1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 8-K CURRENT REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 Date of Report: May 26, 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 2. ACQUISITION OR DISPOSITION OF ASSETS On April 29, 1999, Integrated Electrical Services, Inc. (the "Company") consummated the acquisition of all of the issued and outstanding capital stock Putzel Electrical Contractors, Inc. (the "Significant Acquisition"). The Significant Acquisition performs electrical contracting in the Southeast United States. The consideration paid by the Company for the Significant Acquisition was determined through negotiations between the Company and the owners of the Significant Acquisition and consisted of an aggregate of 589,060 shares of common stock of the Company and approximately $10.5 million in cash. The cash portion of the consideration paid for the Significant Acquisition was funded through proceeds from the Company's offering of $150.0 million Senior Subordinated Notes on January 25, 1999. The Company intends to continue using the assets of the Significant Acquisition in the electrical contracting business. See Item 7. "Financial Statements, Pro Forma Financial Information and Exhibits" 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) Financial Statements of Businesses Acquired See Pages 1 through 20
3 INDEPENDENT AUDITOR'S REPORT To the Board of Directors Delco Electric, Inc. Oklahoma City, Oklahoma We have audited the accompanying balance sheet of Delco Electric, Inc. as of December 31, 1998, and the related statements of operations, 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 Delco Electric, 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. REZNICK, FEDDER & SILVERMAN Charlotte, North Carolina May 14, 1999 1
4 DELCO ELECTRIC, INC. --------------------------------------- BALANCE SHEETS - DECEMBER 31, 1998, AND MARCH 31, 1999 (UNAUDITED) DECEMBER 31, MARCH 31, ASSETS 1998 1999 ------------ ------------ (UNAUDITED) CURRENT ASSETS: Cash $ 1,509,880 $ 1,381,382 Receivables: Contracts - current 722,046 955,944 Contracts - retention 231,029 108,100 Note 83,813 82,468 Other -- 3,982 Costs and estimated gross profit in excess of billings on contracts in progress 65,766 83,823 Prepaid expenses and other current assets 61,162 49,156 ------------ ------------ Total current assets 2,673,696 2,664,855 LEASEHOLD IMPROVEMENTS AND EQUIPMENT, net 380,944 350,102 ------------ ------------ Total assets $ 3,054,640 $ 3,014,957 ============ ============ LIABILITIES AND STOCKHOLDER'S EQUITY CURRENT LIABILITIES: Accounts payable and accrued liabilities $ 567,082 $ 325,924 Billings in excess of costs and estimated gross profit on 177,743 232,804 ------------ ------------ contracts in progress Total current liabilities 744,825 558,728 ------------ ------------ STOCKHOLDER'S EQUITY: Common stock, $1 par value, 10,000 shares authorized; 500 shares issued and outstanding in 1998 and 1999 500 500 Retained earnings 2,309,315 2,455,729 ------------ ------------ Total stockholder's equity 2,309,815 2,456,229 ------------ ------------ Total liabilities and stockholder's equity $ 3,054,640 $ 3,014,957 ============ ============ The accompanying notes to financial statements are an integral part of these statements. 2
5 DELCO ELECTRIC, INC. --------------------------------------- STATEMENTS OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 1998, AND THE THREE-MONTH PERIODS ENDED MARCH 31, 1998 (UNAUDITED), AND MARCH 31, 1999 (UNAUDITED) THREE-MONTH PERIODS ENDED ------------------------------- YEAR ENDED DECEMBER 31, MARCH 31, MARCH 31, 1998 1998 1999 ------------ ------------ ------------ (UNAUDITED) (UNAUDITED) CONTRACT REVENUE $ 7,500,045 $ 2,070,292 $ 1,305,643 CONTRACT COSTS 5,463,763 1,412,160 1,013,557 ------------ ------------ ------------ Gross profit 2,036,282 658,132 292,086 GENERAL AND ADMINISTRATIVE EXPENSES 757,837 189,208 166,233 ------------ ------------ ------------ Income from operations 1,278,445 468,924 125,853 OTHER INCOME ( EXPENSE): Interest income 54,651 10,355 15,024 Other income, net -- 5,256 5,537 ------------ ------------ ------------ Other income (expense), net 54,651 15,611 20,561 ------------ ------------ ------------ INCOME BEFORE INCOME TAXES 1,333,096 484,535 146,414 ------------ ------------ ------------ NET INCOME $ 1,333,096 $ 484,535 $ 146,414 ============ ============ ============ The accompanying notes to financial statements are an integral part of these statements. 3
6 DELCO ELECTRIC, INC. --------------------------------------- STATEMENTS OF STOCKHOLDER'S EQUITY FOR THE YEAR ENDED DECEMBER 31, 1998, AND THE THREE-MONTH PERIOD ENDED MARCH 31, 1999 (UNAUDITED) COMMON STOCK ------------------------------- RETAINED SHARES AMOUNT EARNINGS TOTAL ------------ ------------ ------------ ------------ BALANCE, December 31, 1997 500 $ 500 $ 1,691,297 $ 1,691,797 Dividends distribution -- -- (715,078) (715,078) Net income -- -- 1,333,096 1,333,096 ------------ ------------ ------------ ------------ BALANCE, December 31, 1998 500 500 2,309,315 2,309,815 Net income (unaudited) -- -- 146,414 146,414 ------------ ------------ ------------ ------------ BALANCE, March 31, 1999 (unaudited) 500 $ 500 $ 2,455,729 $ 2,456,229 ============ ============ ============ ============ The accompanying notes to financial statements are an integral part of these statements. 4
7 DELCO ELECTRIC, 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) DECEMBER 31, MARCH 31, MARCH 31, 1998 1998 1999 ------------ ------------ ------------ (UNAUDITED) (UNAUDITED) CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 1,333,096 $ 484,535 $ 146,414 Adjustments to reconcile net income (loss) to net cash provided by operating activities- Depreciation 82,712 20,678 20,678 Loss (gain) on sale of equipment -- -- (2,031) (Increase) decrease in net cash from changes in operating assets and liabilities: Increase (decrease) in accounts receivable and other receivables 490,059 282,161 (113,606) (Increase) decrease in billings in excess of costs and estimated gross profit on contracts in progress (314,657) (127,671) 55,061 (Increase) decrease in cost and estimated earnings in excess of billings on contracts in progress 30,148 (54,475) (18,057) (Increase) decrease in prepaid expenses and other current assets (6,994) 9,440 12,006 Increase (decrease) in accounts payable and accrued liabilities (67,515) 53,455 (241,158) ------------ ------------ ------------ Net cash provided by operating activities 1,546,849 668,123 (140,693) ------------ ------------ ------------ CASH FLOWS FROM INVESTING ACTIVITIES: (Advances) collections on related party note receivable -- -- -- Collections on other receivables, net 12,458 (24,512) -- Purchase of equipment (265,928) (19,385) (430) Proceeds from sale of property and equipment -- -- 12,625 ------------ ------------ ------------ Net cash provided by (used in) investing activities (253,470) (43,897) 12,195 CASH FLOWS FROM FINANCING ACTIVITIES: Payment for stock redemption dividends (715,078) -- -- ------------ ------------ ------------ Net cash provided by (used in) financing activities (715,078) -- -- ------------ ------------ ------------ NET INCREASE (DECREASE) IN CASH 578,301 624,226 (128,498) CASH, beginning of period 931,579 931,579 1,509,880 ------------ ------------ ------------ CASH, end of period $ 1,509,880 $ 1,555,805 $ 1,381,382 ============ ============ ============ SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: Cash received from other income, net -- 5,256 5,537 Equipment and other assets purchased through issuance of debt 173,465 -- -- The accompanying notes to financial statements are an integral part of these statements. 5
8 DELCO ELECTRIC, INC. --------------------------------------- NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 1998, MARCH 31, 1998 (UNAUDITED) AND MARCH 31, 1999 (UNAUDITED) 1. ORGANIZATION AND DESCRIPTION OF BUSINESS: Delco Electric, Inc. (the Company) is engaged in the construction industry, operating as an electrical contractor in approximately fifteen states nationwide. The work is performed under fixed-price and time-and-material contracts. The Company was incorporated on November 7, 1994, in the state of Oklahoma. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: INTERIM FINANCIAL STATEMENTS The accompanying interim financial statements and related disclosures 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. FINANCIAL STATEMENT CLASSIFICATION In accordance with normal practice in the construction industry, the Company includes in current assets and liabilities amounts realizable and payable over a period in excess of one year. Consistent with this practice, asset and liability accounts relating to construction contracts are classified as current. The lives of contracts entered into by the Company generally range from one to two months. REVENUE AND COST RECOGNITION The Company recognizes revenues from long-term construction contracts on the percentage-of-completion method. Under this method, the completion percentage is measured by the proportion of costs incurred to date to total estimated costs for each contract. However, no gross profit is recognized on contracts that are less than ten percent complete. This method is used because management believes the cost-to-cost method to be the best available measure of progress on the contracts. Because of inherent uncertainties in estimating cost, it is at least reasonably possible that the estimates used will change within the near term. 6
9 Contract costs include all direct material, labor and subcontract costs and those indirect costs related to contract performance, such as indirect labor, supplies, tools, repairs, and depreciation costs. Selling, 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 conditions and estimated profitability, including those arising from contract penalty provisions and final contract settlements, may result in revisions to costs and income and are recognized in the period in which the revisions are determined. Profit incentives are included in revenues when their realization is reasonably assured. An amount equal to contract costs attributable to claims is included in revenue when realization is probable and the amount can be reliably estimated. Contracts are considered completed when all costs except insignificant items have been incurred and the owner has accepted the project. The asset, "Costs and estimated gross profit in excess of billings on contracts in progress," represents revenue recognized in excess of amounts billed. The liability, "Billings in excess of costs and estimated gross profit on contracts in progress," represents billings in excess of revenues recognized. LEASEHOLD IMPROVEMENTS AND EQUIPMENT Leasehold improvements and equipment, carried at cost, is depreciated over the estimated useful life of the related asset. Depreciation is computed substantially on the accelerated methods for both financial statement and income tax reporting purposes. Transportation and construction equipment are depreciated between five and seven years. Office equipment is depreciated between three and seven years. Leasehold improvements are depreciated between seven and fifteen years. At December 31, 1998, leasehold improvements and equipment consisted of: DECEMBER 31, 1998 ------------ Transportation equipment $279,396 Construction equipment 35,830 Office equipment 70,113 Leasehold improvements 160,671 -------- 546,010 Less - Accumulated depreciation 165,066 -------- Leasehold improvements and equipment, net $380,944 ======== Depreciation charged to general and administrative expenses amounted to $82,712 for the year ended December 31, 1998. INCOME TAXES For income tax purposes, the company reports income on the completed contract method of accounting. Under this method, billings and costs are accumulated during the period of construction, but profits are not recorded until completion of the contracts. 7
10 The company has elected to be taxed under the provisions of subchapter S of the Internal Revenue Code and the State of Oklahoma. Under these provisions, the company does not pay federal or state corporate income taxes on its taxable income. The stockholder is liable for individual federal and state taxes on the company's taxable income. In order for the stockholder to be able to pay these taxes, the board of directors of the company has resolved that the stockholder may take minimum annual equity withdrawals up to the full tax liability on the company's taxable income. 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. CONCENTRATIONS OF RISK The Company's contract revenue is highly concentrated in three general contractors which perform work for one owner. These customers account for approximately 48% of contract revenue for the year ended December 31, 1998. The associated contracts receivable from these customers represented approximately 58% of total contracts receivables at December 31, 1998. The loss of these customers could have a material impact on the Company's future earnings results. The Company grants credit generally without collateral, to its customers which are located nationwide. Consequently, the company is subject to potential credit risk related to change in business and economic factors. However, the company's management believes that its contract acceptance, billing, and collection policies are adequate to minimize potential credit risk. The Company maintains its demand deposits in commercial banks with Federal Deposit Insurance Corporation limits of $100,000 per bank. FAIR VALUE OF FINANCIAL INSTRUMENTS The Company's financial instruments consist of cash, accounts receivable and accounts 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 the fair value. 3. RELATED PARTY TRANSACTIONS: During the year, the company purchased transportation equipment and a note receivable from the sole stockholder in the amount of $173,465 which approximates fair value. The amount is included in accounts payable at December 31, 1998. 8
11 The Company rents office and warehouse space from the sole stockholder. See Note 6. 4. NOTE RECEIVABLE: Note receivable at December 31, 1998 consists of $83,813 due from an employee of the company. The note bears interest at 5% per annum. 5. COSTS AND ESTIMATED GROSS PROFIT ON CONTRACTS IN PROGRESS: Costs incurred to date, estimated earnings and the related billings to date of contracts in progress at December 31, 1998, are shown below: DECEMBER 31, 1998 ------------ Costs incurred on contracts in progress $ 2,598,585 Estimated gross profit 1,091,079 ------------ Contract revenue earned to date 3,689,664 Less progress billings to date 3,801,641 ------------ $ (111,977) ============ This amount is included in the accompanying balance sheet at December 31, 1998, under the following captions: DECEMBER 31, 1998 ------------ Costs and estimated gross profit in excess of billings on contracts in progress $ 65,766 Billings in excess of costs and estimated gross profit on contracts in progress (177,743) ------------ $ (111,977) ============ 6. LEASE COMMITMENTS: FACILITY LEASE On July 31, 1998, the Company entered into an operating lease with the sole stockholder to lease office and warehouse space. The lease expires on July 31, 2008. Total rental expense under this lease amounts to $25,000 for the year ended December 31, 1998 and is included in general and administrative expenses. Future minimum rental payments under the facility lease are as follows: DECEMBER 31, ------------ 1999 $ 60,625 2000 62,140 2001 63,691 2002 65,283 2003 66,918 Thereafter 328,523 -------- $647,180 ======== 9
12 EQUIPMENT LEASES The company leases automotive equipment under operating leases which expire May 1999 and December 2000. Total rental expense under the leases amounted to $20,578 for the year ended December 31, 1998 and is included in general and administrative expenses. Future minimum rental payments under the leases are as follows: DECEMBER 31, ------------ 1999 $ 14,556 2000 10,256 -------- $ 24,812 ======== 7. CONTRACT BACKLOG: The following schedule is a reconciliation of contract backlog representing signed contracts as of December 31, 1998: Balance, January 1, 1998 $3,244,003 Contract adjustments and new contracts awarded 6,084,006 ---------- Subtotal 9,328,009 Less contract revenue earned 7,500,045 ---------- Balance, December 31, 1998 $1,827,964 ========== 8. PROFIT SHARING AND PENSION PLANS: The company has a profit sharing plan covering all eligible nonprevailing wage employees. The company's contribution is determined annually by the board of directors and may not exceed 15% of compensation paid to eligible employees. The board of directors has elected to make a contribution of $107,361 to the profit sharing plan for the year ended December 31, 1998, and is included in the accompanying balance sheet under accrued liabilities. 9. SUBSEQUENT EVENT: On May 13, 1999, all of the Company's common stock was sold to an unrelated purchaser and the Company became a subsidiary of Integrated Electrical Services, Inc. 10
13 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To the Board of Directors: We have audited the accompanying balance sheet of Valentine Electrical, Inc. (a Virginia corporation) as of March 31, 1999, and the related statements of operations, 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 Valentine Electrical, Inc. as of March 31, 1999, and the results of its operations and cash flows for year then ended in conformity with generally accepted accounting principles. REZNICK FEDDER & SILVERMAN Charlotte, North Carolina May 13, 1999 11
14 VALENTINE ELECTRICAL, INC. BALANCE SHEET MARCH 31, 1999 ASSETS CURRENT ASSETS: Cash and cash equivalents $ 637,823 Contract receivables 1,288,497 Inventories 5,620 Cost and estimated earnings in excess of billings on uncompleted contracts 414,818 Prepaid expenses and other current assets 5,321 ------------ Total current assets 2,352,079 PROPERTY AND EQUIPMENT, net 278,994 OTHER NON-CURRENT ASSETS 20,883 ------------ Total assets $ 2,651,956 ============ LIABILITIES AND STOCKHOLDER'S EQUITY CURRENT LIABILITIES: Current portion of long-term debt $ 24,935 Accounts payable and accrued liabilities 526,802 Billings in excess of costs and estimated earnings on uncompleted contracts 86,654 Income taxes payable 210,621 Deferred income tax liability - current 126,343 ------------ Total current liabilities 975,355 ------------ LONG-TERM DEBT, net of current portion 4,619 DEFERRED TAX LIABILITY 39,195 COMMITMENTS AND CONTINGENCIES STOCKHOLDER'S EQUITY: Common stock, $100 per share par value, 500 shares authorized; 10 shares issued and outstanding 1,000 Additional paid-in capital 5,000 Retained earnings 1,626,787 ------------ Total stockholder's equity 1,632,787 ------------ Total liabilities and stockholder's equity $ 2,651,956 ============ The accompanying notes to financial statements are an integral part of these statements. 12
15 VALENTINE ELECTRICAL, INC. STATEMENT OF OPERATIONS FOR THE YEAR ENDED MARCH 31, 1999 REVENUES $ 5,220,816 COST OF SERVICES (including depreciation) 3,844,493 ------------ Gross profit 1,376,323 SELLING, GENERAL AND ADMINISTRATIVE EXPENSES 910,720 ------------ Income from operations 465,603 OTHER INCOME ( EXPENSE): Interest income 10,088 Interest expense (6,632) ------------ Other income (expense), net 3,456 ------------ INCOME BEFORE INCOME TAXES 469,059 PROVISION FOR INCOME TAXES (108,448) ------------ NET INCOME $ 360,611 ============ The accompanying notes to financial statements are an integral part of these statements. 13
16 VALENTINE ELECTRICAL, INC. STATEMENT OF STOCKHOLDERS' EQUITY FOR THE YEAR ENDED MARCH 31, 1999 ADDITIONAL COMMON STOCK PAID-IN ACCUMULATED SHARES AMOUNT CAPITAL EARNINGS TOTAL ---------- ---------- ---------- ---------- ---------- BALANCE, March 31, 1998 10 $ 1,000 $ 5,000 $1,266,176 $1,272,176 Net income 360,611 360,611 ---------- ---------- ---------- ---------- ---------- BALANCE, March 31, 1999 10 $ 1,000 $ 5,000 $1,626,787 $1,632,787 ========== ========== ========== ========== ========== The accompanying notes to financial statements are an integral part of these statements. 14
17 VALENTINE ELECTRICAL, INC. STATEMENT OF CASH FLOWS FOR THE YEAR ENDED MARCH 31, 1999 CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 360,611 Adjustments to reconcile net income to net cash provided by (used in) operating activities- Deferred taxes 68,962 Depreciation 67,244 Increase (decrease) in net cash from changes in operating assets and liabilities: Increase in contract receivables (538,573) Increase in inventories (310) Increase in costs and estimated earnings in excess of billings on uncompleted contracts (169,901) Decrease in other current assets 300 Increase in accounts payable and accrued expenses 496,085 Decrease in billings in excess of costs and estimated earnings on uncompleted contracts (43,819) Decrease in income taxes payable (267,384) ---------- Net cash provided by (used in) operating activities (26,785) ---------- CASH FLOWS FROM INVESTING ACTIVITIES: Purchase of property and equipment (3,483) ---------- Net cash provided by (used in) investing activities (3,483) ---------- CASH FLOWS FROM FINANCING ACTIVITIES: Payment of long-term debt (47,830) ---------- Net cash provided by (used in) financing activities (47,830) ---------- NET INCREASE (DECREASE) IN CASH (78,098) CASH, beginning of period 715,921 ---------- CASH, end of period $ 637,823 ========== SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: Cash paid during the year for interest $ 6,632 Cash paid during the year for income taxes $ 306,870 The accompanying notes to financial statements are an integral part of these statements. 15
18 VALENTINE ELECTRICAL, INC. NOTES TO FINANCIAL STATEMENTS MARCH 31, 1999 1. ORGANIZATION AND DESCRIPTION OF BUSINESS: Valentine Electrical, Inc. (the Company) is engaged in electrical contracting, primarily for commercial and industrial construction projects. The Company was incorporated on October 1, 1985, in the Commonwealth of Virginia. 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. Specifically, the Company recognizes revenue from fixed-price construction contracts using the percentage-of-completion method, measured by the percentage of costs incurred to date to management's estimated total costs for each contract. That method is used because management considers total costs to be the best available measure of progress on the contracts. Because of the inherent uncertainties in estimating costs, it is at least reasonably possible that the estimates used will change within the near term. 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. 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. 16
19 CASH The Company records as cash and cash equivalents all cash and short-term investments with original maturities of three months or less. CONCENTRATION OF CREDIT RISK The Company maintains its bank accounts in one bank, and from time-to-time, the amount on deposit exceeds the FDIC insurance limits. At March 31, 1999, the uninsured cash totaled $559,055. PROPERTY AND EQUIPMENT Property and equipment are stated at cost. Depreciation is calculated on a straight-line basis over the estimated useful life of the asset. Machinery and equipment and furniture and fixtures are depreciated between 5 and 10 years. Vehicles are depreciated over 5 years. Leasehold improvements are depreciated over 20 years. At March 31, 1999, property and equipment consisted of: Furniture and fixtures $ 91,096 Machinery and equipment 94,306 Vehicles 316,632 Leasehold improvements 107,947 --------- 609,981 Less - Accumulated depreciation (330,987) --------- Property and equipment, net $ 278,994 INCOME TAXES Income taxes are provided for the tax effects of transactions reported in the financial statements and consist of taxes currently due plus deferred taxes related to the differences between the bases of long-term contracts and depreciable assets for financial reporting and income tax reporting. The deferred taxes represent the future tax return consequences of those differences, which will either be taxable or deductible when the assets and liabilities are recovered or settled. For tax purposes, the Company uses the cash basis of accounting (see Note 8 for discussion of IRS audit challenging this method) and accelerated deprecation. FAIR VALUE OF FINANCIAL INSTRUMENTS The Company's financial instruments consist of cash, accounts receivable and accounts payable. Estimates of the fair value of these instruments are based on interest rates available to the Company. At March 31, 1999, the carrying value of the Company's financial instruments approximated the fair value. 17
20 3. CONTRACT RECEIVABLES: Contract receivables consist of: Completed contracts $ 310,169 Contracts in progress 846,544 Retainage 131,784 ----------- $ 1,288,497 =========== 4. CONTRACTS IN PROGRESS: Costs incurred to date, estimated earnings and the related billings to date of contracts in progress at March 31, 1999, are shown below: Costs incurred to date $ 1,239,992 Estimated earnings 406,013 ----------- 1,646,005 Less progress billings to date 1,317,841 ----------- $ 328,164 =========== Included in the accompanying balance sheet at March 31, 1999, under the following captions: Costs and estimated earnings in excess of billings on contracts in progress $ 414,818 Billings in excess of costs and estimated earnings on uncompleted contracts (86,654) --------- $ 328,164 ========= 5. LINE OF CREDIT: The Company has an available line of credit in the amount of $50,000 from NationsBank. The line of credit bears interest at 10%. As of March 31, 1999, no balance was outstanding on the line of credit, which is collateralized by the Company's accounts receivable, inventory and equipment. 6. LONG-TERM DEBT: Long-term debt at March 31, 1999 consisted of: Installment notes payable in monthly payments that currently equal $2,830, including interest from 8.25% to 9.5%, with various maturity dates from June 1999 through September 2000, secured by vehicles and equipment, some of which are guaranteed by the Company's stockholder $ 29,554 Less current portion (24,935) --------- $ 4,619 ========= Maturities of long-term debt are as follows: YEAR ENDING MARCH 31 2000 $ 24,935 2001 4,619 -------- $ 29,554 ======== 18
21 7. LEASE COMMITMENTS: On November 20, 1996, Valentine Electrical, Inc. entered into a facility lease with a company controlled by Valentine Electrical, Inc.'s sole stockholder and his spouse. During the initial lease term of ten years, the annual commitment is $36,000 for the first four years of the lease, and thereafter, the lease is to be increased 10% annually. The Company began paying rent under this lease in November 1996. The lease has a renewal option for a period of six additional years at a rate of $5,000 per month. Total rental expense under this lease was $36,000 for the year ended March 31, 1999. Future minimum rental payments under the facility lease are as follows: Year ending March 31 2000 $ 36,000 2001 37,200 2002 40,920 2003 45,012 2004 49,513 Thereafter 156,895 -------- $365,540 ======== 8. INCOME TAXES: The IRS has audited the Company's tax returns for the years ended March 31, 1996 and 1997, and has assessed additional federal income taxes totaling $336,520. The issues that the IRS has raised primarily concern two areas: the accounting method used and excess officer compensation. These financial statements have been prepared assuming that the Company will no longer be allowed to use the cash basis method of accounting for income tax purposes, but will be required to change to the accrual method (as outlined in the IRS audit report) beginning with the tax year ended March 31, 1996. Included in the account "Income Taxes Payable" is an amount representing income taxes on the cumulative difference between these two methods of accounting. At March 31, 1999, deferred taxes have been recorded for the differences between financial statement reporting and income tax reporting for the following: (1) the difference caused by using the percentage-of-completion method for financial statement reporting and the accrual method for income tax reporting, and (2) the difference caused by using different depreciation methods for financial statement reporting and income tax reporting. The current deferred tax liability at March 31, 1999 is $126,343 and the long-term deferred tax liability is $39,195. The provision for income taxes shown on the statement of operations for the year ended March 31, 1999 is composed of the following: Current taxes $ 37,762 Deferred taxes 70,686 --------- $ 108,448 19
22 Income taxes payable at March 31, 1999 are composed of the following: Tax overpayment based upon continued use of the cash basis method $ (88,238) for the March 31, 1999 tax return Taxes for the cumulative difference between cash basis method and accrual method through March 31, 1999 298,859 --------- $ 210,621 ========= No provision for taxes associated with the IRS's claim that officer compensation was excessive for the two years under audit have been recorded. The amount of taxes the IRS has assessed regarding this issue totals $159,243. Management intends to contest this assessment vigorously. 9. BENEFIT PLANS: On January 1, 1989, the Company established a defined contribution 401(k) plan that covers all eligible employees. The plan provides for the Company to match voluntary employee contributions at a rate of 100%. The maximum employee contribution the Company will match is 3% of annual compensation. Such matching rate can be changed at the Company's discretion. All contributions by the Company are funded currently and vest 20% after two years, and 20% per year thereafter. All employee contributions are immediately vested. Company matching contributions to the plan were $33,486 for the year ended March 31, 1999. 10. SUBSEQUENT EVENT: On May 7, 1999, the Company's sole stockholder completed the sale of all of the Company's outstanding common stock to Integrated Electrical Services, Inc. 20
23 ITEM 7. FINANCIAL STATEMENTS, PRO FORMA FINANCIAL INFORMATION AND EXHIBITS (A) FINANCIAL STATEMENTS OF BUSINESSES ACQUIRED 21
24 INDEPENDENT AUDITOR'S REPORT To the Board of Directors Putzel Electrical Contractors, Inc. Macon, Georgia We have audited the accompanying balance sheet of Putzel Electrical Contractors, Inc. (an S corporation) as of December 31, 1998, and the related statements of operations, 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 Putzel Electrical Contractors, 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. DAVIDSON AND GOLDEN, P.C. Nashville, Tennessee May 6, 1999 22
25 PUTZEL ELECTRICAL CONTRACTORS, INC. BALANCE SHEETS DECEMBER 31, 1998, AND MARCH 31, 1999 (UNAUDITED) December 31 March 31 1998 1999 ----------- ---------- (Unaudited) ASSETS Current assets: Cash and cash equivalents $ 746,424 $ 49,853 Accounts receivable: Uncompleted contracts 3,867,978 2,348,865 Completed contracts 184,218 68,991 Other 12,861 12,516 Marketable securities 37,743 38,435 Cost and estimated earnings in excess of billings on uncompleted contracts 452,945 414,996 Inventory 131,567 137,134 ----------- ---------- Total Current Assets 5,433,736 3,070,790 Property and equipment, at cost, net of accumulated 2,497,536 2,590,676 Depreciation and amortization (1,295,510) (1,295,510) Other assets 59,091 59,091 ----------- ---------- Total Assets $ 6,694,853 $4,425,047 =========== ========== LIABILITIES Current liabilities: Accounts payable $ 1,181,867 $ 643,763 Line of credit -- 454,385 Current portion of long-term debt 72,943 72,943 Billings in excess of costs and estimated earnings on uncompleted contracts 608,764 242,491 Sales tax payable 47,000 -- Accrued 401(k)/profit sharing and payroll related expenses 59,957 50,062 ----------- ---------- Total Current Liabilities 1,970,531 1,463,644 Long-term debt, net of current portion 153,213 139,805 STOCKHOLDER'S EQUITY Common stock, no par value, 1,000 shares authorized, 298 shares issued and outstanding 24,800 24,800 Additional paid-in capital 67,680 67,680 Retained earnings 4,478,629 2,729,118 ----------- ---------- Total Shareholder's Equity 4,571,109 2,821,598 Total Liabilities and Shareholder's Equity $ 6,694,853 $4,425,047 =========== ========== See independent auditor's report and accompanying notes to financial statements. 23
26 PUTZEL ELECTRICAL CONTRACTORS, INC. STATEMENTS OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 1998 AND THE THREE-MONTH PERIODS ENDED MARCH 31, 1998 (UNAUDITED), AND MARCH 31, 1999 (UNAUDITED) Three-Month Periods Ended Year Ended --------------------------------- December 31 March 31 March 31 1998 1998 1999 ------------ ------------ ------------ (Unaudited) (Unaudited) Contract revenue $ 22,519,760 $ 5,890,701 $ 3,893,645 Cost of contract revenue 17,198,258 4,047,571 2,844,767 ------------ ------------ ------------ Gross profit 5,321,502 1,843,130 1,048,878 General and administrative expenses 2,444,488 450,193 633,728 ------------ ------------ ------------ Income from operations 2,877,014 1,392,937 415,150 Other income (expense): Interest expense (62,918) -- -- Interest income 19,564 6,094 8,139 Contributions (21,045) (950) (1,450) Gain on sale of property and equipment 7,757 -- -- Customer discounts (8,335) (850) (8,698) Other income 751 244 266 ------------ ------------ ------------ (64,226) 4,538 (1,743) ------------ ------------ ------------ Net Income $ 2,812,788 $ 1,397,475 $ 413,407 ============ ============ ============ See independent auditor's report and accompanying notes to financial statements. 24
27 PUTZEL ELECTRICAL CONTRACTORS, 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 ------------------------ CAPITAL RETAINED SHARES AMOUNT STOCK EARNINGS TOTAL --------- ---------- ---------- ---------- ---------- Balance, December 31, 1997 298 $ 24,800 $ 67,680 $3,356,590 $3,449,070 Dividends Paid -- -- -- (1,690,749) (1,690,749) Net Income -- -- -- 2,812,788 2,812,788 --------- ---------- ---------- ---------- ---------- Balance, December 31, 1998 298 $ 24,800 $ 67,680 $4,478,629 $4,571,109 Dividends Paid (unaudited) -- -- -- (2,162,918) (2,162,918) Net Income (unaudited) -- -- -- 413,407 413,407 --------- ---------- ---------- ---------- ---------- Balance, March 31, 1999 (unaudited) 298 $ 24,800 $ 67,680 $2,729,118 $2,821,598 ========= ========== ========== ========== ========== See independent auditor's report and accompanying notes to financial statements. 25
28 PUTZEL ELECTRICAL CONTRACTORS, 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) December 31 March 31 March 31 1998 1998 1999 ----------- ----------- ----------- (Unaudited) (Unaudited) Cash flows from operating activities: Net income $ 2,812,788 $ 1,397,475 $ 413,407 Adjustments to reconcile net income to net cash provided by operating activities-- Depreciation and amortization 226,881 34,740 -- Realized gain on sale of marketable securities -- -- -- Gain on sale of property and equipment (7,757) -- -- (Increase) decrease in-- Accounts receivable (1,108,209) (545,120) 1,634,340 Costs and estimated earnings in excess of billings on uncompleted contracts (106,889) (324,276) 37,949 Cash value of life insurance 193,897 -- -- Inventory (42,800) (12,377) (5,567) Other current assets (7,630) (1,196) (347) Increase (decrease) in-- Accounts payable 365,856 969,052 (538,104) Billings in excess of costs and estimated earnings on uncompleted contracts 108,333 (1,334,811) (366,273) Accrued payroll taxes and withholdings (26,657) 618 (9,895) Sales tax payable 47,000 -- (47,000) ----------- ----------- ----------- Net cash provided by operating 2,454,813 184,105 1,118,510 activities Cash flows from investing activities: Purchase of property and equipment (731,700) (380,023) (93,140) Proceeds from sale of property and equipment 7,757 -- -- ----------- ----------- ----------- Net cash used by investing (723,943) (380,023) (93,140) activities Cash flows from financing activities: Proceeds from line of credit -- -- 454,385 Principal payments on notes (99,292) (12,750) (13,408) Dividends paid (1,690,749) (79,903) (2,162,918) ----------- ----------- ----------- Net cash used by financing (1,790,041) (92,653) (1,721,941) ----------- ----------- ----------- activities Net decrease in cash and cash equivalents (59,171) (288,571) (696,571) Cash and cash equivalents, beginning of year 805,595 805,595 746,424 ----------- ----------- ----------- Cash and cash equivalents, end of year $ 746,424 $ 517,024 $ 49,853 =========== =========== =========== See independent auditor's report and accompanying notes to financial statements. 26
29 PUTZEL ELECTRICAL CONTRACTORS, INC. NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 1998, MARCH 31, 1998 (UNAUDITED) AND MARCH 31, 1999 (UNAUDITED) 1. Organization and Description of Business: Putzel Electrical Contractors, Inc. (the Company) operations consist of commercial electrical subcontracting primarily for general contractors and commercial property owners within the southeastern United States. Most of the work is performed under fixed-price, cost plus, and time and materials contracts. The operating cycle of the Company's contracts varies but is typically less than one year. 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 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. 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. 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. 27
30 Summary of Significant Accounting Policies (Continued) Concentrations of risk Financial instruments that potentially subject the Company to credit risk consists principally of cash and cash equivalents. The Company maintains its cash in bank deposit accounts which, at times, may exceed federally insured limits. The Company has not experienced any losses in such accounts. The Company believes it is not exposed to any significant credit risk on cash and cash equivalents. Advertising Advertising expenses are charged to expense as incurred and are included in general and administrative expenses. Advertising expense totaled $30,063 for the year ended December 31, 1998. 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 assets, which are generally five to thirty-one 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 $ 600,097 Machinery and equipment 128,501 Transportation equipment 1,210,519 Warehouse 117,452 Leasehold improvements 440,967 ----------- 2,497,536 Less--accumulated depreciation and amortization (1,295,510) ----------- Property, plant and equipment, net $ 1,202,026 =========== Depreciation expense of $63,687 has been included in selling, general and administrative expenses and $163,194 has been included in cost of sales for the year ended December 31, 1998. Income taxes The Company elected to be taxed as an S Corporation as of March 1, 1987, under Section 1362 of the Internal Revenue Code. In lieu of corporate income taxes, the stockholders of an S Corporation are taxed on their proportionate share of 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. 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. 28
31 Summary of Significant Accounting Policies (Continued) 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. The following is an analysis of the securities: Trading Securities: Marketable securities, at cost $ 18,806 Gross unrealized gain 18,937 ------------- Marketable securities, at fair value $ 37,743 ------------- Contracts in Progress Contracts in progress at December 31, 1998 are as follows: Total contracts $ 22,439,481 Estimated costs Costs to date 7,984,999 Costs to complete 8,066,415 ------------- Total estimated costs 16,051,414 Estimated gross profit $ 6,388,067 ============= Amount billed to date $ 12,852,414 Costs and estimated earnings in excess of billings 452,945 Billings in excess of costs and estimated earnings (608,764) ------------- Contract revenue earned 12,696,595 Costs to date (7,984,999) ------------- Gross profit earned $ 4,711,596 ============= 4. Line of Credit The Company has a $2,000,000 line of credit with a bank with interest payable monthly at a rate per annum of two points above the Eurodollar fixed period rate, which expires on May 31, 1999, secured by Company real estate, accounts receivable, inventory and property and equipment. There is no outstanding balance at December 31, 1998. 29
32 5. Notes Payable Notes payable consist of the following: $500,000 equipment line of credit with a bank, outstanding amount due on May 30, 1999 with an interest rate of 7.4% per annum, collateralized by transportation equipment. The line of credit has an option for a 42 month payoff. $ 66,704 Note payable to bank, payable in monthly installments of $444 including interest at 9.75% per annum, matures in February 2002, collateralized by a vehicle. 14,617 Note payable to a bank, installment note with monthly payments of $550 including interest at 9.153% per annum, final payment due in November 2001, collateralized by a vehicle 16,845 Note payable to a bank, installment note with monthly payments of $396 including interest at 9.214% per annum, final payment due in November 2001, collateralized by a vehicle 12,029 Note payable to a bank, installment note with monthly payments of $489 including interest at 9.253% per annum, final payment due in November 2000, collateralized by a vehicle 10,307 Note payable to a bank, with monthly payments of $486 including interest at 9.275% per annum, matures in December 2000, collateralized by a vehicle 12,494 Note payable to a bank, with monthly payments of $487 including interest at 9.0% per annum, matures in May 2001, collateralized by a vehicle 12,945 Note payable to a bank, with monthly payments of $599 including interest at 9.0% per annum, matures in May 2001, collateralized by a vehicle 15,941 Note payable to a bank, with monthly payments of $487 including interest at 9.0% per annum, matures in May 2001, collateralized by a vehicle 12,944 30
33 Notes Payable (Continued) Note payable to a bank, with monthly payments of $1,617 including interest at 7.0% per annum, matures in November 2001, collateralized by three vehicles 51,330 ---------- Notes payable 226,156 Less: Current Portion 72,943 ---------- Long-term notes payable $ 153,213 ========== Maturities of the notes payable are as follows: Year Ended December 31 Amount ----------- ---------- 1999 $ 72,943 2000 78,386 2001 63,546 2002 11,281 ---------- $ 226,156 Some of the above notes are personally guaranteed by the stockholder 6. Retirement Plan The Company provides a 401(k) retirement plan for its employees whereby the employees may contribute from 1% to 15% of their salary up to a maximum annual amount. The Company, if it so elects, may match 25% of the employee's contributions to the plan. The Company matching policy does not apply to employee contributions in excess of 6% of their salary. The amount the Company contributed during the year was $33,632. 7. Operating Leases The Company is paying the stockholder $6,800 per month under a lease for storage rental and office space in Macon. The Company is paying the stockholder $2,950 per month for a condominium which is used by employees when in the Atlanta area. The Company is renting office space in the Atlanta area for approximately $38,000 per year. 9. Non-Cash Investing and Financing Activities The Company purchased property and equipment totaling $850,769 during the year. In conjunction with the acquisitions, the Company financed $119,069 of the purchase price and paid in cash of $731,700. 10. Major Supplier The Company purchases the majority of its materials from two suppliers. 31
34 11. Contingent Liability A former employee has filed a complaint with the Equal Employment Opportunity Commission. The Company has submitted a statement to the Equal Employment Opportunity Commission denying all liability. A complaint was filed by the former employee in Federal Court on May 26, 1998. The Company has filed an answer denying any liability and has filed a motion for summary judgement. The Company intends to vigorously defend this action. Company attorneys are unable to predict whether an outcome unfavorable to the Company is either probable or remote or the range of potential liability in the event of an unfavorable outcome. 12. Subsequent events In April 1999, the stockholder of Putzel completed the sale of 100% of his ownership interests in Company to Integrated Electrical Services, Inc. 32
35 ITEM 7. (B) PRO FORMA FINANCIAL INFORMATION 33
36 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 statement of operations for the year ended September 30, 1998, presents the statement of operations data to give effect to the 37 electrical contracting and maintenance companies and related entities (including the 16 companies acquired concurrent with IES' IPO) acquired through September 30, 1998 (the "Fiscal 1998 Acquisitions"), the 23 electrical contracting and maintenance companies and related entities (including the Acquisitions) acquired between October 1, 1998 and May 18, 1999 (the "Fiscal 1999 Acquisitions") and the related pro forma adjustments as if they had occurred on October 1, 1997. The unaudited pro forma statement of operations for the six months ended March 31, 1999, presents 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, 1998. 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 combined 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 "Business-Risk Factors" included elsewhere therein. 34
37 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 BANK DEBT................................. 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 ============= ============= ============= ============ 35
38 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 $ 1.36 ============ =========== SHARES USED IN THE COMPUTATION OF EARNINGS (LOSS) PER SHARE BASIC - 19,753,060 35,103,949 ============ =========== DILUTED - 19,753,060 35,503,782 ============ =========== 36
39 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 35,103,949 ============ ============== DILUTED - 32,254,651 35,597,393 ============ ============== 37
40 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) the other Founding Companies beginning February 1, 1998 and each acquired company 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 ========= ========= ========= ========== ============ The following table summarizes the Pro Forma Adjustments for the Quarter Ended December 31, 1998 (in thousands): 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 ========= ========= ========= ========== ============ 38
41 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. 39
42 ITEM 7. (C) EXHIBITS 23.1 Consent of Reznick, Fedder & Silverman 23.2 Consent of Reznick, Fedder & Silverman 23.3 Consent of Davidson and Golden, P.C. 40
43 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/ JIM P. WISE ---------------------------------- JIM P. WISE CHIEF EXECUTIVE OFFICER Dated: May 25, 1999 41
44 INDEX TO EXHIBITS EXHIBIT NUMBER DESCRIPTIONS - ------- ------------ 23.1 Consent of Reznick, Fedder & Silverman 23.2 Consent of Reznick, Fedder & Silverman 23.3 Consent of Davidson and Golden, P.C.
1 EXHIBIT 23.1 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS As independent public accountants, we hereby consent to the incorporation of our report, dated May 14, 1999, on the financial statements of Delco Electric, Inc. included in this Form 8-K, 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. 2 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). /s/ Reznick Fedder & Silverman REZNICK FEDDER & SILVERMAN Charlotte, North Carolina May 25, 1999
1 EXHIBIT 23.2 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS As independent public accountants, we hereby consent to the incorporation of our report, dated May 13, 1999, on the financial statements of Valentine Electrical, Inc. included in this Form 8-K, 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. 2 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). /s/ Reznick Fedder & Silverman REZNICK FEDDER & SILVERMAN Charlotte, North Carolina May 25, 1999
1 EXHIBIT 23.3 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS As independent public accountants, we hereby consent to the incorporation of our report, dated May 6, 1999, on the financial statements of Putzel Electrical Contractors, Inc. as of December 31, 1998 included in this Form 8-K, 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. 2 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). /s/ DAVIDSON AND GOLDEN, P.C. Davidson and Golden, P.C. Nashville, Tennessee May 25, 1999