1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 8-K/A CURRENT REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 Date of Report: May 21, 1999 Commission File No. 001-13783 INTEGRATED ELECTRICAL SERVICES, INC. (Exact name of registrant as specified in its charter) DELAWARE 76-0542208 (State or other jurisdiction of (I.R.S. Employer Identification No.) incorporation or organization) 515 Post Oak Boulevard Suite 450 Houston, Texas 77027-9408 (Address of principal executive offices) (zip code) Registrant's telephone number, including area code: (713) 860-1500
2 ITEM 5. OTHER EVENTS Integrated Electrical Services, Inc., a Delaware corporation (the "Company") is a leading national provider and consolidator of electrical contracting and maintenance services, focusing primarily on the commercial, industrial, residential, powerline and data communication markets. In order to comply with the disclosure requirements of the Securities and Exchange Commission regarding the financial statements of businesses acquired or to be acquired, the Company is filing this Current Report containing the following audited and pro forma financial statements. (a) Pro Forma Financial Information See Pages 1 through 6 (b) Financial Statements of Businesses Acquired See Pages 7 through 28 This Form 8-K/A is being filed to amend the Company's Current Reports on Forms 8-K, which were previously filed on April 29, 1999 and May 7, 1999.
3 INTEGRATED ELECTRICAL SERVICES, INC. UNAUDITED PRO FORMA FINANCIAL STATEMENTS BASIS OF PRESENTATION The unaudited pro forma balance sheet reflects the acquisitions by Integrated Electrical Services, Inc. ("IES"), of ten electrical contracting and maintenance businesses from April 1, 1999 through May 18, 1999 (the "Acquisitions"), as if they had occurred on March 31, 1999. The unaudited pro forma statements of operations present the statement of operations data to give effect to the Acquisitions and the related pro forma adjustments as if they had occurred on October 1, 1997. IES has analyzed the savings that it expects to realize from reductions in salaries, bonuses and certain benefits to the owners. To the extent the owners of the Acquisitions have contractually agreed to changes in salary, bonuses, benefits and lease payments, these changes have been reflected in the unaudited pro forma combined statement of operations. Certain 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 these dates and are not necessarily representative of IES's combined financial position or results of operations for any future period. Since the acquired entities were not under common control or management prior to their acquisitions by IES, historical combined results may not be comparable to, or indicative of, future performance. The unaudited pro forma financial statements should be read in conjunction with the historical consolidated financial statements and notes thereto included in the company's Annual Report for the year ended September 30, 1998 filed on Form 10-K. See also "Risk Factors" included elsewhere therein. 1
4 INTEGRATED ELECTRICAL SERVICES, INC. UNAUDITED PRO FORMA BALANCE SHEET MARCH 31, 1999 (IN THOUSANDS) IES AND PRO FORMA PRO FORMA SUBSIDIARIES ACQUISITIONS ADJUSTMENTS AS ADJUSTED ------------- ------------- ------------- ------------- ASSETS CURRENT ASSETS: Cash ............................................... $ 35,630 $ 4,207 $ (35,907) $ 3,930 Receivables, net ................................... 167,801 18,103 -- 185,904 Inventories, net ................................... 8,995 482 -- 9,477 Cost and estimated earnings in excess of billings on uncompleted contracts .............. 21,129 2,918 -- 24,047 Prepaid expenses and other current assets ......... 4,418 1,652 -- 6,070 ------------- ------------- ------------- ------------- Total current assets ............................ 237,973 27,362 (35,907) 229,428 RECEIVABLES FROM RELATED PARTIES ...................... 233 -- -- 233 GOODWILL, NET ......................................... 341,703 -- 54,797 396,500 PROPERTY AND EQUIPMENT, NET ........................... 29,721 5,144 -- 34,865 OTHER NONCURRENT ASSETS ............................... 9,013 100 -- 9,113 ------------- ------------- ------------- ------------- Total assets .................................... $ 618,643 $ 32,606 $ 18,890 $ 670,139 ============= ============= ============= ============= LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Short-term debt and current maturities of long-term debt ................... $ 537 $ 2,661 $ (2,661) $ 537 Accounts payable and accrued expense ............... 83,357 6,838 -- 90,195 Billings in excess of costs and estimated earnings on uncompleted contracts .............. 29,863 1,779 -- 31,642 Income taxes payable ............................... 3,861 2,044 -- 5,905 Other current liabilities .......................... 451 -- -- 451 ------------- ------------- ------------- ------------- Total current liabilities ....................... 118,069 13,322 (2,661) 128,730 ------------- ------------- ------------- ------------- LONG-TERM DEBT, NET ................................... 851 881 (881) 851 SENIOR SUBORDINATED NOTES, net of $1,188 discount ............................ 148,812 -- -- 148,812 OTHER NON-CURRENT LIABILITIES ......................... 1,498 39 -- 1,537 ------------- ------------- ------------- ------------- Total liabilities ............................... 269,230 14,242 (3,542) 279,930 STOCKHOLDERS' EQUITY: Preferred stock .................................... -- -- -- -- Common stock ....................................... 299 195 (169) 325 Restricted common stock ............................ 27 -- -- 27 Treasury stock ..................................... -- (22) 22 -- Additional paid-in capital ......................... 319,509 378 40,392 360,279 Retained earnings .................................. 29,578 17,813 (17,813) 29,578 ------------- ------------- ------------- ------------- Total stockholders' equity ...................... 349,413 18,364 22,432 390,209 ------------- ------------- ------------- ------------- Total liabilities and stockholders' equity ....... $ 618,643 $ 32,606 $ 18,890 $ 670,139 ============= ============= ============= ============= 2
5 INTEGRATED ELECTRICAL SERVICES, INC. UNAUDITED PRO FORMA STATEMENT OF OPERATIONS FOR THE YEAR ENDED SEPTEMBER 30, 1998 (IN THOUSANDS) IES AND FISCAL 1998 FISCAL 1999 PRO FORMA PRO FORMA SUBSIDIARIES ACQUISITIONS ACQUISITIONS ADJUSTMENTS TOTAL --------------- ------------- ------------- ------------- ------------- REVENUES .......................... $ 386,721 $ 363,728 $ 210,717 $ -- $ 961,166 COST OF SERVICES .................. 306,052 295,349 157,214 -- 758,615 ------------- ------------- ------------- ------------- ------------- GROSS PROFIT ................... 80,669 68,379 53,503 -- 202,551 SELLING, GENERAL, AND ADMINISTRATIVE EXPENSES ....... 47,390 62,621 34,134 (38,826) 105,319 NON-CASH, NON-RECURRING COMPENSATION CHARGE .......... 17,036 -- -- (17,036) -- GOODWILL AMORTIZATION ............. 3,212 -- -- 6,880 10,092 ------------- ------------- ------------- ------------- ------------- INCOME FROM OPERATIONS ......... 13,031 5,758 19,369 48,982 87,140 OTHER INCOME (EXPENSE): Interest expense ............... (1,161) -- (577) (2,554) (4,292) Interest income ................ 433 730 590 (1,455) 298 Other, net ..................... 335 404 528 (462) 805 ------------- ------------- ------------- ------------- ------------- OTHER INCOME (EXPENSE), NET ....... (393) 1,134 541 (4,471) (3,189) INCOME BEFORE INCOME TAXES ........ 12,638 6,892 19,910 44,511 83,951 PROVISION FOR INCOME TAXES ........ 12,690 5,473 7,664 10,015 35,842 ------------- ------------- ------------- ------------- ------------- NET INCOME (LOSS) ................. $ (52) $ 1,419 $ 12,246 $ 34,496 $ 48,109 ============= ============= ============= ============= ============= EARNING (LOSS) PER SHARE - BASIC - ................. $ 0.00 $ 1.37 ============= ============= DILUTED - ............... $ 0.00 $ 1.35 ============= ============= SHARES USED IN THE COMPUTATION OF EARNINGS (LOSS) PER SHARE BASIC - ................. 19,753,060 35,197,669 ============= ============= DILUTED - ............... 19,753,060 35,597,502 ============= ============= 3
6 INTEGRATED ELECTRICAL SERVICES, INC. UNAUDITED PRO FORMA STATEMENT OF OPERATIONS FOR THE SIX MONTHS ENDED MARCH 31, 1999 (IN THOUSANDS) IES AND PRO FORMA PRO FORMA SUBSIDIARIES ACQUISITIONS ADJUSTMENTS TOTAL ------------ ------------ ------------ ------------ REVENUES .......................... $ 413,404 $ 70,184 $ -- $ 483,588 COST OF SERVICES .................. 326,934 53,320 (402) 379,852 ------------ ------------ ------------ ------------ GROSS PROFIT ................... 86,470 16,864 402 103,736 SELLING, GENERAL, AND ADMINISTRATIVE EXPENSES ....... 45,590 20,189 (6,551) 59,228 GOODWILL AMORTIZATION ............. 3,943 -- 1,103 5,046 ------------ ------------ ------------ ------------ INCOME FROM OPERATIONS ......... 36,937 (3,325) 5,850 39,462 OTHER INCOME (EXPENSE): Interest expense ............... (4,923) (195) 195 (4,923) Interest income ................ 496 310 (310) 496 Other, net ..................... 283 217 -- 500 ------------ ------------ ------------ ------------ OTHER INCOME (EXPENSE), NET ....... (4,144) 332 (115) (3,927) INCOME BEFORE INCOME TAXES ........ 32,793 (2,993) 5,735 35,535 PROVISION FOR INCOME TAXES ........ 13,961 (1,152) 2,633 15,442 ------------ ------------ ------------ ------------ NET INCOME (LOSS) ................. $ 18,832 $ (1,841) $ 3,102 $ 20,093 ============ ============ ============ ============ EARNING (LOSS) PER SHARE - BASIC - ................. $ 0.59 $ 0.57 ============ ============ DILUTED - ............... $ 0.58 $ 0.56 ============ ============ SHARES USED IN THE COMPUTATION OF EARNINGS (LOSS) PER SHARE BASIC - ................. 31,761,207 35,197,669 ============ ============ DILUTED - ............... 32,254,651 35,691,113 ============ ============ 4
7 INTEGRATED ELECTRICAL SERVICES, INC. NOTES TO UNAUDITED PRO FORMA FINANCIAL STATEMENTS 1. UNAUDITED PRO FORMA BALANCE SHEET: The Pro Forma Adjustments reflects the Acquisitions which were acquired subsequent to December 31, 1998. 2. UNAUDITED PRO FORMA STATEMENT OF OPERATIONS: The Unaudited Pro Forma Statement of Operations for the year ended September 30, 1998 for IES and Subsidiaries reflects the historical results of Houston-Stafford Electric, Inc. ("Houston-Stafford") as the accounting acquirer (restated for the effect of an acquisition accounted for as a pooling-of-interest combined) the other Founding Companies beginning February 1, 1998, and the Acquired Companies beginning on their respective dates of acquisition. The Acquisitions column reflects the historical results of the Acquisitions as if they had been acquired on October 1, 1997. The following table summarizes the Pro Forma Adjustments for the Year Ended September 30, 1998 (in thousands): ADJUSTMENTS -------------------------------------------------- PRO FORMA (a) (b) (c) (d) ADJUSTMENTS -------- -------- -------- -------- -------- Selling, general and administrative expenses .... $(38,826) $ -- $ -- $ -- $(38,826) Non-cash, nonrecurring compensation charge ...... (17,036) -- -- -- (17,036) Goodwill amortization ........................... -- 6,880 -- -- 6,880 -------- -------- -------- -------- -------- Income (loss) from operations ................ 55,862 (6,880) -- -- 48,982 Other income (expense): Interest expense ............................. -- -- (2,554) -- (2,554) Interest income .............................. -- -- (1,455) -- (1,455) Other, net ................................... -- (462) -- -- (462) -------- -------- -------- -------- -------- Other income (expense), net .................. -- (462) (4,009) -- (4,471) -------- -------- -------- -------- -------- Income (loss) before income taxes ............ 55,862 (7,342) (4,009) -- 44,511 Provision for income taxes ...................... -- -- -- 10,015 10,015 -------- -------- -------- -------- -------- Net income (loss) ............................... $ 55,862 $ (7,342) $ (4,009) $(10,015) $ 34,496 ======== ======== ======== ======== ======== ADJUSTMENTS -------------------------------------------------- PRO FORMA (a) (b) (c) (d) ADJUSTMENTS -------- -------- -------- -------- ----------- Cost of services .............................. (402) -- -- -- (402) -------- -------- -------- -------- -------- Gross profit ............................... 402 -- -- -- 402 Selling, general and administrative expenses .. $ (6,551) $ -- $ -- $ -- $ (6,551) Goodwill amortization ......................... -- 1,103 -- -- 1,103 -------- -------- -------- -------- -------- Income (loss) from operations .............. 6,953 (1,103) -- -- 5,850 Other income (expense): Interest expense ........................... -- -- 195 -- 195 Interest income ............................ -- -- (310) -- (310) Other, net ................................. -- -- -- -- -- -------- -------- -------- -------- -------- Other income (expense), net ................ -- -- (115) -- (115) -------- -------- -------- -------- -------- Income (loss) before income taxes .......... 6,953 (1,103) (115) -- 5,735 Provision for income taxes .................... -- -- -- 2,633 2,633 -------- -------- -------- -------- -------- Net income (loss) ............................. $ 6,953 $ (1,103) $ (115) $ (2,633) $ 3,102 ======== ======== ======== ======== ======== 5
8 INTEGRATED ELECTRICAL SERVICES, INC. NOTES TO UNAUDITED PRO FORMA FINANCIAL STATEMENTS (a) Reflects the reduction in salaries, bonuses and benefits and lease payments to the owners of the Acquisitions. These reductions in salaries, bonuses and benefits and lease payments have been agreed to in accordance with the terms of employment agreements executed as part of the acquisitions. Such employment agreements are for five years, contain restrictions related to competition and provide severance for termination of employment in certain circumstances. Also, includes the reversal of the $17.0 million non-cash, non-recurring compensation charge in connection with the acquisition of the Founding Companies. (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 minority interest expense attributable to minority interests that were acquired as part of the related acquisitions. (c) Reflects the reduction of additional interest expense and income on borrowings which will be repaid and collected, respectively, subsequent to the acquisition and the reduction of certain non-recurring other income. (d) Reflects the incremental provision for federal and state income taxes at a 38.5% overall tax rate, before non-deductible goodwill and other permanent items, related to the other statements of operations adjustments and for income taxes on the pretax income of acquired companies that have historically elected S Corporation tax status. 6
9 INDEPENDENT AUDITOR'S REPORT Stockholder Canova Electrical Contracting, Inc. East McKeesport, Pennsylvania We have audited the accompanying balance sheet of Canova Electrical Contracting, Inc. as of December 31, 1998, and the related statements of income, stockholder's equity, and cash flows for the year 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 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 Canova Electrical Contracting, Inc., as of December 31, 1998, and the results of its operations and its cash flows for the year then ended in conformity with generally accepted accounting principles. LARSON, ALLEN, WEISHAIR & CO., LLP Minneapolis, Minnesota April 29, 1999 7
10 CANOVA ELECTRICAL CONTRACTING, INC. BALANCE SHEETS DECEMBER 31, 1998 AND MARCH 31, 1999 (UNAUDITED) DECEMBER 31, MARCH 31, ASSETS 1998 1999 --------------- --------------- (Unaudited) CURRENT ASSETS Cash $ 258,015 $ 142,701 Accounts Receivable - Contracts (Net of Allowance for Doubtful Accounts of $10,000) 922,676 784,764 Retainages Receivable 256,396 321,797 Accounts Receivable - Employees 5,881 3,860 Costs and Estimated Earnings in Excess of Billings on Uncompleted Contracts 15,080 99,155 Prepaid Expenses 20,484 9,632 --------------- --------------- Total Current Assets $ 1,478,532 $ 1,361,909 PROPERTY AND EQUIPMENT (NET) 211,868 228,997 --------------- --------------- Total Assets $ 1,690,400 $ 1,590,906 =============== =============== LIABILITIES AND STOCKHOLDER'S EQUITY CURRENT LIABILITIES Line of Credit $ 400,000 $ 50,000 Current Portion of Long-Term Debt 24,771 18,846 Accounts Payable - Trade 10,467 333,908 Accrued Expenses 19,846 48,802 Billings in Excess of Costs and Estimated Earnings on Uncompleted Contracts 238,254 108,521 --------------- --------------- Total Current Liabilities $ 693,338 $ 560,077 LONG-TERM DEBT (Net of Current Portion Shown Above) 20,269 30,040 --------------- --------------- Total Liabilities $ 713,607 $ 590,117 --------------- --------------- STOCKHOLDER'S EQUITY Common Stock - $1 Par Value; 1,000 Shares Authorized, Issued and Outstanding $ 1,000 $ 1,000 Additional Paid-In Capital 130,736 130,736 Retained Earnings 845,057 869,053 --------------- --------------- Total Stockholder's Equity $ 976,793 $ 1,000,789 --------------- --------------- Total Liabilities and Stockholder's Equity $ 1,690,400 $ 1,590,906 =============== =============== See accompanying Notes to Financial Statements. 8
11 CANOVA ELECTRICAL CONTRACTING, INC. STATEMENTS OF INCOME FOR THE YEAR ENDED DECEMBER 31, 1998 AND THE THREE-MONTH PERIODS ENDED MARCH 31, 1998 (UNAUDITED) AND MARCH 31, 1999 (UNAUDITED) MARCH 31, DECEMBER 31, ------------------------------------ 1998 1998 1999 --------------- --------------- --------------- (Unaudited) (Unaudited) CONTRACT REVENUES EARNED $ 5,772,864 $ 1,296,173 $ 1,546,460 CONTRACT COSTS 4,734,169 1,030,412 1,318,163 --------------- --------------- --------------- GROSS PROFIT $ 1,038,695 $ 265,761 $ 228,297 GENERAL AND ADMINISTRATIVE EXPENSE 716,592 132,101 193,820 --------------- --------------- --------------- INCOME FROM OPERATIONS $ 322,103 $ 133,660 $ 34,477 --------------- --------------- --------------- OTHER INCOME Interest Income $ 12,230 $ 2,619 $ 3,150 Interest Expense (8,818) (4,337) (3,665) Bad Debts Recovered 8,104 776 776 --------------- --------------- --------------- Total Other Income $ 11,516 $ (942) $ 261 --------------- --------------- --------------- NET INCOME $ 333,619 $ 132,718 $ 34,738 =============== =============== =============== See accompanying Notes to Financial Statements. 9
12 CANOVA ELECTRICAL CONTRACTING, INC. STATEMENTS OF STOCKHOLDER'S EQUITY FOR THE YEAR ENDED DECEMBER 31, 1998 AND THE THREE-MONTH PERIOD ENDED MARCH 31, 1999 (UNAUDITED) ADDITIONAL COMMON STOCK PAID-IN RETAINED SHARES AMOUNT CAPITAL EARNINGS TOTAL --------------- --------------- --------------- --------------- --------------- BALANCE, DECEMBER 31, 1997 1,000 $ 1,000 $ 130,736 $ 570,190 $ 701,926 Distributions to Stockholder -- -- -- (58,752) (58,752) Net Income -- -- -- 333,619 333,619 --------------- --------------- --------------- --------------- --------------- BALANCE, DECEMBER 31, 1998 1,000 $ 1,000 $ 130,736 $ 845,057 $ 976,793 Distributions to Stockholder -- -- -- (10,742) (10,742) Net Income -- -- -- 34,738 34,738 --------------- --------------- --------------- --------------- --------------- BALANCE, MARCH 31, 1999 1,000 $ 1,000 $ 130,736 $ 869,053 $ 1,000,789 =============== =============== =============== =============== =============== See accompanying Notes to Financial Statements. 10
13 CANOVA ELECTRICAL CONTRACTING, INC. STATEMENTS OF CASH FLOWS FOR THE YEAR ENDED DECEMBER 31, 1998 AND THE THREE-MONTH PERIODS ENDED MARCH 31, 1998 (UNAUDITED) AND MARCH 31, 1999 (UNAUDITED) MARCH 31, DECEMBER 31, --------------------------- 1998 1998 1999 ---------- ---------- ---------- (Unaudited) (Unaudited) CASH FLOWS FROM OPERATING ACTIVITIES Net Income $ 333,619 $ 132,718 $ 34,738 Adjustments to Reconcile Net Income to Net Cash Provided by Operating Activities: Depreciation 81,450 17,251 17,251 Loss on Disposal of Equipment 3,456 -- -- (Increase) Decrease in Current Assets: Accounts Receivable - Contracts (486,491) 31,123 72,511 Unbilled Revenues 92,742 27,946 (84,075) Other Current Assets 51,564 -- 10,852 Increase (Decrease) in Current Liabilities: Accounts Payable (67,676) 152,665 323,441 Excess Billings 204,047 22,486 (129,733) Accrued Expenses (3,934) 5,760 28,956 Income Taxes Payable 2,400 -- ---------- ---------- ---------- Net Cash Provided by Operating Activities $ 211,177 $ 389,949 $ 273,941 ---------- ---------- ---------- CASH FLOWS FROM INVESTING ACTIVITIES Payments for Purchase of Equipment $ (56,558) $ (12,153) $ (19,380) Loans Receivable - Employees (2,000) 373 2,021 Loans Receivable - Affiliates (940) -- -- ---------- ---------- ---------- Net Cash Used by Investing Activities $ (59,498) $ (11,780) $ (17,359) ---------- ---------- ---------- CASH FLOWS FROM FINANCING ACTIVITIES Net Change on Line of Credit $ -- $ (330,000) $ (350,000) Payments on Long-Term Debt (23,086) (5,064) (11,154) Distributions (58,752) (9,414) (10,742) ---------- ---------- ---------- Net Cash Used by Financing Activities $ (81,838) $ (344,478) $ (371,896) ---------- ---------- ---------- NET INCREASE IN CASH $ 69,841 $ 33,691 $ (115,314) Cash - Beginning 188,174 188,174 258,015 ---------- ---------- ---------- CASH - ENDING $ 258,015 $ 221,865 $ 142,701 ========== ========== ========== SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION Interest Paid $ 8,818 $ 4,337 $ 3,665 ========== ========== ========== SUPPLEMENTAL SCHEDULE OF NON-CASH TRANSACTIONS Equipment Purchased with Long-Term Debt $ 30,000 $ -- $ 15,000 ========== ========== ========== See accompanying Notes to Financial Statements. 11
14 CANOVA ELECTRICAL CONTRACTING, INC. NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 1998 NOTE 1 ORGANIZATION AND DESCRIPTION OF BUSINESS The Company is engaged in the business of providing electrical contracting services on various commercial, institutional, industrial and multi-family residential projects located primarily in Western Pennsylvania. The Company began operations in 1972 and conducted business as a sole proprietorship until January 10, 1989, when it was incorporated under the laws of the Commonwealth of Pennsylvania NOTE 2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES USE OF ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. INTERIM FINANCIAL STATEMENTS The accompanying interim financial statements and related disclosures for the three-month periods ended March 31, 1998 and 1999, have not been audited by independent accountants. However, the financial statements for all interim periods have been prepared in conformity with the accounting principles stated in the audited financial statements for the year ended December 31, 1998, and include all adjustments (which were of a normal, recurring nature) which, in the opinion of management, are necessary to present fairly the financial position of the Company and the results of operations and cash flows for each of the periods presented. The operating results for the interim periods presented are not necessarily indicative of results for the full year. REVENUE AND COST RECOGNITION Revenues are recognized on the percentage-of-completion method, measured by the costs incurred to date to the estimated total costs for each contract. Contract revenue earned is the amount of direct costs incurred plus the amount of gross profit recognized based on the extent of progress toward completion. Contract costs include all direct costs and job related overhead. General and administrative costs are charged to expense as incurred. Provisions for estimated losses on uncompleted contracts are made in the period in which such losses are determined. Changes in job performance, job condition, and estimated profitability may result in revisions to costs and income and are recognized in the period in which the revisions are determined. Because of inherent uncertainties in estimating costs and revenues, it is at least reasonably possible that the estimates used will change in the near term. 12
15 CONCENTRATION OF CREDIT RISK The Company maintains cash balances with high quality financial institutions. At times such cash balances may be in excess of the FDIC insurance limit. The Company's revenues are highly concentrated with a few customers. Contract revenues from three customers in 1998 represented approximately 75% of total contract revenues for the year ended December 31, 1998. The contract accounts receivable from these customers were $324,670 as of December 31, 1998. The loss of a significant customer could have a material impact on the Company's future earnings results. The Company has recorded an allowance for doubtful accounts of approximately $10,000 as of December 31, 1998. Management believes that this allowance is adequate. NOTE 2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) PROPERTY AND EQUIPMENT Property and equipment are stated at cost. Depreciation is calculated using the straight-line and accelerated methods over the estimated useful life of the asset. Equipment and fixtures are depreciated between 5 and 7 years. Leasehold improvements are depreciated over the life of the lease term. At December 31, 1998, property and equipment consisted of: Amount ----------- Equipment and Fixtures $ 188,998 Transportation Equipment 319,731 Leasehold Improvements 63,019 ----------- $ 571,748 Less: Accumulated Depreciation (359,880) ----------- Property and Equipment, net $ 211,868 =========== FAIR VALUE OF FINANCIAL INSTRUMENTS The Company's financial instruments consist of cash, accounts receivable, accounts payable and notes payable. Estimates of the fair value of these instruments are based on interest rates available to the Company. At December 31, 1998, the carrying value of the Company's financial instruments approximated fair value. INCOME TAXES The Company has elected S corporation status for federal and state income tax purposes whereby the Company's taxable income and any tax credits resulting from operating losses will be included in the individual income tax return of its stockholder. Therefore, no provision for income taxes is included in these financial statements. 13
16 CANOVA ELECTRICAL CONTRACTING, INC. NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 1998 NOTE 3 CONTRACTS IN PROGRESS Amount ------------ Costs Incurred on Uncompleted Projects $ 3,678,709 Estimated Gross Profit 951,187 ------------ Contract Revenues $ 4,629,896 Less: Billings 4,853,070 ------------ $ (223,174) ============ Cost and Estimated Earnings in Excess of Billings on Uncompleted Contracts $ 15,080 Billings in Excess of Costs and Estimated Earnings on Uncompleted Contracts (238,254) ------------ Total, Net $ (223,174) ============ NOTE 4 NOTE PAYABLE - BANK The Company has a discretionary demand line of credit available from Dollar Bank for maximum working capital borrowings of $500,000. The line of credit is unsecured except for the personal guarantee of the stockholder. The interest rate is equal to the prime rate and was 7.75% as of December 31, 1998. Borrowings on the line of credit as of December 31, 1998 were $400,000. 14
17 CANOVA ELECTRICAL CONTRACTING, INC. NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 1998 NOTE 5 LONG-TERM DEBT Description Collateral Amount - ----------- ---------- -------- Installment Note - G.M.A.C., Interest at 9.50%, Monthly Principal and Interest Payments of $420 through October 1999 Truck $ 3,635 Installment Note - Irwin Bank, Interest at 8.39%, Monthly Principal and Interest Payments of $315 through April 1999 Van 1,239 Installment Note - Irwin Bank, Interest at 8.39%, Monthly Principal and Interest Payments of $252 through April 1999 Truck 991 Installment Note - Irwin Bank, Interest at 8.38%, Monthly Principal and Interest Payments of $315 through December 1999 Truck 3,615 Installment Note - Irwin Bank, Interest at 8.38%, Monthly Principal and Interest Payments of $315 through December 1999 Van 3,615 Installment Note - G.M.A.C., Interest at 3.90%, Monthly Principal and Interest Payments of $305 through February 2000 Automobile 4,166 Installment Note - Irwin Bank, Interest at 8.38%, Monthly Principal and Interest Payments of $315 through September 2001 Truck 9,010 Installment Note - Ford Motor Credit, Interest at 0.90%, Monthly Principal and Interest Payments of $212 through September 2002 Truck 8,769 Installment Note - Irwin Bank, Interest at 7.50%, Monthly Principal and Interest Payments of $311 through January 2002 Truck 10,000 -------- Subtotal $ 45,040 Less: Current Portion 24,771 -------- Long-Term Portion $ 20,269 ======== 15
18 NOTE 5 LONG-TERM DEBT (CONTINUED) Maturity requirements on long-term debt as of December 31, 1998 are as follows: Year Ending December 31, Amount - ------------------------ ------- 1999 $24,771 2000 9,522 2001 8,835 2002 1,912 ------- Total $45,040 ======= NOTE 6 PROFIT SHARING PLAN The Company provides a defined contribution profit sharing plan. The Plan covers all full-time employees with at least one year of service. The Company matches 20% of employee contributions up to a maximum of 15% of gross compensation. The employer contribution for the year ended December 31, 1998 was $9,147. NOTE 7 LEASE COMMITMENTS On April 23, 1999, the Company agreed to a five year net operating lease for its East McKeesport office and two warehouse with its sole stockholder. The terms of the lease provide for the payment of fixed monthly rentals of $2,500 plus all expenses of occupying and operating the premises. Prior to this lease the facilities were leased under a year-to-year basis. Rent expense was $17,900 for the year ended December 31, 1998. Future minimum lease commitments are as follows: Year Ending December 31, Amount - ----------------------- -------- 1999 $ 20,000 2000 30,000 2001 30,000 2002 30,000 2003 30,000 Thereafter 10,000 -------- Total $150,000 ======== NOTE 8 SUBSEQUENT EVENT On April 23, 1999 effective on April 16, 1999, the Company completed the sale of substantially all of its assets and liabilities to Integrated Electrical Services. 16
19 INDEPENDENT AUDITOR'S REPORT To the Board of Directors Tesla Power and Automation, Inc. Houston, Texas We have audited the accompanying balance sheet of Tesla Power and Automation, Inc. (a Texas corporation) as of December 31, 1998, and the related statements of operations and comprehensive income, stockholders' equity and cash flows for the year 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 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 Tesla Power and Automation, Inc. as of December 31, 1998, and the results of its operations and its cash flows for the year then ended in conformity with generally accepted accounting principles. BROCKMANN, ARMOUR & CO. LLC Denver, Colorado April 23, 1999 17
20 TESLA POWER AND AUTOMATION, INC. BALANCE SHEETS December 31, March 31, 1999 1998 (unaudited) --------------- --------------- ASSETS Current assets: Cash and cash equivalents $ 16,171 $ 2,816,498 Accounts receivable: Uncompleted contracts 1,055,864 81,762 Completed contracts, net of allowance of $50,000 1,196,431 461,278 Other 5,310 26,320 Marketable securities 1,373,206 -- Cost and estimated earnings in excess of billings on uncompleted contracts 343,830 852,434 Prepaid expenses and other current assets 16,628 60,038 --------------- --------------- Total current assets 4,007,440 4,298,330 Property and equipment, at cost, net of accumulated depreciation and amortization 1,378,935 1,416,151 Other assets 1,420 1,420 --------------- --------------- Total assets $ 5,387,795 $ 5,715,901 =============== =============== LIABILITIES Current liabilities: Line of credit and margin securities account $ 301,849 $ 3,492 Accounts payable 892,935 435,346 Current portion of long-term debt 15,412 5,155 Current portion of notes payable to stockholders 96,674 73,223 Provision for product warranty 42,732 Billings in excess of costs and estimated earnings on uncompleted contracts 292,738 115,739 Income taxes payable 54,512 18,746 Accrued 401(k)/profit sharing and payroll related expenses 53,301 209,966 --------------- --------------- Total current liabilities 1,750,153 861,667 Long-term debt, net of current portion 30,534 395,534 Notes payable to stockholders 8,409 8,409 STOCKHOLDERS' EQUITY Common stock, $1 par value, 100,000 shares authorized, 50,000 shares issued and outstanding 50,000 50,000 Additional paid-in capital 53,900 53,900 Retained earnings 3,576,669 4,346,391 Unrealized loss on marketable securities (81,870) -- --------------- --------------- 3,598,699 4,450,291 --------------- --------------- $ 5,387,795 $ 5,715,901 =============== =============== See independent auditor's report and accompanying notes to financial statements. 18
21 TESLA POWER AND AUTOMATION, INC. STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME Three Month Periods Ended ------------------------- Year ended March 31, 1998 March 31, 1999 December 31, 1998 (Unaudited) (Unaudited) ----------------- -------------- -------------- Contract revenue $ 10,330,238 $ 2,416,582 $ 3,418,781 Cost of contract revenue 8,150,867 1,878,555 2,492,974 -------------- -------------- -------------- Gross profit 2,179,371 538,027 925,807 General and administrative expenses 1,322,085 511,992 491,895 -------------- -------------- -------------- Income from operations 857,286 26,035 433,912 Other income (expense): Interest expense (77,678) (23,450) (7,188) Interest income 101,331 2,374 6,476 Realized gain (loss) on sale of marketable securities 28,708 -- (76,488) Gain on sale of property and equipment 1,626 12,344 -- Rental income 63,841 -- -- Other income -- 2,880 44,110 -------------- -------------- -------------- 117,828 (5,852) (33,090) -------------- -------------- -------------- Income before state income taxes 975,114 20,183 400,822 Provision for state income taxes 50,825 -- 18,000 -------------- -------------- -------------- Net income 924,289 20,183 382,822 Other comprehensive income: Unrealized holding losses recognized during the Period (121,498) -- -- Previously recognized unrealized loss on marketable securities 39,628 -- 81,870 -------------- -------------- -------------- Comprehensive income $ 842,419 $ 20,183 $ 464,692 ============== ============== ============== See independent auditor's report and accompanying notes to financial statements. 19
22 TESLA POWER AND AUTOMATION, INC. STATEMENT OF STOCKHOLDERS' EQUITY ADDITIONAL UNREALIZED PAID-IN GAIN (LOSSES) COMMON STOCK CAPITAL RETAINED ON MARKETABLE SHARES AMOUNT STOCK EARNINGS SECURITIES TOTAL --------- --------- --------- ----------- ----------- ----------- Balance, December 31, 1997 50,000 $ 50,000 $ 53,900 $ 2,977,380 $ 39,628 $ 3,120,908 Distributions to stockholders -- -- -- (325,000) -- (325,000) Accumulated other comprehensive income -- -- -- -- (121,498) (121,498) Net income -- -- -- 924,289 -- 924,289 --------- --------- --------- ----------- ----------- ----------- Balance, December 31, 1998 50,000 50,000 53,900 3,576,669 (81,870) 3,598,699 Merger with UCI (unaudited) -- -- -- 386,900 -- 386,900 Accumulated other comprehensive income (unaudited) -- -- -- -- 81,870 81,870 Net income (unaudited) -- -- -- 382,822 -- 382,822 --------- --------- --------- ----------- ----------- ----------- Balance, March 31, 1999 (unaudited) 50,000 $ 50,000 $ 53,900 $ 4,346,391 $ -- $ 4,450,291 ========= ========= ========= =========== =========== =========== See independent auditor's report and accompanying notes to financial statements. 20
23 TESLA POWER AND AUTOMATION, INC. STATEMENTS OF CASH FLOWS Three Month Periods Ended Year Ended March 31, 1998 March 31, 1999 December 31, 1998 (Unaudited) (Unaudited) --------------- ------------- ------------ Cash flows from operating activities: Net income $ 924,289 $ 20,183 $ 382,822 Adjustments to reconcile net income to net cash provided by operating activities-- Depreciation and amortization 142,224 33,106 36,367 Realized (loss) on sale of marketable securities 28,708 -- 76,488 (Gain) loss on sale of property and equipment (1,626) (12,344) -- (Increase) decrease in-- Accounts receivable (132,905) 436,308 2,039,457 Costs and estimated earnings in excess of billings On uncompleted contracts 516,317 211,648 (426,019) Other current assets 13,003 2,965 (30,289) Increase (decrease) in-- Accounts payable 181,396 124,420 (523,291) Billings in excess of costs and estimated Earnings on uncompleted contracts 262,118 (15,722) (176,999) Other current liabilities 15,276 (12,260) 45,785 ------------- ------------- ------------- Net cash provided by operating activities 1,948,800 788,304 1,424,321 Cash flows from investing activities: Purchase of property and equipment (260,684) (46,547) (37,272) Purchase of marketable securities (157,759) -- -- Proceeds from sale of investments -- -- 1,378,588 Proceeds from sale of property and equipment 17,500 -- -- ------------- ------------- ------------- Net cash used by investing activities (400,943) (46,547) 1,341,316 Cash flows from financing activities: Proceeds on margin securities account (604,690) -- 3,492 Cash received in Merger -- -- 1,755 Distributions to stockholders (325,000) (100,000) -- Borrowings on line of credit 3,755,730 -- -- Payments on line of credit (3,734,922) (613,838) (301,849) Proceeds from issuance of long-term debt -- -- 350,000 Payments on long-term debt (642,350) (26,923) (18,708) ------------- ------------- ------------- Net cash used by financing activities (1,551,232) (740,761) 34,690 ------------- ------------- ------------- Net increase in cash and cash equivalents (3,375) 996 2,800,327 Cash and cash equivalents, beginning of period 19,546 20,545 16,171 ------------- ------------- ------------- Cash and cash equivalents, end of period $ 16,171 $ 21,541 $ 2,816,498 ============= ============= ============= See independent auditor's report and accompanying notes to financial statements. 21
24 TESLA POWER AND AUTOMATION, INC. NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 1998 1. Organization and description of business: Tesla Power and Automation, Inc. (the Company) is an engineering and manufacturing company specializing in the construction of electrical power control units. The Company was incorporated on January 18, 1988, in the state of Texas. The Company's long-term construction contracts are primarily comprised of fixed-price contracts. 2. Summary of significant accounting policies: Interim financial statements The accompanying interim financial statements and related disclosures as of March 31, 1999 and for the three months ended March 31, 1998 and 1999, have not been audited by independent accountants. However, the financial statements for all interim periods have been prepared in conformity with the accounting principles stated in the audited financial statements for the year ended December 31, 1998, and include all adjustments (which were of a normal, recurring nature) which, in the opinion of management, are necessary to present fairly the financial position of the Company and the results of operations and cash flows for each of the periods presented. The operating results for the interim periods presented are not necessarily indicative of results for the full year. As discussed further in note 12, on January 13, 1999, the Company completed a corporate reorganization. The interim financial statement information as of and for the three months ended March 31, 1999, include the accounts and entities owned by Tesla Power and Automation (Nevada), Inc. Use of estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Accounting for construction contracts Revenues from long-term construction contracts are recognized on the percentage-of-completion method, measured by the percentage of total costs incurred to date to estimated total costs for each contract. Contract costs include all direct job costs and those indirect costs related to contract performance, such as indirect labor, supplies, insurance, equipment repairs, and depreciation costs. General and administrative costs are charged to expense as incurred 22
25 The asset, "Costs and estimated earnings in excess of billings on uncompleted contracts", represents revenue recognized in excess of billings. The liability, "Billings in excess of costs and estimated earnings on uncompleted contracts", represents billings in excess of revenues recognized. Provisions for estimated losses on uncompleted contracts are made in the period in which such losses are determined. Cash and cash equivalents The Company records as cash and cash equivalents all cash and short-term investments with original maturities of three months or less. Concentrations of risk Financial instruments that potentially subject the Company to credit risk consist principally of cash and cash equivalents and contract receivables. The Company maintains cash balances at single financial institution. Accounts at this institution are insured by the Federal Deposit Insurance Corporation up to $100,000. At times, the balances in the Company's accounts may exceed this limit. The Company's contract revenues are highly concentrated with two individual customers. These customers accounted for approximately $3,003,000 or 29% of contract revenues for the year ended December 31, 1998. The associated accounts receivable from these customers total approximately $375,000 or 17% of total accounts receivable at December 31, 1998. The loss of a significant customer could have a material impact on the Company's future earnings results. These sales are primarily derived from sales of electrical power control units concentrated with customers in the petroleum industry. The Company has recorded an allowance for doubtful accounts of approximately $50,000 as of December 31, 1998. Management believes that this allowance is adequate. The Company purchases materials, parts and supplies from four unrelated third party vendors and one vendor under common control as more further discussed in Note 10. These vendors accounted for approximately $4,299,000 or 68% of material, part and supply purchases during the year ended December 31, 1998. Management believes there are alternative sources of supply should a loss of one of these vendors occur, however, the loss may result in a short-term impact to the Company. Advertising Advertising expenses are charged to expense as incurred and are included in general and administrative expenses. Advertising expense totaled $22,234 for the year ended December 31, 1998. 23
26 Property, plant and equipment Property, plant and equipment is stated at cost. Depreciation and amortization is provided on a straight-line basis over the estimated useful life of the asset. Machinery and equipment, vehicles and furniture and fixtures are depreciated between 5 and 7 years. Building and improvements are depreciated and amortized between 31 and 39 years. Repairs and maintenance of a routine nature are charged to expense as incurred, while those that improve or extend the life of existing assets are capitalized. At December 31, 1998, property, plant and equipment consist of the following: Furniture and fixtures $ 22,056 Machinery and equipment 564,428 Vehicles 197,682 Building and improvements 716,204 Land 445,349 ----------- 1,945,719 Less--accumulated depreciation and amortization (566,784) ----------- Property, plant and equipment, net $ 1,378,935 =========== Depreciation expense of $38,988 has been included in selling, general and administrative expenses and $103,236 has been included in cost of sales for the year ended December 31, 1998. Accrued Product Warranty The Company provides limited warranties, through its original equipment manufacturers (OEM) for the products it sells. Generally, warranty costs during the basic warranty period, which varies based on the OEM, are reimbursed by the OEM. The accrued product warranty in the accompanying financial statements is based on management's estimate of future warranty costs for warranties provided by the Company outside of the OEM warranty period. Income taxes The Company, with the consent of its stockholders, elected under the Internal Revenue Code to be taxed as an S Corporation. In lieu of corporate income taxes, the stockholders of an S Corporation are taxed individually on the Company's taxable income. As a result of the Company being a non-taxpaying entity, no provision for income taxes has been provided for Federal income tax reporting purposes. The Company reports income for both financial and tax reporting using the percentage-of-completion method on its long-term contracts. The provision for income taxes relates to State of Texas franchise taxes owed by the Company. 24
27 Upon completion of the acquisition of the Company's outstanding stock as discussed in Note 12, the Company's S Corporation tax status will be terminated. Fair value of financial instruments The following methods and assumptions were used to estimate the fair value of each class of financial instruments for which it is practicable to estimate that value: Cash and cash equivalents The carrying amount approximates fair value because of the short maturity of those instruments. Marketable securities The fair values of marketable securities are estimated based on quoted market prices for those or similar investments. The carrying amount approximates fair value. Long-term debt The fair value of the Company's long-term debt is estimated based on the quoted market prices for the same or similar issues or on the current rates offered to the Corporation for debt of the same remaining maturities. The carrying amount approximates fair value. 3. Change in accounting principle The Company has adopted the provisions of Statement of Financial Accounting Standards No. 130, Reporting Comprehensive Income. This statement requires the disclosure of comprehensive income as well as net income. The only element of comprehensive income that the Company has that is not part of net income is unrealized gains on marketable securities. The Company has reclassified its 1997 financial statements in conjunction with the adoption of this statement. Other comprehensive income is shown of net realized gains on the sale of marketable securities. 4. Marketable securities The Company records its investment in marketable securities in accordance with Statement of Financial Accounting Standards (SFAS) No. 115, "Accounting for Certain Investments in Debt and Equity Securities." The Company's marketable securities consist of mutual funds and are classified as "available-for-sale." Accordingly, unrealized gains and losses are excluded from earnings and reported as a separate component of stockholders' equity. Realized gains or losses are computed based on specific identification of the securities sold. The following is an analysis of marketable securities available for sale at December 31, 1998: Balance at cost $ 1,455,076 Gross unrealized losses (81,870) ----------- $ 1,373,206 =========== 25
28 In March, 1999, the marketable securities were sold and the net proceeds were distributed to the stockholders on April 13, 1999. 5. Contracts in progress Contracts in progress at December 31, 1998 are as follows: Total contracts $ 5,528,445 ----------- Estimated costs Costs to date 944,576 Costs to complete 3,288,872 ----------- Total estimated costs 4,233,448 ----------- Estimated gross profit $ 1,294,997 =========== Amount billed to date $ 1,214,594 Costs and estimated earnings in excess of billings 343,830 Billings in excess of costs and estimated earnings (292,738) ----------- Contract revenue earned 1,265,686 Costs to date (944,576) ----------- Gross profit earned $ 321,110 =========== 6. Line of credit and margin securities account The Company has a $750,000 revolving line of credit with a financial services company. Advances on the LOC are limited to 80% of eligible accounts receivable. As of December 31, 1998, the maximum amount available under the LOC is approximately $448,000, with interest due monthly at 30-day commercial paper rate plus 2.9% per annum (totaling 8.0% at December 31, 1998). As of December 31, 1998, a total of $301,849 was outstanding. The line of credit is collateralized by the Company's accounts receivable, property, plant and equipment, is guaranteed by the Company's stockholders and requires the Company to maintain a minimum tangible net worth of $1,500,000. Subsequent to December 31, 1998, the Company repaid the amounts on the line of credit prior to its expiration on January 31, 1999. The Company has a margin securities account with a financial services company to provide borrowings up to 50% of the marketable securities balance with interest at a 30-day commercial paper rate plus 2.9% payable monthly. Outstanding balances under the margin securities account are collaterialized by marketable securities. No balance was outstanding under the margin securities account at December 31, 1998. As a result of the acquisition of the Company's outstanding stock as discussed in Note 12, the line of credit agreement was not renewed and the margin securities account was cancelled. 26
29 7. Long-term debt and notes payable stockholders Term note payable to a financial service company with monthly payments of $7,679, including interest at 30 day commercial paper rate plus 2.9% (totaling 8.0% at December 31, 1998) through January 31, 2003 when any outstanding principal and interest is due. Cross-collateralized with line of credit and secured by accounts receivable, fixtures and equipment. Guaranteed by the Company's stockholders $ 8,410 Term note payable to financial institution with monthly payments of $767.71 including interest at 9.9% per annum through May 15, 2001, with a balloon payment of $18,507 due at maturity; collaterialized by a vehicle and guaranty by the Company's stockholders 37,536 --------- 45,946 Less current portion (15,412) --------- $ 30,534 Unsecured notes payable to stockholders; monthly payments of $8,465 ========= including interest at 8% per annum; due January 12, 2000 $ 105,083 Less current portion (96,674) --------- $ 8,409 ========= 8. Operating leases The Company is obligated under several non-cancelable operating leases for office equipment and machinery that expire at various dates through the year 2002. The annual minimum lease payments under non-cancelable operating leases as of December 31, 1998 are as follows: Year Ending December 31, ------------------------ 1999 $ 49,645 2000 48,645 2001 26,631 2002 68,371 -------- $193,292 ======== Rent expense totaled $76,647 for the year ended December 31, 1998. 9. Benefit plans On January 1, 1994, Company adopted a salary reduction/profit-sharing plan (the Plan) 27
30 under the provisions of Section 401(k) of the Internal Revenue Code. The Plan covers substantially all full-time employees who have completed one year of service. The Plan provides for the Company to match voluntary employee contributions at a rate of 25%. Such matching rate can be changed at the Company's discretion. All contributions by the Company are funded annually and vest over six years. All employee contributions are immediately vested. Company matching contributions to the Plan were $52,601 for the year ended December 31, 1998. 10. Related party transactions The Company purchases substantially all of its fabricated sheet metal products from Unlimited Controls, Inc. (UCI), a Texas corporation controlled by the stockholders of the Company. Purchases from this entity during the year ended December 31, 1998 totaled $2,283,486. The Company also rents manufacturing space to UCI. Rent received from UCI totaled $63,841 for the year ended December 31, 1998. Interest expense related to notes payable to stockholders as discussed in Note 7 totaled $12,322 for the year ended December 31, 1998. 11. Cash flows During the year ended December 31, 1998, interest paid was $77,698. During the year ended December 31, 1998, the Company had non-cash investing activities related to unrealized holding losses on marketable securities of $121,498. 12. Subsequent events On January 13, 1999, the Company completed a corporate reorganization whereby the Company merged with Unlimited Controls, Inc into a newly formed entity, Tesla Power and Automation (Nevada), Inc., a Nevada corporation (TPAN). TPAN contributed its operating assets to Tesla Power and Automation, LLP (TPALLP) in exchange for a 99% limited partnership interest and contributed real estate to Tesla Properties, LLP (TPLLP) in exchange for a 99% limited partnership interest. The ownership of TPAN and the 1% general partnership interests in TPALLP and TPLLP are in direct proportion to the ownership of the Company. On April 23, 1999, the stockholders of TPAN and the general partners of TPALLP and TPLLP completed the sale of 100% of their ownership interests in TPAN, TPALLP and TPLLP to Integrated Electrical Services (IES). 28
31 ITEM 7. EXHIBITS (C) EXHIBITS 23.1 Consent of Larson, Allen, Weishair & Co., LLP 23.2 Consent of Brockmann, Armour & Co., LLC 29
32 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this Current Report to be signed on its behalf by the undersigned, thereunto duly authorized. INTEGRATED ELECTRICAL SERVICES, INC. By: /s/ JOHN F. WOMBWELL JOHN F. WOMBWELL SENIOR VICE PRESIDENT AND GENERAL COUNSEL Dated: May 20, 1999
33 EXHIBIT INDEX EXHIBIT NUMBER DESCRIPTION - ------- ----------- 23.1 Consent of Larson, Allen, Weishair & Co., LLP 23.2 Consent of Brockmann, Armour & Co., LLC
1 EXHIBIT 23.1 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS We hereby consent to the incorporation of our report, dated April 29, 1999, on the financial statements of Canova Electrical Contracting, Inc., included in this Form 8-K/A, into Integrated Electrical Services, Inc's previously filed Registration Statements on Form S-8 (File Nos. 333-67113, 333-45447 and 333-45449), previously filed Registration Statement on Amendment No. 1 to Form S-4 (File No. 33-75139) and on previously filed Post Effective Amendment No. 5 to Form S-1 on Form S-4 (File No. 333-50031), and to all references to our firm. /s/ LARSON, ALLEN, WEISHAIR & CO., LLP LARSON, ALLEN, WEISHAIR & Co., LLP Minneapolis, MN May 20, 1999
1 EXHIBIT 23.2 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS As independent public accountants, we hereby consent to the incorporation of our report, dated April 23, 1999, on the financial statements of Tesla Power and Automation, Inc., included in this Form 8-K/A, into Integrated Electrical Services Inc.'s previously filed Registration Statements on Form S-8 (File Nos. 333-67113, 333-45447 and 333-45449), previously filed Registration Statement on Amendment No. 1 to Form S-4 (File No. 333-75139), and on previously filed Post Effective Amendment No. 5 to Form S-1 on Form S-4 (File No. 333-50031), and to all references to our firm. /s/ BROCKMAN, ARMOUR & CO. LLC BROCKMAN, ARMOUR & CO. LLC Denver, Colorado May 20, 1999