in revenues when
realization is probable and the amount can be reliably estimated.
The balances billed but not paid by customers pursuant to retainage
provisions in construction contracts will be due upon completion of the
contracts and acceptance by the customer. Based on the Company's experience with
similar contracts in recent years, the retention balance at each balance sheet
date will be collected within the subsequent fiscal year.
The current asset, "Costs and estimated earnings in excess of billings on
uncompleted contracts," represents revenues recognized in excess of amounts
billed. The current liability, "Billings in excess of costs and estimated
earnings on uncompleted contracts," represents billings in excess of revenues
recognized.
Warranty Costs
For certain contracts, the Company warrants labor for the first year after
installation of new electrical systems. The Company generally warrants labor for
one year after servicing of existing electrical systems.
Allowance for Doubtful Accounts
The Company provides an allowance for doubtful accounts based upon the
specific identification of accounts receivable where collection is no longer
probable.
Income Taxes
The Company follows the asset and liability method of accounting for income
taxes in accordance with Statement of Financial Accounting Standards (SFAS) No.
109. Under this method, deferred assets and liabilities are recorded for future
tax consequences of temporary differences between the financial reporting and
tax bases of assets and liabilities, and are measured using enacted tax rates
and laws.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires the use of estimates and assumptions by
management in determining the reported amounts of assets and liabilities,
disclosures of contingent liabilities at the date of the financial statements
and the reported amounts of revenues and expenses during the reporting period.
Actual results
F-100
176
could differ from those estimates. Reference is made to the "Revenue
Recognition" section of this footnote for discussion of significant estimates
reflected in the Company's financial statements.
New Accounting Pronouncement
Effective November 1, 1996, the Company adopted SFAS No. 121, "Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed
Of." Accordingly, in the event that facts and circumstances indicate that
property and equipment or other assets may be impaired, an evaluation of
recoverability would be performed. If an evaluation is required, the estimated
future undiscounted cash flows associated with the asset are compared to the
asset's carrying amount to determine if an impairment of such property is
necessary. The effect of any impairment would be to expense the difference
between the fair value of such property and its carrying value. Adoption of this
standard did not have a material effect on the financial position or results of
operations of the Company.
3. PROPERTY AND EQUIPMENT:
Property and equipment consists of the following (in thousands):
ESTIMATED DECEMBER 31,
USEFUL LIVES ----------------------- SEPTEMBER 30,
IN YEARS 1995 1996 1997
------------ ----------- ----------- -------------
Transportation equipment........... 3-7 $ 430 $ 541 $ 631
Machinery and equipment............ 3-7 101 78 99
Leasehold improvements............. 5-39 76 74 87
Furniture and fixtures............. 3-7 121 91 191
------ ------ -------
728 784 1,008
Less -- Accumulated depreciation
and amortization................. (444) (404) (492)
------ ------ -------
Property and equipment,
net....................... $ 284 $ 380 $ 516
====== ====== =======
4. DETAIL OF CERTAIN BALANCE SHEET ACCOUNTS:
Activity in the Company's allowance for doubtful accounts receivable
consists of the following (in thousands):
DECEMBER 31,
------------------ SEPTEMBER 30,
1995 1996 1997
---- ---- -------------
Balance at beginning of period.............. $ 17 $ 28 $ 40
Additions to costs and expenses............. 17 35 11
Deductions for uncollectible receivables
written off and recoveries................ (6) (23) --
---- ---- ----
Balance at end of period.................... $ 28 $ 40 $ 51
==== ==== ====
Accounts payable and accrued expenses consist of the following (in
thousands):
DECEMBER 31,
------------------- SEPTEMBER 30,
1995 1996 1997
------ ------ -------------
Accounts payable, trade ............. $ 537 $ 882 $1,006
Accrued compensation and benefits ... 84 110 187
Other accrued expenses .............. 75 165 83
------ ------ ------
$ 696 $1,157 $1,276
====== ====== ======
Electrical system installation contracts in progress are as follows (in
thousands):
DECEMBER 31,
---------------------- SEPTEMBER 30,
1995 1996 1997
------- ------- -------------
Costs incurred on contracts in progress .............. $ 1,912 $ 2,100 $ 1,582
Estimated earnings, net of losses .................... 333 258 192
------- ------- -------
2,245 2,358 1,774
Less -- Billings to date ............................. (2,575) (2,615) (1,851)
------- ------- -------
$ (330) $ (257) $ (77)
======= ======= =======
Costs and estimated earnings in excess of billings
on uncompleted contracts ........................... $ 25 $ 151 $ 119
Less -- Billings in excess of costs and
estimated earnings on uncompleted
contracts ..................................... (355) (408) (196)
------- ------- -------
$ (330) $ (257) $ (77)
======= ======= =======
F-101
177
5. LONG-TERM DEBT:
Long-term debt consists of notes payable to various banks. The debt is
secured by certain equipment. The notes are payable in monthly installments
including interest at rates ranging from 8 percent to 10.9 percent.
The Company has a note payable to a former stockholder payable in monthly
installments of $4,333, including interest at 7.5 percent, due August 2004. The
debt is guaranteed by the majority stockholder. The balance of such debt was
approximately $330,000, $302,000 and $279,000 at December 31, 1995, 1996 and
September 30, 1997, respectively.
The Company also has a note payable outstanding to an individual with a 5
percent stated interest rate and an 8.12 percent imputed interest rate. The note
is payable in monthly installments of principal and interest of $1,893,
collateralized by equipment and inventories, and is due February 2005. The
balance of the note was approximately $168,000, $153,000 and $142,000 at
December 31, 1995, 1996 and September 30, 1997, respectively.
The maturities of long-term debt as of September 30, 1997, are as follows
(in thousands):
Year ending December 31 --
1998.................... $ 179
1999.................... 155
2000.................... 115
2001.................... 76
2002.................... 70
Thereafter.............. 152
-----
$ 747
=====
At September 30, 1997 and December 31, 1996, the Company had a $500,000 line
of credit with a bank, collateralized by accounts receivable and certain other
assets. Interest is payable monthly at the bank's prime rate (8.5 percent at
September 30, 1997). The agreement stipulates a minimum interest rate of 8
percent. Any amounts available are limited to 75 percent of eligible accounts
receivable, as defined. At September 30, 1997 and December 31, 1996, the entire
amount of the line remains available to be borrowed. The line of credit is
subject to a continuing guarantee by the Company's majority stockholder. The
line of credit is due on demand, but in no event no later than July 5, 1998.
At December 31, 1995, the maximum amount available under such line of credit
was approximately $99,000 as the Company had a $200,000 line of credit with the
bank.
6. LEASES:
The Company leases office space from the majority stockholder under a
month-to-month operating lease. Rent expense incurred under this related-party
lease was approximately $67,000, $81,000, $83,000 and $29,000 for the years
ended December 31, 1995, 1996 and September 30, 1997 and for the period from
October 1, 1997 through January 30, 1998, respectively.
There are no future minimum lease payments under this operating lease.
F-102
178
7. INCOME TAXES (IN THOUSANDS):
Federal income taxes are as follows:
PERIOD FROM
OCTOBER 1,
YEAR ENDED 1997
DECEMBER 31, YEAR ENDED THROUGH
---------------- SEPTEMBER 30, JANUARY 30,
1995 1996 1997 1998
---- ---- ------------- -----------
Federal --
Current ............ $ 1 $ 224 $ 510 $(251)
Deferred ........... 30 (54) 32 8
State --
Current ............ -- 27 95 -
Deferred ........... 5 1 (5) (33)
---- ----- ----- -----
$ 36 $ 198 $ 632 $(276)
==== ===== ===== =====
Actual income tax expense (benefit) differs from income tax expense
(benefit) computed by applying the U.S. federal statutory corporate rate of 35
percent to income before provision for income taxes as follows:
PERIOD FROM
OCTOBER 1,
YEAR ENDED 1997
DECEMBER 31, YEAR ENDED THROUGH
----------------- SEPTEMBER 30, JANUARY 30,
1995 1996 1997 1998
----- ----- ------------- -----------
Provision at the statutory rate ................ $ 33 $ 171 $ 565 $(251)
Increase resulting from --
State income taxes, net of related
federal benefit ........................... 3 19 59 (25)
Permanent differences, primarily meals and
entertainment ............................. -- 8 8 --
----- ----- ----- -----
$ 36 $ 198 $ 632 $(276)
===== ===== ===== =====
Deferred income tax provisions result from temporary differences in the
recognition of income and expenses for financial reporting purposes and for tax
purposes. The tax effects of these temporary differences, representing deferred
tax assets and liabilities, result principally from the following:
DECEMBER 31,
------------------ SEPTEMBER 30,
1995 1996 1997
----- ----- -------------
Deferred tax assets --
Allowance for doubtful accounts ................... $ 11 $ 17 $ 20
Other accrued expenses not deducted for tax
purposes ....................................... 25 48 43
----- ----- -----
Total ..................................... 36 65 63
----- ----- -----
Deferred tax liabilities --
Accounting for long-term contracts ................ (129) (97) (122)
Bases differences on property and equipment and
capital lease accounting ....................... (38) (45) (52)
----- ----- -----
Total ..................................... (167) (142) (174)
----- ----- -----
Net deferred income tax liabilities ....... $(131) $ (77) $(111)
===== ===== =====
The net deferred tax assets and liabilities are comprised of the following:
DECEMBER 31,
------------------ SEPTEMBER 30,
1995 1996 1997
----- ----- -------------
Deferred tax assets --
Current .............................. $ 36 $ 65 $ 63
Long-term ............................ -- -- --
----- ----- -----
Total ........................ 36 65 63
----- ----- -----
Deferred tax liabilities --
Current .............................. (129) (97) (122)
Long-term ............................ (38) (45) (52)
----- ----- -----
Total ........................ (167) (142) (174)
----- ----- -----
Net deferred tax liability ... $(131) $ (77) $(111)
===== ===== =====
8. RELATED-PARTY TRANSACTIONS:
During 1995, the Company transferred its interest in the cash surrender
value of life insurance policies in exchange for a note receivable bearing
annual interest of 4 percent to a partnership controlled by the majority
stockholder of the Company. The entire
F-103
179
principal and accrued interest is due August 2005. The Company continues to pay
premiums for this policy, also increasing the receivable.
The Company had a note payable to the majority stockholder at December 31,
1996, which represented a bonus to the stockholder and was loaned to the Company
without interest attached. The balance was subsequently paid to the stockholder.
The Company will advance money to employees on occasion. Advanced amounts
are based on certain levels of employment and are repaid to the Company based on
a variety of repayment plans.
9. EMPLOYEE BENEFIT PLAN:
The Company has a defined contribution profit-sharing plan. The plan
provides for the Company to match, on a discretionary basis, one-half of the
first 4 percent contributed by each employee. Total contributions by the Company
under the plan were approximately $31,000, $44,000, $56,000 and $0 for the years
ending December 31, 1995, 1996 and September 30, 1997 and for the period from
October 1, 1997 through January 30, 1998, respectively. The Company had accrued
approximately $5,000 at September 30, 1997, for contributions to be funded in
the subsequent fiscal year.
10. FINANCIAL INSTRUMENTS:
The Company's financial instruments consist of cash and cash equivalents,
accounts receivable, employee advances, notes receivable, a line of credit,
accounts payable, notes payable and long-term debt. The Company believes that
the carrying value of these instruments on the accompanying balance sheets
approximates their fair value.
11. COMMITMENTS AND CONTINGENCIES:
Litigation
The Company is involved in disputes or legal actions arising in the ordinary
course of business. Management does not believe the outcome of such legal
actions will have a material adverse effect on the Company's financial position
or results of operations.
Insurance
The Company carries a broad range of insurance coverage, including business
auto liability, general liability and an umbrella policy. The Company has not
incurred significant uninsured losses on any of these items.
The Company provides for workers' compensation insurance through a partially
self-insured plan whereby the Company is responsible for certain incurred losses
with a maximum of 125 percent of standard state-rated workers' compensation
premiums. Estimated claims incurred during the years ended December 31, 1995,
1996 and September 30, 1997 were not material. Accordingly, the Company has not
recorded any reserves for its portion of self-insurance claims. During 1997, the
Company enrolled in a secured individual preferred dividend safety incentive
program for workers' compensation with a maximum premium of 100 percent of the
total normal state-rated premium. Employee health insurance is provided for
under a fully insured medical plan consisting of HMO and POS programs.
12. MAJOR CUSTOMERS AND RISK CONCENTRATION:
The Company had sales of approximately 16 percent of total sales to one
major customer for the year ended December 31, 1995, sales of approximately 15
and 13 percent of total sales to two major customers for the year ended December
31, 1996, sales of approximately 22 percent of total sales to one major customer
during the year ended September 30, 1997, and sales of approximately 51, 23 and
18 percent of total sales to three customers during the period from October 1,
1997 through January 30, 1998.
In addition, the Company grants credit, generally without collateral, to its
customers, which are real estate operations, general contractors, etc., located
primarily in central Florida. Consequently, the Company is subject to potential
credit risk related to changes in business and economic factors within the
central Florida region. However, management believes that its contract
acceptance, billing and collection policies are adequate to minimize the
potential credit risk.
The Company routinely maintains cash balances in financial institutions in
excess of federally insured limits.
F-104
180
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Daniel Electrical Contractors, Inc. and
Daniel Electrical of Treasure Coast Inc.:
We have audited the accompanying combined balance sheets of Daniel
Electrical Contractors, Inc., a Florida corporation, and Daniel Electrical of
Treasure Coast Inc., a Florida corporation, as of December 31, 1995 and 1996 and
September 30, 1997, and the related combined statements of operations, cash
flows and stockholder's equity for the years then ended and for the nine months
ended September 30, 1997, and for the period from October 1, 1997 through
January 30, 1998. These combined financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
combined financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the combined financial statements referred to above present
fairly, in all material respects, the combined financial position of Daniel
Electrical Contractors, Inc. and Daniel Electrical of Treasure Coast Inc., as of
December 31, 1995 and 1996 and September 30, 1997, and the combined results of
their operations and their cash flows for the years then ended and for the nine
months ended September 30, 1997, and for the period from October 1, 1997 through
January 30, 1998, in conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Houston, Texas
September 11, 1998
F-105
181
DANIEL ELECTRICAL CONTRACTORS, INC. AND
DANIEL ELECTRICAL OF TREASURE COAST INC.
COMBINED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE INFORMATION)
ASSETS
DECEMBER 31,
------------------- SEPTEMBER 30,
1995 1996 1997
------ ------ -------------
CURRENT ASSETS:
Cash and cash equivalents ................................ $ 62 $ 411 $ 917
Investments .............................................. 393 694 1,504
Accounts receivable --
Trade, net of allowance of $68, $69 and $115,
respectively ........................................ 1,819 1,444 3,443
Retainage, net of allowance of $--, $12 and $12,
respectively ........................................ 815 1,353 1,294
Employee receivables (Note 7) ......................... 8 17 30
Inventories .............................................. 103 84 23
Costs and estimated earnings in excess of billings on
uncompleted contracts ................................. 119 719 510
Prepaid expenses and other current assets ................ 24 35 166
------ ------ ------
Total current assets ............................. 3,343 4,757 7,887
PROPERTY AND EQUIPMENT, net ................................ 322 371 541
------ ------ ------
Total assets ..................................... $3,665 $5,128 $8,428
====== ====== ======
LIABILITIES AND STOCKHOLDER'S EQUITY
CURRENT LIABILITIES:
Current maturities of long-term debt ..................... $ 46 $ 34 $ 62
Accounts payable and accrued expenses .................... 1,325 946 1,840
Billings in excess of costs and estimated earnings on
uncompleted contracts ................................. 121 752 1,370
Deposit on contract in progress .......................... -- 500 --
Other current liabilities (Note 7) ....................... 477 114 81
------ ------ ------
Total current liabilities ........................ 1,969 2,346 3,353
------ ------ ------
LONG-TERM DEBT, net of current maturities .................. 42 52 102
OTHER LONG-TERM LIABILITIES (Note 7) ....................... 483 483 483
COMMITMENTS AND CONTINGENCIES
STOCKHOLDER'S EQUITY:
Common stock, $1 and $0.01 par value, 7,500 and 2,000
shares authorized, 7,500 and 100 shares issued and
outstanding at December 31, 1995, 1996, and
September 30, 1997 for Daniel Electrical
Contractors, Inc. and Daniel Electrical of Treasure
Coast Inc., respectively .............................. 8 8 8
Retained earnings ........................................ 1,110 2,111 4,131
Unrealized gain on securities ............................ 53 128 351
------ ------ ------
Total stockholder's equity ....................... 1,171 2,247 4,490
------ ------ ------
Total liabilities and stockholder's equity ....... $3,665 $5,128 $8,428
====== ====== ======
The accompanying notes are an integral part of these
combined financial statements.
F-106
182
DANIEL ELECTRICAL CONTRACTORS, INC. AND
DANIEL ELECTRICAL OF TREASURE COAST INC.
COMBINED STATEMENTS OF OPERATIONS
(IN THOUSANDS)
PERIOD FROM
OCTOBER 1,
YEAR ENDED NINE MONTHS 1997
DECEMBER 31, ENDED SEPTEMBER 30, YEAR ENDED THROUGH
-------------------- --------------------- SEPTEMBER 30, JANUARY 30,
1995 1996 1996 1997 1997 1998
------- ------- ----------- ------- ------------- ------------
(UNAUDITED)
REVENUES....................... $12,049 $12,585 $ 8,846 $14,670 $ 18,409 $ 9,132
COST OF SERVICES (including
depreciation)................ 11,725 9,713 6,675 10,480 13,518 6,789
------- ------- ------- ------- -------- --------
Gross profit......... 324 2,872 2,171 4,190 4,891 2,343
SELLING, GENERAL AND
ADMINISTRATIVE EXPENSES...... 1,502 1,884 1,360 1,792 2,316 1,312
------- ------- ------- ------- -------- --------
Income (loss) from
operations......... (1,178) 988 811 2,398 2,575 1,031
------- ------- ------- ------- -------- --------
OTHER INCOME (EXPENSE):
Interest expense............. (46) (73) (58) (45) (60) (20)
Other........................ 71 86 48 62 100 16
------- ------- ------- ------- -------- --------
Other income
(expense), net..... 25 13 (10) 17 40 (4)
------- ------- ------- ------- -------- ---------
NET INCOME (LOSS).............. $(1,153) $ 1,001 $ 801 $ 2,415 $ 2,615 $ 1,027
======= ======= ======= ======= ======== ========
The accompanying notes are an integral part of these
combined financial statements.
F-107
183
DANIEL ELECTRICAL CONTRACTORS, INC. AND
DANIEL ELECTRICAL OF TREASURE COAST INC.
COMBINED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
PERIOD FROM
OCTOBER 1,
YEAR ENDED NINE MONTHS 1997
DECEMBER 31, ENDED SEPTEMBER 30, YEAR ENDED THROUGH
---------------------- ------------------------ SEPTEMBER 30, JANUARY 30,
1995 1996 1996 1997 1997 1998
------- ------- ----------- ------- ------------- -----------
(UNAUDITED)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) ............................ $(1,153) $ 1,001 $ 801 $ 2,415 $ 2,615 $ 1,027
Adjustments to reconcile net income (loss)
to net cash provided by (used in)
operating activities --
Depreciation and amortization .............. 113 125 100 116 141 57
Provision for bad debts .................... 29 205 23 47 229 34
Loss on abandonment of leasehold
improvements ............................. -- -- -- 34 34 --
Changes in operating assets and
liabilities --
(Increase) decrease in --
Accounts receivable ................... 423 (185) (577) (1,998) (1,606) (971)
Inventories ........................... 14 19 43 61 37 (190)
Costs and estimated earnings in
excess of billings on uncompleted
contracts ........................... 733 (600) (436) 209 45 (11)
Prepaid expenses and other current
assets .............................. 25 (11) 17 (130) (158) 150
Increase (decrease) in --
Accounts payable and accrued
expenses ............................ (567) (379) (151) 895 667 146
Deposits on contracts in progress ..... -- 500 500 (500) (500) --
Billings in excess of costs and
estimated earnings on uncompleted
contracts ........................... (92) 631 701 618 548 131
Other current liabilities ............. (42) (87) (8) 11 (68) (81)
------- ------- ------- ------- ------- -------
Net cash provided by (used in)
operating activities ................ (517) 1,219 1,013 1,778 1,984 292
------- ------- ------- ------- ------- -------
CASH FLOWS FROM INVESTING
ACTIVITIES:
Purchase of investments ...................... (31) (306) (3) (586) (889) (536)
Additions of property and equipment .......... (97) (175) (84) (353) (444) (5)
------- ------- ------- ------- ------- -------
Net cash used in investing
activities .......................... (128) (481) (87) (939) (1,333) (541)
------- ------- ------- ------- ------- -------
CASH FLOWS FROM FINANCING
ACTIVITIES:
Borrowings of long-term debt ................. 350 17 -- 154 171 4,062
Payments of long-term debt ................... (44) (406) (323) (92) (175) (15)
Distributions to stockholders ................ -- -- -- (395) (395) (4,005)
------- ------- ------- ------- ------- -------
Net cash provided by (used in)
financing activities ................ 306 (389) (323) (333) (399) 42
------- ------- ------- ------- ------- -------
NET INCREASE (DECREASE) IN CASH
AND CASH EQUIVALENTS ........................ (339) 349 603 506 252 (207)
CASH AND CASH EQUIVALENTS, beginning
of period ................................... 401 62 62 411 665 917
------- ------- ------- ------- ------- -------
CASH AND CASH EQUIVALENTS, end of
period ..................................... $ 62 $ 411 $ 665 $ 917 $ 917 $ 710
======= ======= ======= ======= ======= =======
SUPPLEMENTAL DISCLOSURE OF CASH
FLOW INFORMATION
Cash paid for --
Interest ..................................... $ 20 $ 113 $ 18 $ 7 $ 102 $ 17
The accompanying notes are an integral part of these
combined financial statements.
F-108
184
DANIEL ELECTRICAL CONTRACTORS INC. AND
DANIEL ELECTRICAL OF TREASURE COAST INC.
COMBINED STATEMENTS OF STOCKHOLDER'S EQUITY
(IN THOUSANDS, EXCEPT SHARE INFORMATION)
UNREALIZED
COMMON STOCK GAIN (LOSS) TOTAL
--------------------- RETAINED ON STOCKHOLDER'S
SHARES AMOUNT EARNINGS SECURITIES EQUITY
------- ------- -------- ---------- -------------
BALANCE, December 31, 1994 ..................... 7,500 $ 8 $ 2,263 $ (13) $ 2,258
Issuance of stock in Daniel Electrical of
Treasure Coast Inc. ....................... 100 -- -- -- --
Change in unrealized gain on securities ...... -- -- -- 66 66
Net loss ..................................... -- -- (1,153) -- (1,153)
------- ------- ------- ------- -------
BALANCE, December 31, 1995 ..................... 7,600 8 1,110 53 1,171
Change in unrealized gain on securities ...... -- -- -- 75 75
Net income ................................... -- -- 1,001 -- 1,001
------- ------- ------- ------- -------
BALANCE, December 31, 1996 ..................... 7,600 8 2,111 128 2,247
Distributions to stockholders ................ -- -- (395) -- (395)
Change in unrealized gain on securities ...... -- -- -- 223 223
Net income ................................... -- -- 2,415 -- 2,415
------- ------- ------- ------- -------
BALANCE, September 30, 1997 .................... 7,600 8 4,131 351 4,490
Change in unrealized gains on securities ..... -- -- -- 33 33
Distributions to stockholders ................ -- -- (5,123) (384) (5,507)
Net income ................................... -- -- 1,027 -- 1,027
------- ------- ------- ------- -------
BALANCE, January 30, 1998 ...................... 7,600 $ 8 $ 35 $ -- $ 43
======= ======= ======= ======= =======
The accompanying notes are an integral part of these
combined financial statements.
F-109
185
DANIEL ELECTRICAL CONTRACTORS, INC. AND
DANIEL ELECTRICAL OF TREASURE COAST INC.
NOTES TO COMBINED FINANCIAL STATEMENTS
1. BUSINESS AND ORGANIZATION:
Daniel Electrical Contractors, Inc. and Daniel Electrical of Treasure Coast
Inc., (collectively, the Company), both Florida corporations focuses on
providing electrical system installation and repair services primarily for
residential and mid-sized to large commercial facilities. The Company performs
the majority of its contract work under fixed price contracts with contract
terms generally ranging from six to 18 months. The Company performs the majority
of its work in Dade County, Florida.
The combined financial statements include the accounts of Daniel Electrical
Contractors, Inc. and Daniel Electrical of Treasure Coast Inc. These entities
are related by virtue of common ownership. All material intercompany
transactions and balances have been eliminated in combination.
On January 30, 1998, concurrent with the closing of the initial public
offerings in the United States and Canada and outside the United States and
Canada (the Offerings) of additional common stock by Integrated Electrical
Services, Inc. (IES), the Company was acquired by IES. All outstanding shares of
the Company's common stock were exchanged for cash and shares of IES common
stock. In addition, the key executives of the Company entered into employment
agreements with the Company and IES which have an initial term of five years,
and generally restrict the disclosure of confidential information as well as
restrict competition with the Company and IES for a period of two years
following termination of employment. The Company has changed from a calendar to
a September fiscal year.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Interim Financial Information
The interim financial statements for the nine months ended September 30,
1996 are unaudited and have been prepared pursuant to the rules and regulations
of the Securities and Exchange Commission. Accordingly, they do not include all
of the information and footnotes required by generally accepted accounting
principles for complete financial statements. In the opinion of the Company's
management, the unaudited interim financial statements contain all adjustments
(consisting of normal recurring adjustments) considered necessary for a fair
presentation. The results of operations for the interim periods are not
necessarily indicative of the results for the entire fiscal year.
The financial statements for the period from October 1, 1997 through January
30, 1998 are presented for purposes of complying with certain reporting
requirements of the Securities and Exchange Commission's Staff Accounting
Bulletin No. 80 and are not necessarily indicative of the results to be expected
for the entire year.
Cash and Cash Equivalents
The Company considers all highly liquid investments purchased with an
original maturity of three months or less to be cash equivalents.
Supplemental Cash Flow Information
The Company distributed certain net assets to a stockholder of the Company
totaling approximately $1,469,000.
Investments
Investments in securities are classified as securities available for sale
and consist of equity securities. Unrealized holding gains and losses on
securities available-for-sale are reported as net amount as a separate component
of stockholder's equity.
F-110
186
Inventories
Inventories consist of parts and supplies held for use in the ordinary
course of business and are stated at the lower of cost or market using the
first-in, first-out (FIFO) method.
Property and Equipment
Property and equipment are stated at cost, and depreciation is computed
using the straight-line method over the estimated useful lives of the assets.
Leasehold improvements are capitalized and amortized over the lesser of the life
of the lease or the estimated useful life of the asset. Depreciation and
amortization expense was $113,000, $125,000, $141,000 and $57,000 for the years
ended December 31, 1995, 1996 and September 30, 1997 and for the period from
October 1, 1997 through January 30, 1998, respectively.
Expenditures for repairs and maintenance are charged to expense when
incurred. Expenditures for major renewals and betterments, which extend the
useful lives of existing equipment, are capitalized and depreciated. Upon
retirement or disposition of property and equipment, the cost and related
accumulated depreciation are removed from the accounts and any resulting gain or
loss is recognized in the statements of operations.
Revenue Recognition
The Company recognizes revenue when services are performed, except when work
is being performed under a construction contract. Revenues from construction
contracts are recognized on the percentage-of-completion method measured by the
percentage of costs incurred to date to total estimated costs for each contract.
Such contracts generally provide that the customers accept completion of
progress to date and compensate the Company for services rendered measured in
terms of hours expensed or some other measure of progress. Contract costs
include all direct material and labor costs and those indirect costs related to
contract performance, such as indirect labor, supplies, tools, repairs and
depreciation costs. Provisions for the total estimated losses on uncompleted
contracts are made in the period in which such losses are determined. Changes in
job performance, job conditions, estimated profitability and final contract
settlements may result in revisions to costs and income and their effects are
recognized in the period in which the revisions are determined. An amount equal
to contract costs attributable to claims is included in revenues when
realization is probable and the amount can be reliably estimated.
The balances billed but not paid by customers pursuant to retainage
provisions in construction contracts will be due upon completion of the
contracts and acceptance by the customer. Based on the Company's experience with
similar contracts in recent years, the retention balance at each balance sheet
date will be collected within the subsequent fiscal year.
The current asset, "Costs and estimated earnings in excess of billings on
uncompleted contracts," represents revenues recognized in excess of amounts
billed. The current liability, "Billings in excess of costs and estimated
earnings on uncompleted contracts," represents billings in excess of revenues
recognized.
Warranty Costs
For certain contracts, the Company warrants labor for the first year after
installation of new electrical systems. The Company generally warrants labor for
30 days after servicing existing electrical systems. A reserve for warranty
costs is recorded based upon the historical level of warranty claims and
management's estimate of future costs.
Accounts Receivable and Allowance for Doubtful Accounts
The Company provides an allowance for doubtful accounts based upon the
specific identification of accounts receivable where collection is no longer
probable.
Income Taxes
The Company has elected S Corporation status as defined by the Internal
Revenue Code, whereby the Company itself is not subject to taxation for federal
purposes. Under S Corporation status, the stockholders report their share of the
Company's taxable earnings or losses in their personal tax returns.
Consequently, the accompanying financial statements of the Company do not
include a
F-111
187
provision for current or deferred income taxes. The Company intends to terminate
its S Corporation status concurrently with the effective date of the Offerings.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires the use of estimates and assumptions by
management in determining the reported amounts of assets and liabilities,
disclosures of contingent liabilities at the date of the financial statements
and the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates. Reference is made to the
"Revenue Recognition" section of this footnote and Note 10 for discussion of
significant estimates reflected in the Company's combined financial statements.
New Accounting Pronouncement
Effective November 1, 1996, the Company adopted Statement of Financial
Accounting Standards (SFAS) No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of." Accordingly, in
the event that facts and circumstances indicate that property and equipment or
other assets may be impaired, an evaluation of recoverability would be
performed. If an evaluation is required, the estimated future undiscounted cash
flows associated with the asset are compared to the asset's carrying amount to
determine if an impairment of such property is necessary. The effect of any
impairments would be to expense the difference between the fair value of such
property and its carrying value. Adoption of this standard did not have a
material effect on the combined financial position or results of operations of
the Company.
3. PROPERTY AND EQUIPMENT:
Property and equipment consists of the following (in thousands):
ESTIMATED DECEMBER 31,
USEFUL LIVES ---------------------- SEPTEMBER 30,
IN YEARS 1995 1996 1997
------------ ------- ------- -------------
Transportation equipment ................. 5 $ 446 $ 517 $ 597
Machinery and equipment .................. 5 120 134 151
Computer and telephone equipment ......... 5 92 114 141
Leasehold improvements ................... 5 116 144 209
Furniture and fixtures ................... 5 26 29 29
------- ------- -------
800 938 1,127
Less -- Accumulated depreciation
and amortization ....................... (478) (567) (586)
------- ------- -------
Property and equipment, net ... $ 322 $ 371 $ 541
======= ======= =======
4. DETAIL OF CERTAIN BALANCE SHEET ACCOUNTS:
Activity in the Company's allowance for doubtful accounts receivable
consists of the following (in thousands):
DECEMBER 31,
------------------ SEPTEMBER 30,
1995 1996 1997
----- ----- -------------
Balance at beginning of period ............. $ 47 $ 68 $ 87
Additions to costs and expenses ............ 29 205 229
Deductions for uncollectible receivables
written off and recoveries ............... (8) (192) (189)
----- ----- -----
Balance at end of period ......... $ 68 $ 81 $ 127
===== ===== =====
F-112
188
Accounts payable and accrued expenses consist of the following (in
thousands):
DECEMBER 31,
------------------- SEPTEMBER 30,
1995 1996 1997
------ ------ -------------
Accounts payable, trade ................ $1,009 $ 686 $1,296
Accrued compensation and benefits ...... 76 28 180
Other accrued expenses ................. 240 232 364
------ ------ ------
$1,325 $ 946 $1,840
====== ====== ======
Electrical system installation contracts in progress are as follows (in
thousands):
DECEMBER 31,
------------------------ SEPTEMBER 30,
1995 1996 1997
-------- -------- -------------
Costs incurred on contracts in progress ............. $ 6,197 $ 8,381 $ 11,760
Estimated earnings, net of losses ................... 1,238 2,993 4,120
-------- -------- --------
7,435 11,374 15,880
Less -- Billings to date ............................ (7,437) (11,407) (16,740)
-------- -------- --------
$ (2) $ (33) $ (860)
======== ======== ========
Costs and estimated earnings in excess of
billings on uncompleted contracts ................. $ 119 $ 719 $ 510
Less -- Billings in excess of costs and estimated
earnings on uncompleted contracts ................. (121) (752) (1,370)
-------- -------- --------
$ (2) $ (33) $ (860)
======== ======== ========
5. LONG-TERM DEBT:
Long-term debt consists of installment obligations collateralized by certain
transportation and computer equipment, and due in various monthly installments,
including interest ranging from 6 percent to 11 percent.
The maturities of long-term debt at September 30, 1997, are as follows (in
thousands):
1998 $ 62
1999 44
2000 36
2001 15
2002 7
------
$ 164
The Company has a $400,000 open line of credit with a bank. The line of
credit bears interest based upon the prime lending rate, which was 8.25% at
September 30, 1997. The line of credit is secured by the Company's investment in
securities and borrowings under such line of credit are due on demand. No
borrowings were outstanding under this line of credit at September 30, 1997.
6. LEASES:
In February of 1997, the Company leased its Miami facility from a Limited
Partnership which is controlled by the Company's stockholder. Prior to February
1997, the Company leased office space from a third party, and such lease expired
January 1997. The rent paid under this lease was approximately $71,000 for
December 31, 1996. The Company leases its Vero Beach facility from a company
which is owned by the Company's stockholder and is leased on a month-to-month
basis.
7. RELATED-PARTY TRANSACTIONS:
Related-Party Notes Payable
The Company has a $483,000 subordinated long-term note payable to the
president of the Company at December 31, 1995, 1996 and at September 30, 1997.
The Company also has a $175,000, $115,000 and $81,000 note payable due on demand
to the president of the Company at the respective periods.
F-113
189
Related-Party Accounts Receivable
The Company has an $8,000, $8,000 and $18,000 account receivable due from
the president of the Company at December 31, 1995, 1996 and at September 30,
1997, respectively. The Company also has a $9,000 and $12,000 employee
receivable at December 31, 1996 and at September 30, 1997, respectively.
Related-Party Entertainment Expense
Costs related to related-party entertainment expense amounted to $15,000,
$8,000, $4,000 and $0 for the years ended December 31, 1995, 1996 and September
30, 1997 and for the period from October 1, 1997 through January 30, 1998,
respectively.
Related-Party Compensation
The Company paid $58,000, $72,000, $72,000 and $0 for the years ended
December 31, 1995, 1996 and September 30, 1997 and for the period from October
1, 1997 through January 30, 1998, respectively to a related-party company for
compensation.
8. EMPLOYEE BENEFIT PLAN:
The Company has a nonqualifying discriminatory pension plan for certain
key executives. Contributions are subject to management's discretion. Total
contributions by the Company under the plan were approximately $9,000, $14,000,
$14,000 and $0 for the years ended December 31, 1995, 1996 and September 30,
1997 and for the period from October 1, 1997 through January 30, 1998,
respectively.
9. FINANCIAL INSTRUMENTS:
The Company's financial instruments consist of cash and cash equivalents,
investments, accounts receivable, accounts payable, a line of credit, notes
payable and long-term debt. The Company believes that the carrying value of
these instruments on the accompanying balance sheets approximates their fair
value.
10. COMMITMENTS AND CONTINGENCIES:
Litigation
The Company is involved in disputes or legal actions arising in the ordinary
course of business. Management does not believe the outcome of such legal
actions will have a material adverse effect on the Company's financial position
or results of operations.
Insurance
The Company carries a broad range of insurance coverage, including business
auto liability, general liability and an umbrella policy. The Company has not
incurred significant uninsured losses on any of these items.
The Company is self-insured for medical claims up to $14,000 per year in
total for all covered individuals. Additionally, the Company is part of the
state's workers' compensation plan and is responsible for claims up to $100,000
per accident with a maximum aggregate exposure for 24 months of $500,000. Claims
in excess of these amounts are covered by a stop-loss policy. Under the state's
policy, the Company has a $305,000 letter of credit which expires April 1, 1998.
The Company has recorded reserves for its portion of self-insured claims based
on estimated claims incurred through March 31, 1995 and 1996, December 31, 1996,
and September 30, 1997.
11. INVESTMENTS AVAILABLE-FOR-SALE:
Investments in securities consist of equity securities and mutual funds with
an aggregate market value of $393,000, $694,000 and $1,504,000 at December 31,
1995, 1996 and September 30, 1997, respectively, and unrealized holding gains of
$66,000, $75,000 and $237,000 for the respective periods.
F-114
190
12. MAJOR CUSTOMERS AND RISK CONCENTRATION:
The Company had sales of approximately 32 percent and 21 percent of total
sales to two major customers during the year ended December 31, 1995, sales of
approximately 29 percent and 25 percent of total sales to two major customers
during the year ended December 31, 1996, sales of approximately 30 percent and
38 percent of total sales to two major customers during the year ended September
30, 1997, and sales of approximately 35 percent, 21 percent and 21 percent of
total sales to three major customers for the period from October 1, 1997 through
January 30, 1998.
In addition, the Company grants credit, generally without collateral, to its
customers, which are general contractors located primarily in southern Florida.
Consequently, the Company is subject to potential credit risk related to changes
in business and economic factors within the southern Florida region. However,
management believes that its contract acceptance, billing and collection
policies are adequate to minimize the potential credit risk.
The Company routinely maintains cash balances in financial institutions in
excess of federally insured limits.
F-115
191
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Summit Electric of Texas, Incorporated:
We have audited the accompanying balance sheets of Summit Electric of Texas,
Incorporated, a Texas corporation, as of March 31, 1997 and September 30, 1997,
and the related statements of operations, cash flows and stockholder's equity
for the years then ended and for the period from October 1, 1997 through January
30, 1998. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Summit Electric of Texas,
Incorporated as of March 31, 1997 and September 30, 1997, and the results of its
operations and its cash flows for the years then ended and for the period from
October 1, 1997 through January 30, 1998, in conformity with generally accepted
accounting principles.
ARTHUR ANDERSEN LLP
Houston, Texas
September 11, 1998
F-116
192
SUMMIT ELECTRIC OF TEXAS, INCORPORATED
BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
ASSETS
MARCH 31, SEPTEMBER 30,
1997 1997
--------- -------------
CURRENT ASSETS:
Cash and cash equivalents .................................... $ 57 $ 157
Accounts receivable--
Trade, net of allowance of $112 and $122, respectively .... 2,270 2,543
Retainage ................................................. 128 91
Receivable from stockholder ............................... -- 66
Other receivables ......................................... 6 8
Deferred tax asset ........................................... 69 69
Costs and estimated earnings in excess of billings
on uncompleted contracts .................................. 239 178
Prepaid expenses and other current assets .................... 25 27
------ ------
Total current assets ................................. 2,794 3,139
NOTES RECEIVABLE FROM RELATED PARTIES .......................... 270 268
PROPERTY AND EQUIPMENT, net .................................... 223 180
OTHER ASSETS ................................................... 49 50
------ ------
Total assets ......................................... $3,336 $3,637
====== ======
LIABILITIES AND STOCKHOLDER'S EQUITY
CURRENT LIABILITIES:
Short-term debt, including current maturities of
long-term debt ............................................ $ 819 $ 808
Accounts payable and accrued expenses ........................ 974 1,494
Billings in excess of costs and estimated earnings
on uncompleted contracts .................................. 436 182
Other current liabilities .................................... 3 19
------ ------
Total current liabilities ............................ 2,232 2,503
------ ------
LONG-TERM DEBT, net of current maturities ...................... 101 88
DEFERRED TAX LIABILITY ......................................... 11 11
COMMITMENTS AND CONTINGENCIES
STOCKHOLDER'S EQUITY:
Common stock, $1 par value, 10,000 shares
authorized, 1,000 shares issued and
outstanding ............................................... 1 1
Retained earnings ............................................ 991 1,034
------ ------
Total stockholder's equity ........................... 992 1,035
------ ------
Total liabilities and stockholder's
equity ............................................. $3,336 $3,637
====== ======
The accompanying notes are an integral part of these financial statements.
F-117
193
SUMMIT ELECTRIC OF TEXAS, INCORPORATED
STATEMENTS OF OPERATIONS
(IN THOUSANDS)
PERIOD FROM
OCTOBER 1,
SIX MONTHS 1997
YEAR ENDED ENDED SEPTEMBER 30, YEAR ENDED THROUGH
MARCH 31, -------------------- SEPTEMBER 30, JANUARY 30,
1997 1996 1997 1997 1998
---------- ------- ------- ------------- ------------
(UNAUDITED)
REVENUES.......................... $ 10,565 $ 5,735 $ 6,165 $ 10,995 $ 3,735
COST OF SERVICES (including
depreciation)................... 9,157 4,946 5,243 9,454 3,123
-------- ------- ------- -------- --------
Gross profit............ 1,408 789 922 1,541 612
SELLING, GENERAL AND
ADMINISTRATIVE EXPENSES......... 1,340 699 822 1,463 878
-------- ------- ------- -------- --------
Income (loss) from
operations............ 68 90 100 78 (266)
-------- ------- ------- -------- ---------
OTHER INCOME (EXPENSE):
Interest expense................ (56) (19) (42) (79) (34)
Other........................... 25 13 11 23 8
-------- ------- ------- -------- --------
Other expense, net...... (31) (6) (31) (56) (26)
-------- ------- ------- -------- --------
INCOME (LOSS) BEFORE PROVISION
(BENEFIT) FOR INCOME TAXES........ 37 84 69 22 (292)
PROVISION (BENEFIT) FOR INCOME
TAXES............................. 23 28 26 21 (107)
-------- ------- ------- -------- ---------
NET INCOME (LOSS)................. $ 14 $ 56 $ 43 $ 1 $ (185)
======== ======= ======= ======== =========
The accompanying notes are an integral part of these financial statements.
F-118
194
SUMMIT ELECTRIC OF TEXAS, INCORPORATED
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
PERIOD FROM
SIX MONTHS OCTOBER 1,
ENDED 1997
YEAR ENDED SEPTEMBER 30, YEAR ENDED THROUGH
MARCH 31, ---------------------- SEPTEMBER 30, JANUARY 30,
1997 1996 1997 1997 1998
------- ------- ------- ------------- ------------
(UNAUDITED)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) .................................... $ 14 $ 56 $ 43 $ 1 $ (185)
Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating
activities --
Depreciation and amortization....................... 72 38 41 75 34
Provision for doubtful accounts .................... -- -- 10 10 --
Changes in operating assets and
liabilities --
(Increase) decrease in --
Accounts receivable ........................... 316 452 (284) (420) (90)
Receivable from stockholder ................... 56 48 (66) (58) (203)
Income tax receivable ......................... -- -- -- -- (95)
Other receivables ............................. 32 25 35 42 5
Costs and estimated earnings in
excess of billings on uncompleted
contracts ................................... (105) 1 61 (45) (38)
Prepaid expenses and other current
assets ...................................... (23) (16) (1) (8) 23
Increase (decrease) in --
Accounts payable and accrued
expenses .................................... (498) (519) 520 541 (215)
Billings in excess of costs and
estimated earnings on uncompleted
contracts ................................... 48 (52) (253) (153) (75)
Other, net ......................................... 3 2 14 15 28
------- ------- ------- ------- -------
Net cash provided by (used in)
operating activities ........................ (85) 35 120 -- (811)
------- ------- ------- ------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Payments on notes receivable from related
parties ............................................ 3 1 2 4 268
Additions to property and equipment .................. (191) (35) -- (156) (9)
------- ------- ------- ------- -------
Net cash provided by (used in)
investing activities ........................ (188) (34) 2 (152) 259
------- ------- ------- ------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings of long-term debt and notes
payable ............................................ 238 3 (9) 226 1,654
Payments of long-term debt ........................... (19) (8) (13) (24) (1,212)
------- ------- ------- ------- -------
Net cash provided by (used in)
financing activities ........................ 219 (5) (22) 202 442
------- ------- ------- ------- -------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS .......................................... (54) (4) 100 50 (110)
CASH AND CASH EQUIVALENTS, beginning of
period ............................................... 111 111 57 107 157
------- ------- ------- ------- -------
CASH AND CASH EQUIVALENTS, end of period ............... $ 57 $ 107 $ 157 $ 157 $ 47
======= ======= ======= ======= =======
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
Cash paid for --
Interest ........................................... $ 56 $ 19 $ 42 $ 79 $ 2
Income taxes ....................................... $ 35 $ 19 $ 3 $ 19 $ 34
The accompanying notes are an integral part of these financial statements.
F-119
195
SUMMIT ELECTRIC OF TEXAS, INCORPORATED
STATEMENTS OF STOCKHOLDER'S EQUITY
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
COMMON STOCK TOTAL
--------------------- RETAINED STOCKHOLDER'S
SHARES AMOUNT EARNINGS EQUITY
------- ------- -------- -------------
BALANCE, March 31, 1996 ....... 1,000 $ 1 $ 977 $ 978
Net income .................. -- -- 14 14
------- ------- ------- -------
BALANCE, March 31, 1997 ....... 1,000 1 991 992
Net income (unaudited) ...... -- -- 43 43
------- ------- ------- -------
BALANCE, September 30, 1997.... 1,000 1 1,034 1,035
Net loss .................... -- -- (185) (185)
------- ------- ------- -------
BALANCE, January 30, 1998 ..... 1,000 $ 1 $ 849 $ 850
======= ======= ======= =======
The accompanying notes are an integral part of these financial statements.
F-120
196
SUMMIT ELECTRIC OF TEXAS, INCORPORATED
NOTES TO FINANCIAL STATEMENTS
1. BUSINESS AND ORGANIZATION:
Summit Electric of Texas, Incorporated (the Company), a Texas corporation,
focuses on providing electrical system installation and repair services
primarily for mid-sized to large commercial facilities. The Company performs the
majority of its contract work under fixed price contracts, with contract
duration generally ranging from two to eight months. The Company performs the
majority of its work primarily in Houston, Texas.
On a limited basis, the Company provides auto repair and restoration
services to its sole stockholder (the Stockholder) and third parties. The
revenues and cost of services related to such activities have not been removed
from the Company's results of operations for the year ended March 31, 1997 and
September 30, 1997, as such amounts are not material.
On January 30, 1998, concurrent with the closing of the initial public
offerings in the United States and Canada and outside the United States and
Canada (the Offerings) of additional common stock by Integrated Electrical
Services, Inc. (IES), the Company was acquired by IES. All outstanding shares of
the Company's common stock were exchanged for cash and shares of IES common
stock. In addition, the key executives of the Company entered into employment
agreements with the Company and IES which have an initial term of five years,
and generally restrict the disclosure of confidential information as well as
restrict competition with the Company and IES for a period of two years
following termination of employment. The Company has changed from a March to a
September fiscal year.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Interim Financial Information
The interim financial statements for the six months ended September 30, 1996
and 1997, are unaudited and have been prepared pursuant to the rules and
regulations of the Securities and Exchange Commission. Accordingly, they do not
include all of the information and footnotes required by generally accepted
accounting principles for complete financial statements. In the opinion of the
Company's management, the unaudited interim financial statements contain all
adjustments (consisting of normal recurring adjustments) considered necessary
for a fair presentation. The results of operations for the interim periods are
not necessarily indicative of the results for the entire fiscal year.
The financial statements for the period from October 1, 1997 through January
30, 1998 are presented for purposes of complying with certain reporting
requirements of the Securities and Exchange Commission's Staff Accounting
bulletin No. 80 and are not necessarily indicative of the results to be expected
for the entire year.
Cash and Cash Equivalents
The Company considers all highly liquid investments purchased with an
original maturity of three months or less to be cash equivalents.
Supplemental Cash Flow Information
During the period from October 1, 1997 through January 30, 1998, the
Company's stockholder contributed approximately $268,000 in property and
equipment in exchange for payment of the stockholder's receivable to the
Company.
Property and Equipment
Property and equipment are stated at cost, and depreciation is computed
using an accelerated method over the estimated useful lives of the assets.
Leasehold improvements are capitalized and amortized over the lesser of the life
of the lease or the estimated useful life of the asset. Depreciation expense was
$72,101, $75,358 and $34,000 for the years ended March 31, 1997 and September
30, 1997 and for the period from October 1, 1997 through January 30, 1998,
respectively.
F-121
197
Expenditures for repairs and maintenance are charged to expense when
incurred. Expenditures for major renewals and betterments, which extend the
useful lives of existing equipment, are capitalized and depreciated. Upon
retirement or disposition of property and equipment, the cost and related
accumulated depreciation are removed from the accounts and any resulting gain or
loss is recognized in the statements of operations.
Revenue Recognition
The Company recognizes revenue when services are performed except when work
is being performed under a construction contract. Revenues from construction
contracts are recognized on the percentage-of-completion method measured by the
percentage of costs incurred to date to total estimated costs for each contract.
Such contracts generally provide that the customers accept completion of
progress to date and compensate the Company for services rendered measured in
terms of hours expensed or some other measure of progress. Contract costs
include all direct material and labor costs and those indirect costs related to
contract performance, such as indirect labor, supplies, tools, repairs and
depreciation costs. Provisions for the total estimated losses on uncompleted
contracts are made in the period in which such losses are determined. Changes in
job performance, job conditions, estimated profitability and final contract
settlements may result in revisions to costs and income, and their effects are
recognized in the period in which the revisions are determined. An amount equal
to contract costs attributable to claims is included in revenues when
realization is probable and the amount can be reliably estimated.
The balances billed but not paid by customers pursuant to retainage
provisions in construction contracts will be due upon completion of the
contracts and acceptance by the customer. Based on the Company's experience with
similar contracts in recent years, the retention balance at each balance sheet
date will be collected within the subsequent fiscal year.
The current asset, "Costs and estimated earnings in excess of billings on
uncompleted contracts," represents revenues recognized in excess of amounts
billed. The current liability, "Billings in excess of costs and estimated
earnings on uncompleted contracts," represents billings in excess of revenues
recognized.
Warranty Costs
For certain contracts, the Company warrants labor for the first year after
installation of new electrical systems. The Company generally warrants labor for
30 days after servicing of existing electrical systems. A reserve for warranty
costs is recorded based upon the historical level of warranty claims and
management's estimate of future costs.
Accounts Receivable and Provision for Doubtful Accounts
The Company provides an allowance for doubtful accounts based upon the
specific identification of accounts receivable where collection is no longer
probable.
Income Taxes
The Company follows the asset and liability method of accounting for income
taxes in accordance with Statement of Financial Accounting Standards (SFAS) No.
109. Under this method, deferred assets and liabilities are recorded for future
tax consequences of temporary differences between the financial reporting and
tax bases of assets and liabilities and are measured using enacted tax rates and
laws.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires the use of estimates and assumptions by
management in determining the reported amounts of assets and liabilities and
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
F-122
198
could differ from those estimates. Reference is made to the "Revenue
Recognition" section of this footnote and Note 11 for discussion of significant
estimates reflected in the Company's financial statements.
New Accounting Pronouncement
Effective April 1, 1996, the Company adopted SFAS No. 121, "Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed
Of." Accordingly, in the event that facts and circumstances indicate that
property and equipment or other assets may be impaired, an evaluation of
recoverability would be performed. If an evaluation is required, the estimated
future undiscounted cash flows associated with the asset are compared to the
asset's carrying amount to determine if an impairment of such property is
necessary. The effect of any impairment would be to expense the difference
between the fair value of such property and its carrying value. Adoption of this
standard did not have a material effect on the financial position or results of
operations of the Company.
3. PROPERTY AND EQUIPMENT:
Property and equipment consists of the following (in thousands):
ESTIMATED
USEFUL LIVES MARCH 31, SEPTEMBER 30,
IN YEARS 1997 1997
------------ ---------- -------------
Transportation equipment .................... 5 $ 450 $ 447
Machinery and equipment ..................... 7 11 11
Computer and telephone equipment ............ 5 84 84
Leasehold improvements ...................... 31.5 52 52
Furniture and fixtures ...................... 7 43 43
----- -----
640 637
Less -- Accumulated depreciation
and amortization ........................... (417) (457)
----- -----
Property and equipment, net ....... $ 223 $ 180
===== =====
4. DETAIL OF CERTAIN BALANCE SHEET ACCOUNTS:
Activity in the Company's allowance for doubtful accounts receivable
consists of the following (in thousands):
MARCH 31, SEPTEMBER 30,
1997 1997
--------- -------------
Balance at beginning of period ........................... $112 $112
Additions to costs and expenses .......................... -- 10
Deductions for uncollectible receivables
written off and recoveries ............................. -- --
---- ----
Balance at end of period ................................. $112 $122
==== ====
Accounts payable and accrued expenses consist of the following (in
thousands):
MARCH 31, SEPTEMBER 30,
1997 1997
--------- -------------
Accounts payable, trade .................. $ 696 $1,175
Other accrued expenses ................... 278 319
------ ------
$ 974 $1,494
====== ======
F-123
199
Electrical system installation contracts in progress are as follows (in
thousands):
MARCH 31, SEPTEMBER 30,
1997 1997
--------- -------------
Costs incurred on contracts in progress ................... $ 6,482 $ 6,373
Estimated earnings, net of losses ......................... 2,122 1,818
------- -------
8,604 8,191
Less -- Billings to date .................................. (8,801) (8,195)
------- -------
$ (197) $ (4)
======= =======
Costs and estimated earnings in excess of billings on
uncompleted contracts ................................... $ 239 $ 178
Less-- Billings in excess of costs and estimated
earnings on uncompleted contracts .................... (436) (182)
------- -------
Net liability ................................... $ (197) $ (4)
======= =======
5. LONG-TERM DEBT:
Long-term debt consists of the following (in thousands):
MARCH 31, SEPTEMBER 30,
1997 1997
--------- -------------
Note payable to bank bearing interest at 9.15%,
payable in monthly installments of principal and interest of
$2,612 through October 2001, secured by transportation
equipment .......................................................... $ 117 $ 106
Note payable to a financing company bearing interest
at 7.9%, payable in monthly installments of principal and
interest of $557 through January 1999, secured by transportation
equipment .......................................................... 11 9
----- -----
128 115
Less -- Current portion .............................................. (27) (27)
----- -----
Long-term debt ..................................................... $ 101 $ 88
===== =====
The maturities of long-term debt are as follows (in thousands):
YEAR ENDED MARCH 31, SEPTEMBER 30,
---------- --------- -------------
1998........... $ 27 $ 27
1999........... 29 28
2000........... 26 27
2001........... 28 28
2002........... 18 5
----- -----
$ 128 $ 115
===== =====
The Company has a $1,000,000 line of credit with a bank. The line of credit
expired September 30, 1997, and bears interest at 1 percent above the prime
lending rate. The weighted average interest rate under this line of credit was
9.25 percent for fiscal 1997. The line of credit is secured by contracts
receivable, equipment, furniture and fixtures, and the personal guarantee of the
Stockholder. Outstanding borrowings under this line of credit at March 31, 1997,
total $788,142.
On September 30, 1997, the Company negotiated an amendment to its existing
bank line of credit (the Amended Line of Credit). The Amended Line of Credit has
a $1,500,000 borrowing base and is due October 3, 1998. The Amended Line of
Credit bears interest at 1 percent above the prime lending rate. Outstanding
borrowings under this line of credit at September 30, 1997, total $779,458.
The bank line of credit requires the Company to maintain certain net worth
and profitability covenants. At March 31, 1997 and September 30, 1997, the
Company was in compliance with its line-of-credit covenants, as amended.
6. LEASES:
The Company leases a facility from a company which is owned by the Company's
stockholder. The lease expires on November 30, 1998. The rent paid under this
related-party lease was approximately $96,000 for each of the years ended March
31, 1997 and September 30, 1997 and $32,000 for the period from October 1, 1997
through January 30, 1998. The Company also leases two facilities from third
parties. The rent paid under these leases were approximately $7,144, $15,051 and
$13,308 for the years ended March 31, 1997 and September 30, 1997 and for the
period from October 1, 1997 through January 30, 1998, respectively.
F-124
200
Future minimum lease payments under these noncancelable operating leases are
as follows (in thousands):
YEAR ENDED
-------------------------
MARCH 31, SEPTEMBER 30,
1997 1997
--------- -------------
1998........................................ $ 99 $ 99
1999........................................ 66 26
2000........................................ 1 --
-- --
Thereafter.................................. ----- -----
$ 166 $ 125
===== =====
7. INCOME TAXES:
Federal income taxes are as follows (in thousands):
PERIOD FROM
OCTOBER 1,
YEAR ENDED 1997
--------------------------- THROUGH
MARCH 31, SEPTEMBER 30, JANUARY 30,
1997 1997 1998
--------- ------------- ------------
Current--
Federal .......................... $ 17 $ 19 $ (95)
State ............................ 6 2 (12)
----- ----- -----
$ 23 $ 21 $(107)
===== ===== =====
Actual income tax expense (benefit) differs from income tax expense
(benefit) computed by applying the blended U.S. federal and state statutory
corporate rate of 28 percent to income before provision for income taxes as
follows (in thousands):
PERIOD FROM
OCTOBER 1,
YEAR ENDED 1997
------------------------ THROUGH
MARCH 31, SEPTEMBER 30, JANUARY 30,
1997 1997 1998
--------- ------------- ------------
Provision at the statutory rate .............................. $ 10 $ 6 $(103)
Increase resulting from--
Permanent differences, primarily meals and entertainment ... 9 14 5
State income tax, net of benefit for federal deduction ..... 4 1 (9)
----- ----- -----
$ 23 $ 21 $(107)
===== ===== =====
Deferred income tax provisions result from temporary differences in the
recognition of income and expenses for financial reporting purposes and for tax
purposes. The tax effects of these temporary differences, representing deferred
tax assets and liabilities result principally from the following (in thousands):
MARCH 31, SEPTEMBER 30,
1997 1997
--------- -------------
Allowance for doubtful accounts .................... $ 40 $ 40
Warranty and contract allowances ................... 29 29
Bases difference on property and equipment ......... (15) (29)
---- ----
Deferred tax assets ...................... $ 54 $ 40
==== ====
F-125
201
The net deferred tax assets and liabilities are comprised of the following
(in thousands):
MARCH 31, SEPTEMBER 30,
1997 1997
--------- -------------
Deferred tax assets --
Current .................................... $ 69 $ 69
Long-term .................................. -- --
---- ----
Deferred tax assets ................ 69 69
---- ----
Deferred tax liabilities--
Current .................................... (4) (18)
Long-term .................................. (11) (11)
---- ----
Deferred tax liability ............. (15) (29)
---- ----
Net deferred tax assets ...................... $ 54 $ 40
==== ====
8. RELATED-PARTY TRANSACTIONS:
Notes receivable from related parties consist of the following (in
thousands):
MARCH 31, SEPTEMBER 30,
1997 1997
--------- -------------
Note receivable from the Stockholder, bearing an
interest rate of 7.07%, requiring monthly payments of
interest, maturing November 1998 ........................... $250 $250
Note receivable from the spouse of the Stockholder,
bearing an interest rate of 8%, requiring monthly
installments of principal and interest of $480,
maturing April 2001 ........................................ 20 18
---- ----
$270 $268
==== ====
The receivable of $268,000 was subsequently repaid through a donation of
property and equipment from the Stockholder.
The Company provides auto repair and restoration services to the
Stockholder. The Stockholder reimbursed the Company $81,161, $122,979 and
$27,958 for such services for the years ended March 31, 1997 and September 30,
1997 and for the period from October 1, 1997 through January 30, 1998,
respectively.
9. EMPLOYEE BENEFIT PLAN:
The Company adopted a 401(k) savings and investment plan approved by the
Internal Revenue Service effective January 1, 1996, covering all eligible
Company employees. Contributions may be made to the plan by an employee at a
percentage of salary but cannot exceed the maximum allowed by the Internal
Revenue Code and may be matched by a discretionary Company contribution.
The Company's contributions to the plan for the years ended March 31, 1997
and September 30, 1997 and for the period from October 1, 1997 through January
30, 1998, totaled $24,747, $24,660 and $8,751, respectively.
10. FINANCIAL INSTRUMENTS:
The Company's financial instruments consist of cash and cash equivalents,
accounts receivable, notes receivable, accounts payable, and short and long-term
debt. The Company believes that the carrying values of these instruments on the
accompanying balance sheets approximate their fair values.
11. COMMITMENTS AND CONTINGENCIES:
Litigation
The Company is involved in disputes or legal actions arising in the ordinary
course of business. Management does not believe the outcome of such legal
actions will have a material adverse effect on the Company's financial position
or results of operations.
Insurance
The Company carries a broad range of insurance coverage, including business
auto liability, general liability, workers' compensation and an umbrella policy.
The Company has not incurred significant uninsured losses on any of these items.
F-126
202
12. MAJOR CUSTOMERS AND RISK CONCENTRATION:
For the years ended March 31, 1997 and September 30, 1997, revenues from no
one individual customer exceeded 10 percent of total revenues.
In addition, the Company grants credit, generally without collateral, to its
customers, which are primarily general contractors located in Houston, Texas.
Consequently, the Company is subject to potential credit risk related to changes
in business and economic factors within Houston, Texas. However, management
believes that its contract acceptance, billing and collection policies are
adequate to minimize the potential credit risk.
F-127
203
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Thurman & O'Connell Corporation:
We have audited the accompanying balance sheets of Thurman & O'Connell
Corporation, a Kentucky corporation, as of December 31, 1995 and 1996 and
September 30, 1997, and the related statements of operations, cash flows and
stockholders' equity for the years then ended and for the period from October 1,
1997 through January 30, 1998. These financial statements are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Thurman & O'Connell
Corporation as of December 31, 1995 and 1996 and September 30, 1997, and the
results of its operations and its cash flows for the years then ended and for
the period from October 1, 1997 through January 30, 1998, in conformity with
generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Houston, Texas
September 11, 1998
F-128
204
THURMAN & O'CONNELL CORPORATION
BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE INFORMATION)
ASSETS
DECEMBER 31,
----------------- SEPTEMBER 30,
1995 1996 1997
------ ------ -------------
CURRENT ASSETS:
Cash and cash equivalents ...................................... $ 860 $1,488 $1,160
Accounts receivable --
Trade, net of allowance of $37, $10 and $17, respectively ... 1,078 315 538
Retainage ................................................... 348 78 124
Other receivables ........................................... 12 17 9
Inventories .................................................... 1,072 273 213
Costs and estimated earnings in excess of
billings on uncompleted contracts ........................... -- 22 52
Prepaid expenses and other current assets ...................... 4 13 15
------ ------ ------
Total current assets ................................... 3,374 2,206 2,111
PROPERTY AND EQUIPMENT, net ...................................... 342 306 301
------ ------ ------
Total assets ........................................... $3,716 $2,512 $2,412
====== ====== ======
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current maturities of long-term debt ........................... $ 13 $ 6 $ 7
Accounts payable and accrued expenses .......................... 663 242 262
Dividends payable to stockholders .............................. 160 200 --
Billings in excess of costs and estimated
earnings on uncompleted contracts ........................... 1,652 479 361
------ ------ ------
Total current liabilities .............................. 2,488 927 630
------ ------ ------
LONG-TERM DEBT, net of current maturities ........................ 96 93 88
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Common stock, no par value, 2,000 shares
authorized, 200 shares issued and
outstanding ................................................. 300 300 300
Retained earnings .............................................. 832 1,192 1,394
------ ------ ------
Total stockholders' equity ............................. 1,132 1,492 1,694
------ ------ ------
Total liabilities and stockholders'
equity ............................................... $3,716 $2,512 $2,412
====== ====== ======
The accompanying notes are an integral part of these financial statements.
F-129
205
THURMAN & O'CONNELL CORPORATION
STATEMENTS OF OPERATIONS
(IN THOUSANDS)
PERIOD FROM
NINE MONTHS OCTOBER 1,
YEAR ENDED ENDED 1997
DECEMBER 31, SEPTEMBER 30, YEAR ENDED THROUGH
-------------------- -------------------- SEPTEMBER 30, JANUARY 30,
1995 1996 1996 1997 1997 1998
------- ------- ------- ------- ------------- -----------
(UNAUDITED)
REVENUES ...................................... $ 4,729 $ 4,551 $ 3,741 $ 3,239 $ 4,049 $ 1,342
COST OF SERVICES .............................. 3,309 3,059 2,531 1,653 2,181 721
------- ------- ------- ------- ------- -------
Gross profit ......................... 1,420 1,492 1,210 1,586 1,868 621
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES... 512 503 397 397 503 182
------- ------- ------- ------- ------- -------
Income from operations ............... 908 989 813 1,189 1,365 439
------- ------- ------- ------- ------- -------
OTHER INCOME (EXPENSE):
Interest expense ............................ (13) (8) (6) (4) (6) (3)
Other ....................................... 36 65 46 51 70 111
------- ------- ------- ------- ------- -------
Other income, net .................... 23 57 40 47 64 108
------- ------- ------- ------- ------- -------
INCOME BEFORE INCOME TAX EXPENSE .............. 931 1,046 853 1,236 1,429 547
INCOME TAX EXPENSE ............................ 19 36 24 34 46 11
------- ------- ------- ------- ------- -------
NET INCOME .................................... $ 912 $ 1,010 $ 829 $ 1,202 $ 1,383 $ 536
======= ======= ======= ======= ======= =======
The accompanying notes are an integral part of these financial statements.
F-130
206
THURMAN & O'CONNELL CORPORATION
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
PERIOD FROM
OCTOBER 1,
1997
YEAR ENDED NINE MONTHS THROUGH
DECEMBER 31, ENDED SEPTEMBER 30, YEAR ENDED JANUARY 30,
------------------- -------------------- SEPTEMBER 30, -----------
1995 1996 1996 1997 1997 1998
------- ------- ------- ------- ------------ -----------
(UNAUDITED)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income ........................................... $ 912 $ 1,010 $ 829 $ 1,202 $ 1,383 $ 536
Adjustments to reconcile net income to
net cash provided by operating activities --
Depreciation and amortization ...................... 53 49 37 39 51 26
Provision to (reduction in) allowance
for doubtful accounts ............................ 13 10 (19) 7 36 3
Loss (gain) on sale of property and equipment ...... (1) -- -- (1) (1) (96)
Changes in operating assets and liabilities --
(Increase) decrease in --
Receivables ...................................... (506) 1,018 756 (268) (6) (140)
Inventories ...................................... (405) 799 678 60 181 (37)
Costs and estimated earnings in
excess of billings on uncompleted contracts ... 68 (22) (24) (30) (28) 12
Prepaid expenses and other current contracts ..... 25 (9) (2) (2) (9) (3)
Increase (decrease) in --
Accounts payable and accrued expenses ............ (1) (421) (236) 20 (165) 18
Billings in excess of costs and
estimated earnings on uncompleted contracts ... 916 (1,173) (785) (118) (506) (71)
------- ------- ------- ------- ------- -------
Net cash provided by operating activities ..... 1,074 1,261 1,234 909 936 248
------- ------- ------- ------- ------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of property and
equipment .......................................... 1 -- -- 23 23 290
Additions of property and equipment .................. (42) (13) (7) (56) (62) (6)
------- ------- ------- ------- ------- -------
Net cash provided by (used in) investing
activities .................................. (41) (13) (7) (33) (39) 284
------- ------- ------- ------- ------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings of long-term debt ......................... -- 103 -- -- 103 604
Payments of long-term debt ........................... (63) (113) (7) (4) (110) (2)
Distributions to stockholders ........................ (620) (610) (610) (1,200) (1,200) (1,894)
------- ------- ------- ------- ------- -------
Net cash used in financing
activities .................................. (683) (620) (617) (1,204) (1,207) (1,292)
------- ------- ------- ------- ------- -------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS .......................................... 350 628 610 (328) (310) (760)
CASH AND CASH EQUIVALENTS, beginning of
period ............................................... 510 860 860 1,488 1,470 1,160
------- ------- ------- ------- ------- -------
CASH AND CASH EQUIVALENTS, end of
period ............................................... $ 860 $ 1,488 $ 1,470 $ 1,160 $ 1,160 $ 400
======= ======= ======= ======= ======= =======
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
Cash paid for --
Interest ......................................... $ 10 $ 8 $ 5 $ 4 $ 7 $ 2
Taxes ............................................ $ 6 $ 26 $ 23 $ 47 $ 50 $ 18
The accompanying notes are an integral part of these financial statements.
F-131
207
THURMAN & O'CONNELL CORPORATION
STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE INFORMATION)
COMMON STOCK TOTAL
------------------ RETAINED STOCKHOLDERS'
SHARES AMOUNT EARNINGS EQUITY
------- ------- -------- -------------
BALANCE, December 31, 1994 ............. 200 $ 300 $ 580 $ 880
Distributions to stockholders ........ -- -- (660) (660)
Net income ........................... -- -- 912 912
------- ------- ------- -------
BALANCE, December 31, 1995 ............. 200 300 832 1,132
Distributions to stockholders ........ -- -- (650) (650)
Net income ........................... -- -- 1,010 1,010
------- ------- ------- -------
BALANCE, December 31, 1996 ............. 200 300 1,192 1,492
Distributions to stockholders
(unaudited)......................... -- -- (1,000) (1,000)
Net income (unaudited)................ -- -- 1,202 1,202
------- ------- ------- -------
BALANCE, September 30, 1997 ............ 200 300 1,394 1,694
Distribution to stockholders ......... -- -- (1,894) (1,894)
Net Income ........................... -- -- 536 536
------- ------- ------- -------
BALANCE, January 30, 1998 .............. 200 $ 300 $ 36 $ 336
======= ======= ======= =======
The accompanying notes are an integral part of these financial statements.
F-132
208
THURMAN & O'CONNELL CORPORATION
NOTES TO FINANCIAL STATEMENTS
1. BUSINESS AND ORGANIZATION:
Thurman & O'Connell Corporation (the Company), a Kentucky corporation,
focuses on providing electrical system installation and repair services
primarily to large commercial facilities. The Company performs the majority of
its contract work under fixed price contracts, with contract terms generally
ranging from 12 to 24 months. The Company performs the majority of its work in
Kentucky.
On January 30, 1998, concurrent with the closing of the initial public
offerings in the United States and Canada and outside the United States and
Canada (the Offerings) of additional common stock by Integrated Electrical
Services, Inc. (IES), the Company was acquired by IES. All outstanding shares of
the Company's common stock were exchanged for cash and shares of IES common
stock. In addition, the key executives of the Company entered into employment
agreements with the Company and IES which have an initial term of five years,
and generally restrict the disclosure of confidential information as well as
restrict competition with the Company and IES for a period of two years
following termination of employment. The Company has changed from a calendar to
a September fiscal year.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Interim Financial Information
The interim financial statements for the nine months ended September 30,
1997 and 1996, are unaudited and have been prepared pursuant to the rules and
regulations of the Securities and Exchange Commission. Accordingly, they do not
include all of the information and footnotes required by generally accepted
accounting principles for complete financial statements. In the opinion of the
Company's management, the unaudited interim financial statements contain all
adjustments (consisting of normal recurring adjustments) considered necessary
for a fair presentation. The results of operations for the interim periods are
not necessarily indicative of the results for the entire fiscal year.
The financial statements for the period from October 1, 1997 through January
30, 1998 are presented for purposes of complying with certain reporting
requirements of the Securities and Exchange Commission's Staff Accounting
Bulletin No. 80 and are not necessarily indicative of the results to be expected
for the entire year.
Cash and Cash Equivalents
The Company considers all highly liquid investments purchased with an
original maturity of three months or less to be cash equivalents. The Company
maintains its principal cash balances in one financial institution. The balances
are insured by the Federal Deposit Insurance Corporation up to $100,000.
Inventories
Inventories consist of parts and supplies held for use in the ordinary
course of business and are stated at the lower of cost or market using the
first-in, first-out (FIFO) method.
Property and Equipment
Property and equipment are stated at cost, and depreciation is computed
using the straight-line method over the estimated useful lives of the assets.
Depreciation expense was approximately $53,000, $49,000 and $51,000 and $26,000
for the years ended December 31, 1995 and 1996 and September 30, 1997 and for
the period from October 1, 1997 through January 30, 1998, respectively.
Expenditures for repairs and maintenance are charged to expense when
incurred. Expenditures for major renewals and betterments, which extend the
useful lives of existing equipment, are capitalized and depreciated. Upon
retirement or disposition of
F-133
209
property and equipment, the cost and related accumulated depreciation are
removed from the accounts and any resulting gain or loss is recognized in the
statements of operations.
Revenue Recognition
The Company recognizes revenue when services are performed except when work
is being performed under a construction contract. Revenues from construction
contracts are recognized on the percentage-of-completion method measured by the
percentage of costs incurred to date to total estimated costs for each contract.
Such contracts generally provide that the customers accept completion of
progress to date and compensate the Company for services rendered measured in
terms of hours expensed or some other measure of progress. Contract costs
include all direct material and labor costs and those indirect costs related to
contract performance, such as indirect labor, supplies, tools, repairs and
depreciation costs. Provisions for the total estimated losses on uncompleted
contracts are made in the period in which such losses are determined. Changes in
job performance, job conditions, estimated profitability and final contract
settlements may result in revisions to costs and income and their effects are
recognized in the period in which the revisions are determined.
The balances billed but not paid by customers pursuant to retainage
provisions in construction contracts will be due upon completion of the
contracts and acceptance by the customer. Based on the Company's experience with
similar contracts in recent years, the retention balance at each balance sheet
date will be collected within the subsequent fiscal year.
The current asset, "Costs and estimated earnings in excess of billings on
uncompleted contracts," represents revenues recognized in excess of amounts
billed. The current liability, "Billings in excess of costs and estimated
earnings on uncompleted contracts," represents billings in excess of revenues
recognized.
Warranty Costs
For certain contracts, the Company warrants labor for the first year after
installation of new electrical systems. The Company generally warrants labor for
30 days after servicing of existing electrical systems.
Income Taxes
The stockholders of the Company have elected S Corporation status as defined
by the Internal Revenue Code, whereby the Company itself is not subject to
taxation for federal purposes. Under S Corporation status, the stockholders
report their share of the Company's taxable earnings or losses in their personal
tax returns. The provision for income taxes in the accompanying financial
statements relates to income and other taxes incurred by the Company in those
localities that do not permit the Company to report its net income with that of
its stockholders (S Corporation treatment). The Company intends to terminate its
S Corporation status concurrently with the effective date of the Offerings (as
defined in Note 1).
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires the use of estimates and assumptions by
management in determining the reported amounts of assets and liabilities,
disclosures of contingent liabilities at the date of the financial statements
and the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates. Reference is made to the
"Revenue Recognition" section of this footnote for discussion of significant
estimates reflected in the Company's financial statements.
New Accounting Pronouncement
Effective January 1, 1996, the Company adopted Statement of Financial
Accounting Standards (SFAS) No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of." Accordingly, in
the event that facts and circumstances indicate that property and equipment or
other assets may be impaired, an evaluation of recoverability would be
performed. If an evaluation is required, the estimated future undiscounted cash
flows associated with the asset are compared to the asset's carrying amount to
determine if an impairment of such property is necessary. The effect of any
impairment would be to
F-134
210
expense the difference between the fair value of such property and its carrying
value. Adoption of this standard did not have a material effect on the financial
position or results of operations of the Company.
3. PROPERTY AND EQUIPMENT:
Property and equipment, at cost, consists of the following (in thousands):
ESTIMATED DECEMBER 31,
USEFUL LIVES ------------------------- SEPTEMBER 30,
IN YEARS 1995 1996 1997
------------ ---------- ---------- -------------
Land .................................... -- $ 25 $ 25 $ 25
Building ................................ 30 206 206 206
Machinery and equipment ................. 7 39 39 42
Transportation equipment ................ 5 239 241 257
Computer and telephone equipment ........ 7 19 24 26
Furniture and fixtures .................. 7 20 23 21
---------- ---------- ----------
548 558 577
Less -- Accumulated depreciation and
amortization .......................... (206) (252) (276)
---------- ---------- ----------
$ 342 $ 306 $ 301
========== ========== ==========
4. DETAIL OF CERTAIN BALANCE SHEET ACCOUNTS:
Activity in the Company's allowance for doubtful accounts receivable
consists of the following (in thousands):
DECEMBER 31,
------------------- SEPTEMBER 30,
1995 1996 1997
------ ------ -------------
Balance at beginning of period ........... $ 24 $ 37 $ 18
Additions to costs and expenses .......... 13 10 36
Deductions for uncollectible receivables
written off and recoveries ............. -- (37) (37)
------ ------ ----------
Balance at end of period ................. $ 37 $ 10 $ 17
====== ====== ==========
Accounts payable and accrued expenses consist of the following (in
thousands):
DECEMBER 31,
------------------- SEPTEMBER 30,
1995 1996 1997
------ ------ -------------
Accounts payable, trade ........... $ 516 $ 130 $ 150
Accrued compensation and benefits.. 50 60 64
Accrued cost overruns ............. 78 21 20
Accrued warranty costs ............ 10 10 10
Other accrued expenses ............ 9 21 18
------ ------ ----------
$ 663 $ 242 $ 262
====== ====== ==========
Electrical system installation contracts in progress are as follows (in
thousands):
DECEMBER 31,
----------------------- SEPTEMBER 30,
1995 1996 1997
------- ------- -------------
Costs incurred on contracts in progress ............... $ 2,159 $ 623 $ 1,844
Estimated earnings, net of losses ..................... 721 229 1,466
------- ------- -------
2,880 852 3,310
Less -- Billings to date ............................... (4,532) (1,309) (3,619)
------- ------- -------
$(1,652) $ (457) $ (309)
======= ======= =======
Costs and estimated earnings in excess of billings
on uncompleted contracts ............................ $ -- $ 22 $ 52
Less -- Billings in excess of costs and
estimated earnings on uncompleted contracts ...... (1,652) (479) (361)
------- ------- -------
$(1,652) $ (457) $ (309)
======= ======= =======
F-135
211
5. LONG-TERM DEBT:
During 1996, the Company refinanced the note payable to a bank which was in
place at December 31, 1995, with a variable rate note payable. The note is
payable in monthly principal and interest payments of $1,051 through October
2004, at which time any unpaid principal and interest is due. The note is
collateralized by a cash account at the bank, and the Company has agreed not to
pay dividends in excess of the Company's net income for any fiscal year.
Interest is based upon a variable rate of 1% above the rate being offered on the
sweep account (6% as of December 31, 1996 and September 30, 1997).
At December 31, 1995, the Company had a note payable to a bank which
required monthly principal payments of $1,051 plus interest at the prime rate
(8.25% at December 31, 1995) through July 2008. Under the agreement, the Company
agreed not to pay dividends in excess of the Company's net income for the year.
The note was collateralized by the Company's land and building.
The approximate aggregate maturities of long-term debt as of September 30,
1997, are as follows (in thousands):
YEAR ENDING DECEMBER 31 --
---------------------------
1997 ................................... $ 2
1998 ................................... 7
1999 ................................... 8
2000 ................................... 8
2001 ................................... 9
Thereafter ............................. 61
---
$95
===
The Company has a $1,000,000 line of credit with a bank. The line of credit
expires in April 1998 and bears interest at the prime lending rate. All
receivables are pledged as collateral under the agreement, and the Company has
agreed not to pay dividends in excess of net income for the year and to maintain
its deposit accounts with the bank. There were no borrowings under this
agreement at December 31, 1996 or September 30, 1997. In 1995, the Company had a
$500,000 unsecured line of credit at prime with a bank, which expired in April
1996. There were no borrowings under this agreement during 1995 or 1996.
6. RELATED-PARTY TRANSACTIONS:
The Company earned revenue for electrical contracting services from
companies owned by a stockholder of approximately $47,000, $40,000, $25,000 and
$82,000 for the years ended December 31, 1995 and 1996, and September 30, 1997,
respectively and the period from October 1, 1997 through January 30, 1998, with
approximately $1,000, $2,000, $4,000 and $41,000 of the revenue being recorded
as receivables at the respective balance sheet dates. In addition, the Company
had a receivable from another stockholder in the amount of approximately $1,000,
$2,000 and $5,000 as of December 31, 1995 and 1996 and September 30, 1997,
respectively, related to travel expense advances.
7. EMPLOYEE BENEFIT PLAN:
During 1995, the Company adopted a defined contribution 401(k) savings plan
covering employees meeting certain minimum service and age requirements, as
defined. The plan provides for discretionary contributions on the part of the
Company. For the years ended December 31, 1995 and 1996 and September 30, 1997,
the Company elected to match 100% of the first 2 percent contributed by each
employee. The contributions paid by the Company totaled approximately $9,000,
$12,000, $8,000 and $2,000 for the years ended December 31, 1995 and 1996 and
September 30, 1997 and for the period from October 1, 1997 through January 30,
1998, respectively.
F-136
212
8. FINANCIAL INSTRUMENTS:
The Company's financial instruments consist of cash and cash equivalents,
accounts receivable, accounts payable, a line of credit, and long-term debt. The
Company believes that the carrying value of these instruments on the
accompanying balance sheets approximates their fair value.
9. STOCKHOLDERS' AGREEMENT:
The Company has a right of first refusal on any stock voluntarily offered
for sale by a stockholder subject to certain terms and conditions. The
redemption price shall be as determined by the stockholders on an annual basis
or by formula which is contained in the agreement if a value has not been
established by the stockholders. Such redemption price is payable in not more
than 10 equal quarterly installments with interest at the prime rate. As of
September 30, 1997 and December 31, 1996, the redemption price was determined to
be $5.141 per share.
Upon the death of any stockholder, the Company shall redeem the stock held
by such stockholder provided that the redemption is requested in writing by the
personal representative of the deceased stockholder within two months of the
appointment of such representative or the Company elects to redeem such stock
within the same two-month period. The redemption price pursuant to this
paragraph is the same as described above. Such redemption price may be paid in
full at the closing or in installments, the down payment being the greater of
one-fifth of redemption price or any life insurance proceeds received by the
Company resulting from the death of the stockholder with the balance payable in
quarterly installments over not more than five years with interest at the prime
rate. Coverage under the key-man term life insurance purchased by the Company
totaled $1,000,000 as of December 31, 1995 and 1996 and September 30, 1997.
10. DIVIDENDS:
As long as the election made by the stockholders to report the operations of
the Company on their individual federal and state income tax returns remains in
effect, the board of directors of the Company is required to declare a dividend,
subsequent to the close of the Company's tax year and prior to the date when
payment of individual income taxes is required, to provide the stockholders
sufficient cash to pay any applicable individual income taxes resulting from the
inclusion of the Company's taxable income on their individual income tax
returns. In addition, at the discretion of the Company's board of directors, an
additional minimum dividend shall be authorized which, when combined with the
dividend required to meet the tax obligations of the shareholders, shall equal
not less than 50 percent of the net pretax income of the Company.
11. COMMITMENTS AND CONTINGENCIES:
Litigation
The Company is not currently involved in any significant disputes or legal
actions, however, such actions could arise in the ordinary course of business.
Insurance
The Company carries a broad range of insurance coverage, including business
auto liability, general liability and an umbrella policy. The Company has not
incurred significant uninsured losses on any of these items.
F-137
213
12. MAJOR CUSTOMERS AND RISK CONCENTRATION:
The Company had sales of approximately 25, 18, 12, 12 and 11 percent of
total sales to five major customers during 1995, sales of approximately 48, 11
and 10 percent of total sales to three major customers during 1996, sales of
approximately 26, 12 and 12 percent of total sales to three major customers
during the year ended September 30, 1997 and sales of approximately 47 and 14
percent of total sales to two major customers during the period from October 1,
1997 through January 30, 1998.
In addition, the Company grants credit, generally without collateral, to its
customers, which are general contractors in the commercial and industrial
construction markets in Kentucky. Consequently, the Company is subject to
potential credit risk related to changes in business and economic factors within
the commercial and industrial construction markets in this state. However,
management believes that its contract acceptance, billing and collection
policies are adequate to minimize the potential credit risk.
F-138
214
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Rodgers Electric Company, Inc.:
We have audited the accompanying balance sheet of Rodgers Electric Company,
Inc., a Washington corporation, as of September 30, 1997, and the related
statement of operations, cash flows and stockholders' equity for the year then
ended and for the period from October 1, 1997 through January 30, 1998. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Rodgers Electric Company,
Inc. as of September 30, 1997, and the results of its operations and its cash
flows for the year then ended and for the period from October 1, 1997 through
January 30, 1998, in conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Houston, Texas
September 11, 1998
F-139
215
RODGERS ELECTRIC COMPANY, INC.
BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
ASSETS
SEPTEMBER 30,
1997
-------------
CURRENT ASSETS:
Cash and cash equivalents .......................................... $ 818
Accounts receivable --
Trade, net of allowance of $15 .................................. 571
Retainage ....................................................... 37
Other receivables ............................................... 5
Costs and estimated earnings in excess of billings on
uncompleted contracts .......................................... 20
Deferred tax asset ................................................. 39
Prepaid expenses and other current assets .......................... 29
------
Total current assets ....................................... 1,519
PROPERTY AND EQUIPMENT, net .......................................... 393
OTHER ASSETS ......................................................... 175
------
Total assets ............................................... $2,087
======
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Short-term debt, including current maturities of long-term
debt ............................................................ $ 36
Accounts payable and accrued expenses .............................. 488
Billings in excess of costs and estimated earnings on uncompleted
contracts ....................................................... 109
Other liabilities .................................................. 213
------
Total current liabilities .................................. 846
------
LONG-TERM DEBT, net of current maturities ............................ 58
DEFERRED TAX LIABILITY ............................................... 75
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Common stock, $100 par value, 500 shares authorized, 150 shares
issued and outstanding .......................................... 15
Retained earnings .................................................. 1,093
------
Total stockholders' equity ................................. 1,108
------
Total liabilities and stockholders' equity ................. $2,087
======
The accompanying notes are an integral part of these financial statements.
F-140
216
RODGERS ELECTRIC COMPANY, INC.
STATEMENTS OF OPERATIONS
(IN THOUSANDS)
PERIOD FROM
OCTOBER 1,
1997
YEAR ENDED THROUGH
SEPTEMBER 30, JANUARY 30,
1997 1998
------------- -----------
REVENUES .............................................. $ 3,325 $ 1,600
COST OF SERVICES (including depreciation) ............. 1,621 967
------- -------
Gross profit ................................ 1,704 633
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES .......... 1,238 431
------- -------
Income from operations ...................... 466 202
------- -------
OTHER INCOME (EXPENSE):
Interest expense .................................... (7) (1)
Other ............................................... 36 7
------- -------
Other income, net ........................... 29 6
------- -------
INCOME BEFORE PROVISION FOR INCOME TAXES .............. 495 208
PROVISION FOR INCOME TAXES ............................ 178 73
------- -------
NET INCOME ............................................ $ 317 $ 135
======= =======
The accompanying notes are an integral part of these financial statements.
F-141
217
RODGERS ELECTRIC COMPANY, INC.
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
PERIOD FROM
OCTOBER 1,
1997
YEAR ENDED THROUGH
SEPTEMBER 30, JANUARY 30,
1997 1998
------------ -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income ............................................... $ 317 $ 135
Adjustments to reconcile net income to net cash provided
by operating activities --
Depreciation and amortization ......................... 47 18
Distribution of property and equipment ................ -- 94
Provision for doubtful accounts ....................... 11 10
Changes in operating assets and liabilities --
(Increase) decrease in --
Accounts receivable .............................. (275) (429)
Costs and estimated earnings in excess of billings
on uncompleted contracts ....................... (20) 16
Deferred taxes, net .............................. (34) 8
Other ............................................ 14 4
Increase (decrease) in --
Accounts payable and accrued expenses ............ 355 (262)
Income taxes payable ............................. -- (113)
Other liabilities ................................ 211 --
Billings in excess of costs and estimated earnings
on uncompleted contracts ....................... 109 (74)
---------- ----------
Net cash provided by (used in) operating
activities ..................................... 735 (593)
---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Payments on notes receivable from related parties ........ 2 --
Additions to property and equipment ...................... (170) (7)
Proceeds from disposal of property and equipment ......... -- 54
---------- ----------
Net cash provided by (used in) investing
activities ..................................... (168) 47
---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings of long-term debt and notes payable ........... 70 10
Payments of long-term debt ............................... (23) (30)
---------- ----------
Net cash provided by (used in) financing
activities ..................................... 47 (20)
---------- ----------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS ....... 614 (566)
CASH AND CASH EQUIVALENTS, beginning of period ............. 204 818
---------- ----------
CASH AND CASH EQUIVALENTS, end of period ................... $ 818 $ 252
========== ==========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for --
Interest .............................................. $ 7 $ 2
Income taxes .......................................... $ 180 $ 176
========== ==========
The accompanying notes are an integral part of these financial statements.
F-142
218
RODGERS ELECTRIC COMPANY, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
COMMON STOCK TOTAL
------------------------- RETAINED STOCKHOLDERS'
SHARES AMOUNT EARNINGS EQUITY
---------- ---------- ---------- -------------
BALANCE, September 30, 1996 .. 150 $ 15 $ 776 $ 791
Net income ................. -- -- 317 317
---------- ---------- ---------- ----------
BALANCE, September 30, 1997 .. 150 15 1,093 1,108
Net income ................. -- -- 135 135
---------- ---------- ---------- ----------
BALANCE, JANUARY 30, 1998 .... 150 $ 15 $ 1,228 $ 1,243
========== ========== ========== ==========
The accompanying notes are an integral part of these financial statements.
F-143
219
RODGERS ELECTRIC COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS
1. BUSINESS AND ORGANIZATION:
Principles of Presentation
Rodgers Electric Company, Inc. is a Washington corporation. The Company
provides electrical contracting services to commercial and industrial customers
in Western Washington. Most of the Company's revenue is from partnering with
customers and providing engineering services for design-build projects on a time
and material basis with a guaranteed not-to-exceed price.
On January 30, 1998, concurrent with the closing of the initial public
offerings in the United States and Canada and outside the United States and
Canada (the Offerings) of additional common stock by Integrated Electrical
Services, Inc. (IES), the Company was acquired by IES. All outstanding shares of
the Company's common stock were exchanged for cash and shares of IES common
stock. In addition, the key executives of the Company entered into employment
agreements with the Company and IES which have an initial term of five years,
and generally restrict the disclosure of confidential information as well as
restrict competition with the Company and IES for a period of two years
following termination of employment. The Company has changed from a calendar to
a September fiscal year.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Interim Financial Information
The financial statements for the period from October 1, 1997 through January
30, 1998 are presented for purposes of complying with certain reporting
requirements of the Securities and Exchange Commission's Staff Accounting
Bulletin No. 80 and are not necessarily indicative of the results to be expected
for the entire year.
Cash and Cash Equivalents
The Company considers all highly liquid investments purchased with an
original maturity of three months or less to be cash equivalents.
Property and Equipment
Property and equipment are stated at cost, and depreciation is computed
using a straight-line method over the estimated useful lives of the assets.
Leasehold improvements are capitalized and amortized over the lesser of the life
of the lease or the estimated useful life of the asset. Depreciation expense was
approximately $47,000 and $18,000 for the year ended September 30, 1997 and for
the period from October 1, 1997 through January 30, 1998, respectively.
Expenditures for repairs and maintenance are charged to expense when
incurred. Expenditures for major renewals and betterments, which extend the
useful lives of existing equipment, are capitalized and depreciated. Upon
retirement or disposition of property and equipment, the cost and related
accumulated depreciation are removed from the accounts and any resulting gain or
loss is recognized in the statements of operations.
Revenue Recognition
The Company recognizes revenue when services are performed except when work
is being performed under a construction contract. Revenues from construction
contracts are recognized on the percentage-of-completion method measured by the
percentage of costs incurred to date to total estimated costs for each contract.
Such contracts generally provide that the customers accept completion of
progress to date and compensate the Company for services rendered measured in
terms of hours expensed or some other measure of progress. Contract costs
include all direct material and labor costs and those indirect costs related to
contract performance, such as indirect labor, supplies, tools, repairs and
depreciation costs. Provisions for the total estimated losses on uncompleted
contracts are made in the period in which such losses are determined. Changes in
job performance, job conditions,
F-144
220
estimated profitability and final contract settlements may result in revisions
to costs and income, and their effects are recognized in the period in which the
revisions are determined. An amount equal to contract costs attributable to
claims is included in revenues when realization is probable and the amount can
be reliably estimated.
The balances billed but not paid by customers pursuant to retainage
provisions in construction contracts will be due upon completion of the
contracts and acceptance by the customer. Based on the Company's experience with
similar contracts in recent years, the retention balance at each balance sheet
date will be collected within the subsequent fiscal year.
The current asset, "Costs and estimated earnings in excess of billings on
uncompleted contracts," represents revenues recognized in excess of amounts
billed. The current liability, "Billings in excess of costs and estimated
earnings on uncompleted contracts," represents billings in excess of revenues
recognized.
Warranty Costs
For certain contracts, the Company warrants labor for the first year after
installation of new electrical systems. The Company generally warrants labor for
30 days after servicing of existing electrical systems. A reserve for warranty
costs is recorded based upon the historical level of warranty claims and
management's estimate of future costs.
Accounts Receivable and Provision for Doubtful Accounts
The Company provides an allowance for doubtful accounts based upon the
specific identification of accounts receivable where collection is no longer
probable.
Income Taxes
The Company follows the asset and liability method of accounting for income
taxes in accordance with Statement of Financial Accounting Standards (SFAS) No.
109. Under this method, deferred assets and liabilities are recorded for future
tax consequences of temporary differences between the financial reporting and
tax bases of assets and liabilities and are measured using enacted tax rates and
laws.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires the use of estimates and assumptions by
management in determining the reported amounts of assets
and liabilities and 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.
Reference is made to the "Revenue Recognition" section of this footnote and Note
11 for discussion of significant estimates reflected in the Company's financial
statements.
New Accounting Pronouncement
Effective April 1, 1996, the Company adopted SFAS No. 121, "Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed
Of." Accordingly, in the event that facts and circumstances indicate that
property and equipment or other assets may be impaired, an evaluation of
recoverability would be performed. If an evaluation is required, the estimated
future undiscounted cash flows associated with the asset are compared to the
asset's carrying amount to determine if an impairment of such property is
necessary. The effect of any impairment would be to expense the difference
between the fair value of such property and its carrying value. Adoption of this
standard did not have a material effect on the financial position or results of
operations of the Company.
F-145
221
3. PROPERTY AND EQUIPMENT:
Property and equipment consists of the following (in thousands):
ESTIMATED
USEFUL LIVES SEPTEMBER 30,
IN YEARS 1997
------------ -------------
Transportation equipment ................................... 10 $ 434
Machinery and equipment .................................... 10 53
Leasehold improvements ..................................... 10-25 33
Furniture and fixtures ..................................... 10 96
-----
616
Less -- Accumulated depreciation and amortization .......... (223)
-----
Property and equipment, net ...................... $ 393
=====
4. DETAIL OF CERTAIN BALANCE SHEET ACCOUNTS:
Accounts payable and accrued expenses consist of the following (in
thousands):
SEPTEMBER 30,
1997
-------------
Accounts payable, trade ..................... $106
Payroll, profit sharing and related items ... 363
Other accrued expenses ...................... 19
----
$488
====
Contracts in progress (in thousands):
SEPTEMBER 30,
1997
-------------
Costs incurred on contracts in progress .............................................. $ 321
Estimated earnings, net of losses .................................................... 472
----------
793
Less-Billings to date ................................................................ (882)
----------
$ (89)
==========
Costs and estimated earnings in excess of billings on
uncompleted contracts .............................................................. $ 20
Less-Billings in excess of costs and estimated earnings on uncompleted contracts ... (109)
----------
Net liability .............................................................. $ (89)
==========
5. LONG-TERM DEBT:
Long-term debt consists of the following (in thousands):
SEPTEMBER 30,
1997
-------------
Notes payable to financing companies with interest rates ranging from
3.9% to 9.75%, payable in monthly installments of principal and
interest through March 2002, secured by transportation equipment .... 94
Less -- Current portion ............................................... (36)
----------
Long-term debt ...................................................... $ 58
==========
The maturities of long-term debt are as follows (in thousands):
YEAR ENDED
SEPTEMBER 30,
1997
-------------
1998 ......................... $ 36
1999 ......................... 27
2000 ......................... 18
2001 ......................... 10
2002 ......................... 3
----------
$ 94
==========
F-146
222
6. RELATED PARTY TRANSACTIONS:
The Company is located in a building owned by the sole stockholder which is
leased to the Company with monthly lease payments of $2,200 per month.
7. INCOME TAXES:
Federal income taxes are $178,000 and $73,000 for the fiscal year ended
September 30, 1997 and for the period from October 1, 1997 through January 30,
1998, respectively.
Actual income tax expense differs from income tax expense computed by
applying the U.S. federal statutory corporate rate of 35 percent to income
before provision for income taxes as follows (in thousands):
PERIOD FROM
OCTOBER 1,
1997
YEAR ENDED THROUGH
SEPTEMBER 30, JANUARY 30,
1997 1998
---------- -----------
Provision at the statutory rate ............................ $ 173 $ 72
Increase resulting from--
Permanent differences, mainly meals and entertainment .... 5 1
---------- ----------
$ 178 $ 73
========== ==========
Deferred income tax provisions result from temporary differences in the
recognition of income and expenses for financial reporting purposes and for tax
purposes. The tax effects of these temporary differences, representing deferred
tax assets result principally from the following (in thousands):
SEPTEMBER 30,
1997
-------------
Allowance for doubtful accounts and other ........ $ 39
Bases difference on property and equipment ....... (75)
----------
Net deferred tax liabilities ........... $ (36)
==========
9. EMPLOYEE BENEFIT PLAN:
The Company has a profit sharing plan which covers substantially all
qualified employees. The profit sharing contribution is made at the discretion
of the Directors. Benefits payable under the profit sharing plan are limited to
contributions made and earnings therein. Company contributions for the year
ended September 30, 1997 and for the period from October 1, 1997 through January
30, 1998 were $192,000 and $105,000, respectively.
10. FINANCIAL INSTRUMENTS:
The Company's financial instruments consist of cash and cash equivalents,
accounts receivable, accounts payable, and short and long-term debt. The Company
believes that the carrying values of these instruments on the accompanying
balance sheets approximate their fair values.
11. COMMITMENTS AND CONTINGENCIES:
Litigation
The Company is periodically involved in disputes or legal actions arising in
the ordinary course of business. Management does not believe the outcome of such
legal actions will have a material adverse effect on the Company's financial
position or results of operations.
F-147
223
Insurance
The Company carries a broad range of insurance coverage, including business
auto liability, general liability and an umbrella policy.
12. MAJOR CUSTOMERS AND RISK CONCENTRATION:
The Company had sales greater than 10% of total sales to three major
customers comprising approximately 25%, 22% and 13% of sales during the year
ended September 30, 1997 and total sales to four major customers comprising
approximately 34%, 15%, 15% and 10% of sales during the period from October 1,
1997 through January 30, 1998.
In addition, the Company grants credit, generally without collateral, to its
customers, which are primarily commercial and industrial companies located in
the North Puget Sound area of Western Washington. Consequently, the Company is
subject to potential credit risk related to changes in business and economic
factors in that area, including cyclical changes in the aerospace industry.
However, management believes that its contract acceptance, billing and
collection policies are adequate to minimize the potential credit risk.
F-148
224
INDEPENDENT AUDITORS' REPORT
Mr. Mark Henderson, President
Mark Henderson, Inc.
Decatur, Georgia
We have audited the consolidated balance sheets of Mark Henderson, Inc., a
Georgia corporation, and Subsidiaries as of September 30, 1997 and February 28,
1997 and the related consolidated statements of income, retained earnings, and
cash flows for the years then ended. These consolidated financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the consolidated financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the consolidated financial statements.
An audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Mark Henderson, Inc.
and Subsidiaries as of September 30, 1997 and February 28, 1997, and the results
of their operations and their cash flows for the years then ended in conformity
with generally accepted accounting principles.
As discussed in Note 13 to the financial statements, the Company has made a
change in reporting entity. The financial statements include the accounts of
Holland Electrical Systems, Inc. a 45%-owned subsidiary.
Bradshaw, Pope & Franklin, LLP
Norcross, Georgia
December 19, 1997
F-149
225
MARK HENDERSON, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In Thousands)
ASSETS
February 28, 1997 September 30, 1997 June 30, 1998
----------------- ------------------ --------------
(Unaudited)
CURRENT ASSETS
Cash and cash equivalents $ 4,081 $ 215 $ --
Accounts receivable 8,587 10,068 11,438
Retainage receivable 2,022 3,069 3,545
Costs and estimated earnings in excess of billings 1,157 2,596 136
Prepaid expenses 53 7 543
Other receivables 17 21 11
-------------- -------------- --------------
TOTAL CURRENT ASSETS 15,917 15,976 15,673
PROPERTY AND EQUIPMENT
Office equipment and furniture 156 185 80
Automobiles and trucks 655 601 876
Equipment 114 175 235
Leasehold improvements 77 155 177
-------------- -------------- --------------
1,002 1,116 1,368
Less accumulated depreciation 545 573 665
-------------- -------------- --------------
NET PROPERTY AND EQUIPMENT 457 543 703
-------------- -------------- --------------
TOTAL ASSETS $ 16,374 $ 16,519 $ 16,376
============== ============== ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Notes Payable and Current Maturities of LT Debt $ 340 $ 236 $ 946
Accounts payable 3,791 4,531 3,615
Accrued expenses 1,170 638 1,027
Billings in excess of costs and estimated earnings 3,350 2,102 2,709
Income taxes payable 1,810 73 139
Deferred income taxes 46 58 6
-------------- -------------- --------------
TOTAL CURRENT LIABILITIES 10,507 7,638 8,442
-------------- -------------- --------------
LONG-TERM DEBT 144 117 1,320
-------------- -------------- --------------
MINORITY INTEREST 196 258 258
STOCKHOLDERS' EQUITY
Common stock 1 1 1
Additional paid in capital 58 58 58
Retained earnings 5,468 8,447 6,297
-------------- -------------- --------------
TOTAL STOCKHOLDERS' EQUITY 5,527 8,506 6,356
-------------- -------------- --------------
TOTAL LIABILITIES
STOCKHOLDERS' EQUITY $ 16,374 $ 16,519 $ 16,376
============== ============== ==============
The accompanying notes are an integral part of these statements.
F-150
226
MARK HENDERSON, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(In Thousands)
Year ended Year ended Seven months ended Nine months Nine months
February 28, September 30, September 30, ended ended
1997 1997 1997 June 30, 1997 June 30, 1998
--------------- ------------- ------------------ ------------- -------------
(Unaudited) (Unaudited) (Unaudited)
CONTRACT REVENUES EARNED $ 44,369 $ 55,541 $ 36,502 $ 37,984 $ 47,985
COST OF REVENUES EARNED 37,903 46,938 31,677 32,939 42,669
-------------- ------------- -------------- -------------- --------------
GROSS PROFIT 6,466 8,603 4,825 5,045 5,316
GENERAL AND ADMINISTRATIVE EXPENSE 2,230 3,267 1,272 2,485 2,216
-------------- ------------- -------------- -------------- --------------
INCOME FROM OPERATIONS 4,236 5,336 3,553 2,560 3,100
-------------- ------------- -------------- -------------- --------------
OTHER INCOME (EXPENSES)
Interest income 129 165 89 151 35
Gain (loss) on sale of property
and equipment 5 13 9 6 (5)
Interest expense (41) (52) (34) (30) (36)
Contributions (32) -- (8) -- 20
Other (437) (423) (230) (441) --
-------------- ------------- -------------- -------------- --------------
TOTAL OTHER INCOME (EXPENSES) (376) (297) (174) (314) 14
-------------- ------------- -------------- -------------- --------------
NET INCOME BEFORE INCOME TAXES 3,860 5,039 3,379 2,246 3,114
PROVISION FOR INCOME TAXES 1,484 853 51 777 546
-------------- ------------- -------------- -------------- --------------
INCOME BEFORE MINORITY INTEREST 2,376 4,186 3,328 1,469 2,568
MINORITY INTEREST 73 (62) (62) 0 0
-------------- ------------- -------------- -------------- --------------
NET INCOME $ 2,449 $ 4,124 $ 3,266 $ 1,469 $ 2,568
============== ============= ============== ============== ==============
The accompanying notes are an integral part of these statements.
F-151
227
MARK HENDERSON, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF RETAINED EARNINGS
(In Thousands)
Twelve months Seven months Nine months
ended ended ended
February 28, 1997 September 30, 1997 June 30, 1998
----------------- ------------------ -------------
(Unaudited)
RETAINED EARNINGS -
Beginning of the year $ 3,019 $ 5,468 $ 8,447
ADD:
Net income 2,449 3,266 2,568
LESS:
Shareholder distributions -0- 287 (4,718)
------------ ------------ ------------
RETAINED EARNINGS -
End of the year $ 5,468 $ 8,447 $ 6,297
============ ============ ============
The accompanying notes are an integral part of these statements.
F-152
228
MARK HENDERSON, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
Year ended Year ended Seven months Nine months Nine months
February 28, September 30, ended ended ended
1997 1997 September 30, 1997 June 30, 1997 June 30, 1998
------------ ------------ ------------------ -------------- --------------
(Unaudited) (Unaudited) (Unaudited)
CASH FLOWS FROM OPERATING
ACTIVITIES:
Net income $ 2,449 $ 4,124 $ 3,266 $ 1,469 $ 2,568
Adjustments to reconcile net income to
net cash provided by operating
activities:
Depreciation 190 168 89 84 134
(Gain) loss on sale of property and
equipment (5) (13) (9) (6) 5
Minority interest (73) 62 61 -- --
(Increase) decrease in:
Accounts receivable (1,624) (3,683) (1,513) (266) (1,370)
Retainage receivable (210) (1,543) (1,011) (1,149) (476)
Earnings in excess of billings (177) (1,608) (1,439) 708 2,460
Prepaid expenses (6) 3 46 (95) (536)
Other receivables 51 449 (8) (38) 10
Increase (decrease) in:
Accounts payable (225) 2,652 778 1,394 (916)
Accrued expenses 403 177 (539) 361 389
Billings in excess of earnings 1,576 (2,293) (1,247) (2,994) 607
Income taxes payable 1,521 (686) (1,729) (610) 66
Deferred income taxes (696) (681) 12 (661) (52)
---------- ---------- ---------- ---------- ----------
NET CASH PROVIDED (USED) BY OPERATING
ACTIVITIES 3,174 (2,872) (3,243) (1,802) 2,889
---------- ---------- ---------- ---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Cash inflows:
Sales of property and equipment 29 20 42 10 --
Cash outflows:
Investment in Spectrol, Inc. (85) -- -- -- --
Purchases of property and equipment (150) (254) (135) (52) (299)
---------- ---------- ---------- ---------- ----------
NET CASH (USED) BY INVESTING
ACTIVITIES (206) (234) (93) (42) (299)
---------- ---------- ---------- ---------- ----------
The accompanying notes are an integral part of these statements.
F-153
229
MARK HENDERSON, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
CONTINUED
(In Thousands)
Seven months Nine months Nine months
Year ended Year ended ended ended ended
February 28, September 30, September 30, June 30, June 30,
1997 1997 1997 1997 1998
------------- ------------ ------------- ------------ ------------
(Unaudited) (Unaudited) (Unaudited)
CASH FLOWS FROM FINANCING ACTIVITIES:
Cash inflows:
Proceeds from loans 244 -- -- -- 1,913
Cash outflows:
Loans to related company -- -- (38) -- --
Payments on shareholder loans (90) -- -- -- --
Principle payments on debt (288) (157) (204) (288) --
Shareholder distributions -- (287) (288) (88) (4,718)
--------- --------- --------- --------- ---------
NET CASH PROVIDED (USED) BY
FINANCING ACTIVITIES (134) (444) (530) (376) (2,805)
--------- --------- --------- --------- ---------
NET INCREASE (DECREASE) IN CASH
AND CASH EQUIVALENTS 2,834 (3,550) (3,866) (2,220) (215)
CASH AND CASH EQUIVALENTS AT
BEGINNING OF YEAR 1,247 3,765 4,081 3,765 215
--------- --------- --------- --------- ---------
CASH AND CASH EQUIVALENTS AT END OF
YEAR $ 4,081 $ 215 $ 215 $ 1,545 $ 0
========= ========= ========= ========= =========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION
Cash paid during the year for:
Interest $ 41 $ 52 $ 18 $ 30 $ 36
Income taxes $ 700 $ 1,764 $ 1,764 $ 1,438 $ 184
Additional property and
equipment acquired through $ 28 $ 73 $ 73 $ -- $ --
financing
Purchase of subsidiary net of
cash received (Note 4) $ 85 $ -- $ -- $ -- $ --
The accompanying notes are an integral part of these statements.
F-154
230
MARK HENDERSON, INC.
AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1997 AND FEBRUARY 28, 1997
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of business
Mark Henderson, Inc. and Subsidiaries are electrical contractors, performing
contracts for commercial construction projects in the Southeast.
Principles of consolidation
The consolidated financial statements include the accounts of Mark Henderson,
Inc. for the short year beginning March 1, 1997 and ending September 30, 1997
and year ended February 28, 1997; its 75%-owned subsidiary, Spectrol, Inc. for
the short year beginning May 1, 1997 and ending September 30, 1997 and six
months ended April 30, 1997; and its 45%-owned subsidiary, Holland Electrical
Systems, Inc for the seven months beginning March 1, 1997 and ending September
30, 1997 and year ending February 28, 1997. All material intercompany
transactions have been eliminated.
Effective March 1, 1997, Mark Henderson, Inc. and its 75%-owned subsidiary
Spectrol, Inc. have changed their fiscal year to end September 30 for both
financial and tax reporting purposes. Holland Electrical Systems, Inc. retained
its February 28 year end.
In June, 1998, the Company and its stockholders entered into a definitive
agreement with Integrate Electrical Services, Inc. (IES), pursuant to which all
outstanding shares of the Company's common stock was exchanged for cash and
shares of IES common stock. In addition, the key executives of the Company
entered into employment agreements with the Company and IES which have initial
term of two-five years, and generally restrict the disclosure of confidential
information as well as restrict competition with the Company and IES for a
period of two years following termination of employment.
The interim financial statements for the nine months ended June 30, 1998 and
1997, and the year ended September 30, 1997, are unaudited and have been
prepared pursuant to the rules and regulations of the Securities and Exchange
Commission. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of the Company's management, the unaudited
interim financial statements contain all adjustments (consisting of normal
recurring adjustments) considered necessary for a fair presentation. The results
of operations for the interim periods are not necessarily indicative of the
results for the entire fiscal year.
Revenue recognition
Mark Henderson, Inc. and Subsidiaries record revenue from contracts on the
percentage of completion method which recognizes revenue as work on a contract
progresses. The revenue recognized is that percentage of the estimated total
revenue that incurred costs to date bear to total estimated costs, after giving
effect to Company estimates of costs to complete based upon the most recent
information. Because of the inherent uncertainties in estimating costs, it is at
least reasonably possible that the estimates used will change within the near
future.
The application of this method results in "costs and estimated earnings in
excess of billings" (current asset) with respect to certain contracts and
"billings in excess of costs and estimated earnings" (current liability) with
respect to other contracts.
Cost of revenues earned includes all direct material, labor, and subcontract
costs and those indirect costs related to contract performance, such as indirect
labor, insurance, and depreciation.
The Company considers accounts receivable to be fully collectible; accordingly,
no allowance for doubtful amounts is required. If amounts become uncollectible,
they will be charged to operations when that determination is made.
Property and equipment
Property and equipment are stated at cost. Depreciation is computed using
accelerated and straight-line depreciation methods over estimated service lives
for financial reporting purposes. Principal service lives are:
Office equipment and furniture 3 - 7 years
Automobiles and trucks 5 - 7 years
Equipment 5 years
Leasehold improvements 31.5 years
F-155
231
MARK HENDERSON, INC.
AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
CONTINUED
SEPTEMBER 30, 1997 AND FEBRUARY 28, 1997
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Property and equipment (continued)
Expenditures for major renewals and betterments which extend the useful lives of
property and equipment are capitalized. Expenditures for maintenance and repairs
are charged to expense as incurred.
Cash and cash equivalents
For purposes of the statements of cash flows, the Company considers all
investments purchased with a maturity of three months or less to be cash
equivalents.
Use of estimates
Generally accepted accounting principles require management to estimate some
amounts reported in the financial statements; actual amounts could differ.
Compensated absences
Employees are entitled to paid vacations depending on job classification, length
of service, and other factors. The amount of compensation for future absences
cannot be reasonably estimated, and, accordingly, no liability has been recorded
in the accompanying financial statements.
Income taxes
Mark Henderson, Inc., with the consent of its shareholders, has elected to be
taxed under the provisions of Subchapter S of the Internal Revenue Code
effective March 1, 1997. Under those provisions, the Company does not pay income
taxes on their proportionate share of the Company's taxable income.
Spectrol, Inc. and Holland Electrical Systems, Inc. are taxable corporations,
and the financial statements include a provision for taxes on their earnings and
losses.
Holland Electrical Systems, Inc. reports income on long-term contracts on the
basis of the "completed contract" method of accounting for income tax purposes
while the aforementioned "percentage of completion" method of accounting is used
for financial reporting. Under the "completed contract" method, billings and
costs are accumulated during the period of construction, but no profits are
recognized until completion and acceptance of the work. The current liability of
deferred income taxes results from the deferral of gross profit on uncompleted
contracts. Deferred income taxes are reduced by the alternative minimum tax that
will be allowed as a credit in future years.
Spectrol, Inc. and Holland Electrical Systems, Inc. also incur deferred income
taxes as a result of timing differences between the recognition of depreciation
for income tax reporting and financial reporting. Accelerated depreciation is
used for tax reporting, and straight-line depreciation is primarily used for
financial statement reporting.
F-156
232
MARK HENDERSON, INC.
AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
CONTINUED
SEPTEMBER 30, 1997 AND FEBRUARY 28, 1997
NOTE 2 - COSTS AND ESTIMATED EARNINGS ON UNCOMPLETED CONTRACTS (in thousands):
February 28, 1997 September 30,1997
----------------- -----------------
Total contracts $ 68,792 $ 91,911
-------------- --------------
Estimated costs -
Costs to date 24,027 43,806
Costs to complete 35,455 35,685
-------------- --------------
Total estimated costs 59,482 79,491
-------------- --------------
Estimated gross profit $ 9,310 $ 12,420
============== ==============
Amount billed to date $ 30,335 $ 50,117
Costs and estimated earnings in excess of billings 1,157 2,596
Billings in excess of costs and estimated earnings 3,350 2,102
-------------- --------------
Contract revenues earned 28,142 50,611
Costs to date 24,027 43,806
-------------- --------------
Gross profit earned $ 4,115 $ 6,805
-------------- --------------
NOTE 3 - LONG-TERM DEBT
Long-term debt is summarized below: (in thousands)
February 28, 1997 September 30,1997
----------------- -----------------
Line of credit with Wachovia Bank of Georgia, interest
at prime plus 0.25%, payable on demand, $2,000 unused at
September 30, 1997 and February 28, 1997 $ -0- $ -0-
Line of credit with Wachovia Bank, interest at prime plus
1.0% adjusted daily. Secured by all assets of the Company,
$146 unused at September 30, 1997 200 104
Various notes payable to bank and finance companies,
interest ranging from 2.9% to 11.9%, principle and
interest due monthly of $17, maturing through
February 2001, secured by vehicles and equipment 283 249
---------------- ----------------
483 353
Less current portion 340 236
---------------- ----------------
Long term debt $ 143 $ 117
================ ================
F-157
233
MARK HENDERSON, INC.
AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
CONTINUED
SEPTEMBER 30, 1997 AND FEBRUARY 28, 1997
NOTE 3 - LONG-TERM DEBT (continued)
Scheduled minimum maturities of the current and long-term debt at September 30,
1997, are as follows (in thousands):
1998 $ 236
1999 74
2000 33
2001 8
2002 2
------
$ 353
======
NOTE 4 - INVESTMENT IN SUBSIDIARIES
On October 21, 1996 Mark Henderson, Inc. purchased 300 shares of the outstanding
common stock of Spectrol, Inc. for $100,000. The purchase method was used to
account for the acquisition. The purchase price was allocated as follows (in
thousands):
Cash $ 15
Accounts receivable 659
Earnings in excess of billings 30
Employee receivables 3
Property and equipment --
Deferred credit (3)
Accounts payable (302)
Accrued liabilities (25)
Billings in excess of earnings (4)
Deferred taxes (2)
Notes payable (222)
Minority interest (49)
-----
$ 100
=====
The accompanying financial statements for February 28, 1997 include operations
for Spectrol, Inc. for the six months ended April 30, 1997. Because the two
companies have different fiscal years, some intercompany transactions were not
eliminated in the consolidation. In the intervening period, Spectrol, Inc. had
$376,367 in billings to Mark Henderson, Inc. of which $247,538 is included in
accounts receivable at their fiscal year end.
Mark Henderson, Inc. acquired 45% of Holland Electrical Systems, Inc. in August,
1994. Holland Electrical Systems, Inc. is engaged in substantially the same
business as Mark Henderson, Inc.
NOTE 5 - RELATED PARTY TRANSACTIONS
Mark Henderson, Inc. leases its business premises at 5322 Snapfinger Park Drive
from stockholders on a month-to-month basis for $3,273 per month. Rent expense
under the lease for the short year ended September 30, 1997 was $22,911 and for
the year ended February 28, 1997 was $39,276. Mark Henderson, Inc. is a
guarantor on the mortgage for this property. The rent increased to $6,475 per
month starting October 1, 1997.
F-158
234
MARK HENDERSON, INC.
AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
CONTINUED
SEPTEMBER 30, 1997 AND FEBRUARY 28, 1997
NOTE 5 - RELATED PARTY TRANSACTIONS (continued)
Holland Electrical Systems, Inc. leases its office facilities from Mike Holland,
who owns 21% of its common stock. Total lease expense for the period ended
September 30, 1997 was $10,850 and for the year ended February 28, 1997 was
$18,550.
The lease is currently on a month to month basis.
NOTE 6 - RETIREMENT PLAN
Mark Henderson, Inc. and Holland Electric Systems, Inc. sponsor 401(K) profit
sharing plans for all eligible employees who have completed one year of service
and attained the age of 21. Under the plan, employees may elect to defer a
percentage of their compensation each year subject to Internal Revenue Service
limits. The Company may make discretionary matching contributions equal to a
percentage of the amount of salary reductions elected. The Company may also make
a discretionary contribution equal to a percentage of eligible employees'
compensation.
The Company contribution to the plans for the period ended September 30, 1997
was $230,397, and for the year ended February 28, 1997 was $449,502.
NOTE 7 - INCOME TAXES
Mark Henderson, Inc. with the consent of its shareholder, has elected under the
Internal Revenue Code to be an S-corporation effective beginning March 1, 1997.
In lieu of corporation income taxes, the shareholders of an S corporation are
taxed on their proportionate share of the Company's taxable income. Spectrol,
Inc. and Holland Electrical Systems, Inc. will continue to be taxed as
C-corporations.
The components of the provision for income taxes are as follows (in thousands):
February 28, 1997 September 30, 1997
----------------- ------------------
Current income tax $ 2,180 $ 39
Deferred income tax (696) 12
------------ ------------
Total $ 1,484 $ 51
============ ============
The Company accounts for income taxes under the provisions of Statement of
Financial Accounting Standards No. 109. (SFAS 109) is based on the assumption
that tax laws and financial accounting standards differ in their recognition and
measurement of assets, liabilities, equity, revenues, expenses, gains, and
losses. Therefore, differences arise between the amount of taxable income and
pretax financial income for a year, and the tax bases of assets or liabilities
differ from the amounts reported in financial statements. Since Holland
Electrical Systems, Inc. uses the completed contract method of accounting for
income tax purposes, the primary temporary differences between tax and financial
statements is the unrecognized profit on jobs in progress.
NOTE 8 - DEPRECIATION
The Company recognized $89,417 in depreciation of its property and equipment
during the period ended September 30, 1997 and $190,265 during the year ended
February 28, 1997.
F-159
235
MARK HENDERSON, INC.
AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
CONTINUED
SEPTEMBER 30, 1997 AND FEBRUARY 28, 1997
NOTE 9 - LEASE COMMITMENTS
Mark Henderson, Inc. leases facilities at 2406 - 2408 Park Central Boulevard
under operating leases. The lease expires on September 30, 1999. The monthly
rent is $3,016 for the first two years and $3,267 for the third year. Rental
expense for the year ended September 30, 1997 was $15,080.
Mark Henderson, Inc. also leases facilities in Raleigh, North Carolina under an
operating lease that expires July, 2000. The lease commenced March 15, 1997 with
a monthly rental of $2,010. Rental expense for the short year ended September
30, 1997 was $13,756.
The Company leases several vehicles and a copier under noncancelable operating
leases.
Future minimum lease payments under the above leases are as follows (in
thousands):
1998 $ 156
1999 151
2000 115
2001 48
2002 -
------
$ 470
======
Spectrol, Inc. leases its office and some of its equipment on a month to month
basis.
NOTE 10 - STOCK BONUS PLAN
Under certain circumstances, an officer of Holland Electrical Systems, Inc. has
the option to purchase shares of common stock of Holland Electrical Systems,
Inc. for amounts based upon the book value of the shares at the time of
exercise.
NOTE 11 - OFF-BALANCE-SHEET RISK AND CONCENTRATION OF CREDIT RISK
In March 1990, the Financial Accounting Standards issued Statement of Financial
Accounting Standards No. 105, Disclosure of Information about Financial
Instruments with Off-Balance-Sheet Risk and Financial Instruments with
Concentrations of Credit Risk. The pronouncement requires disclosure of
information about financial instruments for which risk could exceed amounts
reflected in the financial statements and information about significant
geographic, industry, or other concentrations of credit risk for all financial
instruments.
The Company has a potential concentration of credit risk in that it maintains
deposits with financial institutions in excess of amounts insured by FDIC.
Financial instruments which potentially expose the Company to concentrations of
credit risk consist primarily of trade accounts receivable. The Company has not
experienced significant losses related to receivables from individual customers
or groups of customers in a particular industry or geographic area. Due to these
factors, management believes no additional credit risk beyond amounts provided
for collection losses is inherent in the Company's accounts receivable.
F-160
236
MARK HENDERSON, INC.
AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
CONTINUED
SEPTEMBER 30, 1997 AND FEBRUARY 28, 1997
NOTE 12 - COMPONENTS OF COMMON STOCK
Mark Henderson, Inc. $1 par value; 100,000 shares authorized; 1,000 shares
issued and outstanding.
Spectrol, Inc. $100 par value; 5,000 shares authorized; 400 shares issued and
outstanding.
Holland Electrical Systems, Inc. $1 par value; 100,000 shares authorized; 1,000
shares issued and outstanding.
NOTE 13 - CHANGE IN REPORTING ENTITY
The consolidated financial statements for September 30, 1997 and February 28,
1997 include the accounts of Holland Electrical Systems, Inc., a 45%-owned
subsidiary. Holland Electrical Systems, Inc. had previously been accounted for
under the equity method.
F-161
237
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors
DAVIS ELECTRICAL CONSTRUCTORS, INC.
Greenville, South Carolina
We have audited the accompanying balance sheet of DAVIS ELECTRICAL
CONSTRUCTORS, INC. as of September 30, 1997, and the related statements of
income and retained earnings and cash flows for the years then ended. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of DAVIS ELECTRICAL
CONSTRUCTORS, INC. as of September 30, 1997 and the results of its operations
and its cash flows for the year then ended, in conformity with generally
accepted accounting principles.
Elliott, Davis & Company, L.L.P.
Greenville, South Carolina
December 2, 1997
F-162
238
DAVIS ELECTRICAL CONSTRUCTORS, INC.
BALANCE SHEETS
(IN THOUSANDS EXCEPT SHARE DATA)
September 30, June 30,
1997 1998
------- -------
(unaudited)
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 6,203 $ 3,652
Accounts receivable 11,079 10,240
Costs and estimated earnings in excess of billings
on uncompleted contracts 769 2,459
Other assets 86 54
------- -------
Total current assets 18,137 16,405
PROPERTY AND EQUIPMENT 1,320 1,171
OTHER ASSETS
Cash value of life insurance 2,373 2,529
Deposit 771 771
Other assets 312 312
------- -------
3,456 3,612
------- -------
$22,913 $21,188
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 872 $ 1,434
Dividends payable 3,572 --
Accrued salaries and wages 2,142 1,089
Billings in excess of costs and estimated earnings
on uncompleted contracts 1,130 360
Accrued expenses and other liabilities 1,851 1,843
------- -------
Total current liabilities 9,567 4,726
DEFERRED COMPENSATION 2,742 2,907
STOCKHOLDERS' EQUITY
Common stock, par value $1 per share; authorized
500,000 shares; issued and outstanding 62,500 shares 62 62
Additional paid-in capital 130 130
Retained earnings 10,412 13,363
------- -------
10,604 13,555
------- -------
$22,913 $21,188
======= =======
The accompanying notes are an integral part of these financial statements.
F-163
239
DAVIS ELECTRICAL CONSTRUCTORS, INC.
STATEMENTS OF INCOME AND RETAINED EARNINGS
(IN THOUSANDS)
Nine months
Ended
Year Ended June 30,
September 30, ----------------------
1997 1997 1998
----------- -------- -------
(Unaudited)
CONTRACT REVENUE EARNED $ 100,020 $ 78,808 $64,756
COSTS OF EARNED REVENUE 82,101 64,982 56,653
--------- -------- -------
Gross profit 17,919 13,826 8,103
GENERAL AND ADMINISTRATIVE EXPENSES 14,196 5,962 5,254
--------- -------- -------
Income from operation 3,723 7,864 2,849
OTHER INCOME:
Interest Income 290 179 102
Interest Expense (2) (1) --
--------- -------- -------
Net income 4,011 8,042 2,951
RETAINED EARNINGS, BEGINNING OF YEAR 10,798 10,798 10,412
DIVIDENDS (4,397) (600) --
--------- -------- -------
RETAINED EARNINGS, END OF YEAR $ 10,412 $ 18,240 $13,363
========= ======== =======
The accompanying notes are an integral part of these financial statements.
F-164
240
DAVIS ELECTRICAL CONSTRUCTORS, INC.
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
Nine months ended
Year ended June 30,
September 30, ---------------------
1997 1997 1998
-------- ------- -------
(Unaudited)
OPERATING ACTIVITIES
Net income $ 4,011 $ 8,042 $ 2,951
Adjustments to reconcile net income to net cash provided by
operating activities
(Gain) loss on sale of equipment 29 -- --
Depreciation 532 266 267
Changes in deferred and accrued amounts
Accounts receivable 3,061 3,033 839
Costs and estimated earnings in excess of billings on
uncompleted contracts (188) (834) (1,690)
Deposits (378) 20 32
Other assets -- (378) --
Accounts payable (578) (937) 562
Dividends payable (2,598) (2,598) (3,572)
Accrued salaries and wages 818 (183) (1,053)
Billings in excess of costs and estimated earnings on
uncompleted contracts (2,581) (2,469) (770)
Accrued expenses and other liabilities (2) 221 (8)
Deferred compensation 203 152 165
------- ------- -------
Net cash provided by operating activities 2,329 4,335 (2,277)
------- ------- -------
INVESTING ACTIVITIES
Proceeds from sale of equipment 18 -- --
Purchase of equipment (403) (269) (118)
Increase in cash value of life insurance (254) (166) (156)
------- ------- -------
Net cash used for investing activities (639) (435) (274)
------- ------- -------
FINANCING ACTIVITIES
Dividends (825) (600) --
------- ------- -------
Net cash used for financing activities (825) (600) --
------- ------- -------
Net increase in cash and cash equivalents 865 3,300 (2,551)
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 5,338 5,338 6,203
------- ------- -------
CASH AND CASH EQUIVALENTS, END OF YEAR 6,203 8,638 3,652
======= ======= =======
CASH PAID FOR
Interest $ 2 $ 1 $ --
======= ======= =======
Income taxes $ -- $ -- $ --
======= ======= =======
NONCASH INVESTING AND FINANCING ACTIVITIES
The Company accrued $3,571,483 in 1997, for dividends on common stock.
The accompanying notes are an integral part of these financial
statements.
F-165
241
DAVIS ELECTRICAL CONSTRUCTORS, INC.
NOTES TO FINANCIAL STATEMENTS
YEAR ENDED SEPTEMBER 31, 1997
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND ACTIVITIES
The Company is a national industrial electrical contractor. The Company
extends credit to its customers who are concentrated primarily in the
Southeastern region of the United States. The home office is located in
Greenville, South Carolina with branch offices in Midland, Michigan operating as
Davis Constructors Division and in Baton Rouge, Louisiana operating as Davis
International Division.
In September, 1998, the Company and its stockholders entered into a
definitive agreement with Integrated Electrical Services, Inc. (IES), pursuant
to which all outstanding shares of Company's common stock was exchanged for cash
and shares of IES common stock. In addition, the key executives of the Company
entered into employment agreements with the Company and IES which have an
initial term of three to five years, and generally restrict the disclosure of
confidential information as well as restrict competition with the Company and
IES for a period of two years following termination of employment.
INTERIM FINANCIAL INFORMATION
The interim financial statements for the nine months ended June 30, 1998
and 1997, are unaudited and have been prepared pursuant to the rules and
regulations of the Securities and Exchange Commission. Accordingly, they
do not include all of the information and footnotes required by generally
accepted accounting principles for complete financial statements. In the
opinion of the Company's management, the unaudited interim financial
statements contain all adjustments (consisting of normal recurring
adjustments) considered necessary for a fair presentation. The results of
operations for the interim periods are not necessarily indicative of the
results for the entire fiscal year.
REVENUE AND COST RECOGNITION
The Company reports contract revenues from firm-price and guaranteed
maximum contracts on the percentage-of-completion method, measured by the
percentage of costs incurred to date, to the total estimated costs for
each contract. Revisions in contract revenues and cost estimates are
reflected in the period in which the facts that require the revisions
become known. Revenues from cost-plus-percentage and cost-plus-fixed fee
contracts are reported as the costs are incurred. Provisions for estimated
losses on uncompleted contracts are made in the period in which such
losses become known.
Contract costs include all direct material, labor and sub-contract costs
and those indirect costs related to contract performance, such as indirect
labor, equipment repairs, equipment rent, tools and supplies. General and
administrative costs are charged to expense as incurred.
PROPERTY AND EQUIPMENT
Property and equipment, including permanent improvements to existing
facilities, are carried at cost. Maintenance, repairs and other expenses
not resulting in improvements are charged to expense as incurred.
Depreciation is calculated using accelerated methods over the estimated
useful lives of the respective assets.
INCOME TAXES
The Company, with the consent of its stockholders, has elected to be taxed
as an S corporation effective October 1, 1995. Earnings and losses after
that date are included in the personal income tax returns of the
stockholders. Accordingly, the Company will not incur income tax
obligations, and the financial statements will not include a provision for
income taxes, except for provision of taxes in those states that do not
recognize the S corporation election.
F-166
242
CASH AND CASH EQUIVALENTS
For purposes of reporting cash flows, the Company considers all liquid,
nonequity investments with an original maturity of three months or less to
be cash equivalents. The Company places its temporary cash investments
with high credit quality financial institutions. At times such investments
may be in excess of the FDIC insurance limits.
ESTIMATES
The financial statements include estimates and assumptions that affect the
Company's financial position and results of operations and disclosure of
contingent assets and liabilities. Actual results could differ from these
estimates.
NOTE 2 - ACCOUNTS RECEIVABLE
September 30, 1997
------------------
The following summarizes accounts receivable:
Contract receivables 9,517
Contract retainages 1,432
Officers and employees 130
------
11,079
======
NOTE 3 - CONTRACTS IN PROGRESS
September 30, 1997
------------------
The following summarizes uncompleted contracts:
Firm price contracts
Costs $ 23,159
Estimated earnings 6,322
--------
29,481
Less billings 30,213
--------
(732)
Unbilled costs on cost-plus contracts 371
--------
$ (361)
========
Included in current assets as:
Costs and estimated earnings in excess of
billings on uncompleted contracts $ 769
Included in current liabilities as:
Billings in excess of costs and estimated
earnings on uncompleted contracts 1,130
--------
$ (361)
========
NOTE 4 - PROPERTY AND EQUIPMENT
Property and equipment at September 30, 1997 consists of the following:
Accumulated
Cost Depreciation Net
---- ------------ ---
Automobiles and trucks 1,359 739 620
Construction and related equipment 2,357 1,828 529
Office furniture and equipment 818 689 129
Leasehold improvements 273 231 42
----- ----- -----
4,807 3,487 1,320
===== ===== =====
F-167
243
NOTE 5 - NOTE PAYABLE
The Company has an unsecured $4,000,000 line of credit with a bank
which is partially guaranteed by the majority stockholder of the Company with
his guaranty limited to $2,000,000. The line bears interest at Libor plus 185
basis points and expires January 28, 1998. At September 30, 1997, $1,300,000 of
the line has been used under letters of credit which expire March 1, 1998 and
April 1, 1998, leaving $2,700,000 available for additional draws. At September
30, 1996, $1,250,000 of the line has been used under letters of credit which
expire March 1, 1997 and April 1, 1997, leaving $2,750,000 available for
additional draws. Letters of credit issued in connection with the lines of
credit are secured by the cash surrender value of life insurance on the life of
the majority stockholder of the Company. The provisions of the lines of credit
contain various covenants requiring the Company to maintain certain ratios and
to perform or not perform other actions. At September 30, 1997 and 1996, the
Company was in compliance with these provisions.
NOTE 6 - ACCRUED EXPENSES AND OTHER LIABILITIES
September 30, 1997
------------------
Accrued expenses and other liabilities are summarized as follows:
Payroll taxes withheld and accrued $ 655
Workers' compensation and general liability insurance 829
State sales and use tax 27
Other liabilities 340
-----------------
$ 1,851
=================
NOTE 7 - EMPLOYEE BENEFITS
The Company provides deferred compensation to key employees under the
Davis Electrical Constructors, Inc. Incentive Plan. The plan provides for the
award of units to participants that are equivalent in value to one share of the
Company's stock at book value. Effective October 1, 1996, the Company elected to
suspend the Davis Electrical Constructors, Inc. Incentive Plan. The effect of
this election was to cease the appreciation in the book value of the unit as
compared to the initial value per unit defined by the plan on the date of award.
All other terms of the plan are still in effect. The present value of deferred
compensation under the plan since inception is computed as follows:
September 30, 1997
------------------
Deferred compensation from appreciation of
units awarded to participants $ 5,277
Discounted at 8 percent for the time value of money
until the dates of estimated future payouts $ 2,535
--------------
Present value of deferred compensation $ 2,742
==============
For the years ended September 30, 1997 and 1996, $203,550 and $188,047
was charged to operations under the Plan, respectively. The compensation
deferred under the plan is currently 60 percent vested to the participants.
Vesting under the plan begins after the fifth year of participation and
increases twenty percent per year until fully vested. Provisions for full
vesting of benefits under the plan are also provided upon the death or
disability of the participant, termination of the plan and certain other events
related to the majority stockholder.
F-168
244
NOTE 7 - EMPLOYEE BENEFITS, CONTINUED
The participants shall receive payment of plan benefits upon
termination of employment or upon specific actions by the board of directors.
Upon termination of a participant's employment, the participant shall receive
payment of the value of his share units over such period of time (not to exceed
ten years) as the board shall determine in its absolute discretion.
The Company also provides an executive bonus plan whereby the Company
shall pay bonuses for each fiscal year to each identified executive in an amount
equal to a specified percentage of Company's net profits for such fiscal year.
NOTE 8 - LEASE COMMITMENTS
At September 30, 1997 and 1996, the Company was obligated under several
noncancellable operating leases on certain property and equipment that had an
initial or remaining term of more than one year. Lease payments charged to
operations under such leases were approximately $551,745 for the year ended
September 30, 1997 and $558,000 for the year ended September 30, 1996,
respectively. Future minimum lease payments under such operating leases that
have initial or non-cancelable terms in excess of one year are as follows:
September 30, 1997
------------------
1997
1998 371
1999 167
2000 138
2001 90
2002 and thereafter 315
------------
1,081
============
NOTE 9 - INCOME TAXES
The provision for income taxes for the year ended September 30, 1996
consists of the following components:
State income taxes currently payable $ 132
Reversal of prior years' deferred tax asset 878
-----------
Total $ 1,010
===========
NOTE 9 - INCOME TAXES, CONTINUED
As discussed in Note 1, the Company has elected S corporation status
effective as of October 1, 1995. Accordingly, the deferred tax asset of $878,593
as of the date the election for the change was filed has been eliminated through
the deferred tax provision.
NOTE 10 - COMMITMENTS AND CONTINGENCIES
The Company is self insured on major medical coverage which it provides
to its employees. Specific and aggregate excess reinsurance is carried by the
Company to limit potential costs under the self insured plan. Amounts due for
claims submitted by covered employees and the related charges to operations are
accounted for in the period the underlying occurrence or incident for the claim
occurs. Claims payable are processed by an administrator designated by the
Company.
F-169
245
NOTE 10 - COMMITMENTS AND CONTINGENCIES, CONTINUED
The Company is insured for workers compensation claims in certain
states under policies with high deductible provisions generally totaling
$250,000 per incident. Specific and aggregate excess reinsurance is carried by
the Company to limit potential costs.
NOTE 11 - RELATED PARTY TRANSACTIONS
The Company leases offices, warehouses and certain equipment from
stockholders and partnerships in which the stockholders are partners. For the
years ended September 30, 1997 and 1996, approximately $630,556 and $422,000 was
charged to operations under such operating leases, respectively.
NOTE 12 - MAJOR CUSTOMERS AND RISK CONCENTRATION
The Company had sales of approximately 27.9 percent of total sales to
two major customers during 1997. In addition, the Company grants credit,
generally without collateral, to its customers, which are general contractors in
the industrial construction markets. Consequently, the Company is subject to
potential credit risk related to changes in business and economic factors within
the industrial construction markets. However, management believes that its
contract acceptance, billing and collection policies are adequate to minimize
the potential credit risk.
F-170
246
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors and Stockholders of
Florida Industrial Electric, Inc.
We have audited the accompanying balance sheet of Florida Industrial Electric,
Inc. as of December 31, 1997, and the related statements of income and retained
earnings and cash flows for the years then ended. These financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Florida Industrial Electric,
Inc. as of December 31, 1997, and the results of its operations and its cash
flows for the year then ended in conformity with generally accepted accounting
principles.
SAPP & SAPP, P.A.
Winter Park, Florida
February 11, 1998
F-171
247
FLORIDA INDUSTRIAL ELECTRICAL, INC.
BALANCE SHEET
(in thousands)
ASSETS
December 31, 1997 March 31, 1998
----------------- --------------
(unaudited)
