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 28, 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
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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
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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.
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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.
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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.
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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.
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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.
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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.
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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
========
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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.
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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
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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.
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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.
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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.
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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.
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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.
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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.
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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 seven electrical contracting
and maintenance businesses from April 1, 1999 through May 18, 1999 (the "June
Quarter Acquisitions"), Delco Electric, Inc. and Valentine Electrical, Inc.,
(collectively, the "Individually Insignificant Acquisitions") and Putzel
Electrical Contractors, Inc. ("Putzel") 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 57 electrical contracting and maintenance companies and related entities
(including the 16 companies acquired concurrent with IES' IPO) acquired through
May 18, 1999 (the "Previously Closed Acquisitions"), the Individually
Insignificant Acquisitions and Putzel 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 June Quarter Acquisitions, the
Individually Insignificant Acquisitions and Putzel 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)
INDIVIDUALLY
IES AND JUNE QUARTER PRO FORMA INSIGNIFICANT PRO FORMA
SUBSIDIARIES ACQUISITIONS ADJUSTMENTS SUBTOTAL ACQUISITIONS ADJUSTMENTS
------------ ------------ ----------- -------- ------------ -----------
ASSETS
CURRENT ASSETS:
Cash ........................................ $ 35,630 $ 1,442 $ (19,837) $ 17,235 $ 2,019 $ (5,243)
Receivables, net ............................ 167,801 11,599 -- 179,400 2,439 --
Inventories, net ............................ 8,995 344 -- 9,339 6 --
Cost and estimated earnings in excess of
billings on uncompleted contracts .......... 21,129 1,966 -- 23,095 499 --
Prepaid expenses and other current assets ... 4,418 1,560 -- 5,978 54 --
----------- ------------ ---------- --------- --------- ----------
Total current assets .................. 237,973 16,911 (19,837) 235,047 5,017 (5,243)
RECEIVABLES FROM RELATED PARTIES .............. 233 -- -- 233 -- --
GOODWILL, NET ................................. 341,703 -- 29,601 371,304 -- 10,049
PROPERTY AND EQUIPMENT, NET ................... 29,721 3,313 -- 33,034 629 --
OTHER NONCURRENT ASSETS ....................... 9,013 20 -- 9,033 21 --
----------- ------------ ---------- --------- --------- ----------
Total assets .......................... $ 618,643 $ 20,244 $ 9,764 $ 648,651 $ 5,667 $ 4,806
=========== ============ ========== ========= ========= ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Short-term debt and current maturities
of long-term debt ............................ $ 537 $ 2,563 $ (2,563) $ 537 $ 25 $ (25)
Accounts payable and accrued expenses ......... 83,357 4,697 -- 88,054 853 --
Billings in excess of costs and estimated
earnings on uncompleted contracts ............ 29,863 881 -- 30,744 320 --
Income taxes payable .......................... 3,861 1,708 -- 5,569 336 --
Other current liabilities ..................... 451 -- -- 451 -- --
----------- ------------ ---------- --------- --------- ----------
Total current liabilities ............. 118,069 9,849 (2,563) 125,355 1,534 (25)
----------- ------------ ---------- --------- --------- ----------
LONG-TERM DEBT, NET ............................. 851 684 (684) 851 44 (44)
SENIOR SUBORDINATED NOTES, Net of $1,188
unamortized discount .......................... 148,812 -- -- 148,812 -- --
OTHER NON-CURRENT LIABILITIES ................... 1,498 39 -- 1,537 -- --
----------- ------------ ---------- --------- --------- ----------
Total liabilities ..................... 269,230 10,572 (3,247) 276,555 1,578 (69)
STOCKHOLDERS' EQUITY:
Preferred stock ............................... -- -- -- -- -- --
Common stock .................................. 299 168 (153) 314 2 4
Restricted common stock ....................... 27 -- -- 27 -- --
Treasury stock ................................ -- (22) 22 -- -- --
Additional paid-in capital .................... 319,509 305 22,363 342,177 5 8,953
Retained earnings ............................. 29,578 9,221 (9,221) 29,578 4,082 (4,082)
----------- ------------ ---------- --------- --------- ----------
Total stockholders' equity ............ 349,413 9,672 13,011 372,096 4,089 4,875
----------- ------------ ---------- --------- --------- ----------
Total liabilities and stockholders'
equity ............................... $ 618,643 $ 20,244 $ 9,764 $ 648,651 $ 5,667 $ 4,806
=========== ============ ========== ========= ========= ==========
PRO FORMA PRO FORMA
SUBTOTAL PUTZEL ADJUSTMENTS TOTAL
-------- ------ ----------- -----
ASSETS
CURRENT ASSETS:
Cash ........................................ $ 14,011 $ 746 $ (10,827) $ 3,930
Receivables, net ............................ 181,839 4,065 -- 185,904
Inventories, net ............................ 9,345 132 -- 9,477
Cost and estimated earnings in excess of
billings on uncompleted contracts .......... 23,594 453 -- 24,047
Prepaid expenses and other current assets ... 6,032 38 -- 6,070
----------- ------------ ---------- ---------
Total current assets .................. 234,821 5,434 (10,827) 229,428
RECEIVABLES FROM RELATED PARTIES .............. 233 -- -- 233
GOODWILL, NET ................................. 381,353 -- 15,147 396,500
PROPERTY AND EQUIPMENT, NET ................... 33,663 1,202 -- 34,865
OTHER NONCURRENT ASSETS ....................... 9,054 59 -- 9,113
----------- ------------ ---------- ---------
Total assets .......................... $ 659,124 $ 6,695 $ 4,320 $ 670,139
=========== ============ ========== =========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Short-term debt and current maturities
of long-term debt ............................ $ 537 $ 73 $ (73) $ 537
Accounts payable and accrued expense .......... 88,907 1,288 -- 90,195
Billings in excess of costs and estimated
earnings on uncompleted contracts ............ 31,064 578 -- 31,642
Income taxes payable .......................... 5,905 -- -- 5,905
Other current liabilities ..................... 451 -- -- 451
----------- ------------ ---------- ---------
Total current liabilities ............. 126,864 1,939 (73) 128,730
----------- ------------ ---------- ---------
LONG-TERM DEBT, NET ............................. 851 153 (153) 851
SENIOR SUBORDINATED NOTES, Net of $1,188
unamortized discount .......................... 148,812 -- -- 148,812
OTHER NON-CURRENT LIABILITIES ................... 1,537 -- -- 1,537
----------- ------------ ---------- ---------
Total liabilities ..................... 278,064 2,092 (226) 279,930
STOCKHOLDERS' EQUITY:
Preferred stock ............................... -- -- -- --
Common stock .................................. -- -- -- --
Restricted common stock ....................... 320 25 (20) 325
Treasury stock ................................ 27 -- -- 27
Additional paid-in capital .................... 351,135 68 9,076 360,279
Retained earnings ............................. 29,578 4,510 (4,510) 29,578
----------- ------------ ---------- ---------
Total stockholders' equity ............ 381,060 4,603 4,546 390,209
----------- ------------ ---------- ---------
Total liabilities and stockholders'
equity ............................... $ 659,124 $ 6,695 $ 4,320 $ 670,139
=========== ============ ========== =========
35
38
INTEGRATED ELECTRICAL SERVICES, INC.
UNAUDITED PRO FORMA STATEMENT OF OPERATIONS
FOR THE YEAR ENDED SEPTEMBER 30, 1998
(IN THOUSANDS)
PREVIOUSLY INDIVIDUALLY
IES AND CLOSED PRO FORMA INSIGNIFICANT
SUBSIDIARIES ACQUISITIONS ADJUSTMENTS SUBTOTAL ACQUISITIONS
------------ ------------ ------------ ------------ -------------
REVENUES ......................... $ 386,721 $ 539,724 $ -- $ 926,445 $ 13,285
COST OF SERVICES ................. 306,052 426,728 -- 732,780 9,643
------------ ------------ ------------ ------------ ------------
GROSS PROFIT ................. 80,669 112,996 -- 193,665 3,642
SELLING, GENERAL AND
ADMINISTRATIVE EXPENSES ...... 47,390 92,592 (38,439)(a) 101,543 1,765
NON-CASH, NON-RECURRING
COMPENSATION CHARGE .......... 17,036 -- (17,036)(b) -- --
GOODWILL AMORTIZATION ............ 3,212 -- 6,252 (c) 9,464 --
------------ ------------ ------------ ------------ ------------
INCOME FROM OPERATIONS ....... 13,031 20,404 49,223 82,658 1,877
OTHER INCOME (EXPENSE):
Interest expense ............. (1,161) (509) (2,622)(d) (4,292) (7)
Interest income .............. 433 1,235 (1,370)(d) 298 53
Other, net ................... 335 916 (462)(c) 789 9
------------ ------------ ------------ ------------ ------------
OTHER INCOME (EXPENSE), NET ...... (393) 1,642 (4,454) (3,205) 55
INCOME BEFORE INCOME TAXES ....... 12,638 22,046 44,769 79,453 1,932
PROVISION FOR INCOME TAXES ....... 12,690 12,443 8,736 (e) 33,869 744
------------ ------------ ------------ ------------ ------------
NET INCOME (LOSS) ................ $ (52) $ 9,603 $ 36,033 $ 45,584 $ 1,188
============ ============ ============ ============ ============
EARNINGS PER SHARE -
BASIC - $ (0.00)
============
DILUTED - $ (0.00)
============
SHARES USED IN THE COMPUTATION
OF EARNINGS (LOSS) PER SHARE -
BASIC - 19,753,060
============
DILUTED - 19,753,060
============
PRO FORMA PRO FORMA PRO FORMA
ADJUSTMENTS SUBTOTAL PUTZEL ADJUSTMENTS TOTAL
------------ ------------ ------------ ------------ ------------
REVENUES ......................... -- $ 939,730 $ 21,436 -- $ 961,166
COST OF SERVICES ................. -- 742,423 16,192 -- 758,615
------------ ------------ ------------ ------------ ------------
GROSS PROFIT ................. -- 197,307 5,244 -- 202,551
SELLING, GENERAL AND
ADMINISTRATIVE EXPENSES ...... 5 (a) 103,313 2,398 (392)(a) 105,319
NON-CASH, NON-RECURRING
COMPENSATION CHARGE .......... -- -- -- -- (b) --
GOODWILL AMORTIZATION ............ 248 (c) 9,712 -- 380 (c) 10,092
------------ ------------ ------------ ------------ ------------
INCOME FROM OPERATIONS ....... (253) 84,282 2,846 12 87,140
OTHER INCOME (EXPENSE):
Interest expense ............. 7 (d) (4,292) (61) 61 (d) (4,292)
Interest income .............. (53)(d) 298 32 (32)(d) 298
Other, net ................... -- 798 7 -- 805
------------ ------------ ------------ ------------ ------------
OTHER INCOME (EXPENSE), NET ...... (46) (3,196) (22) 29 (3,189)
INCOME BEFORE INCOME TAXES ....... (299) 81,086 2,824 41 83,951
PROVISION FOR INCOME TAXES ....... (20)(e) 34,593 1,087 162 (e) 35,842
------------ ------------ ------------ ------------ ------------
NET INCOME (LOSS) ................ $ (279) $ 46,493 $ 1,737 $ (121) $ 48,109
============ ============ ============ ============ ============
EARNINGS PER SHARE -
BASIC - $ 1.37
============
DILUTED - $ 1.36
============
SHARES USED IN THE COMPUTATION
OF EARNINGS (LOSS) PER SHARE -
BASIC - 35,103,949
============
DILUTED - 35,503,782
============
39
INTEGRATED ELECTRICAL SERVICES, INC
UNAUDITED PRO FORMA STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED MARCH 31, 1999
(IN THOUSANDS)
PREVIOUSLY INDIVIDUALLY
IES AND CLOSED PRO FORMA INSIGNIFICANT
SUBSIDIARIES ACQUISITIONS ADJUSTMENTS SUBTOTAL ACQUISITIONS
------------ ------------ ------------ ------------ -------------
REVENUES ................................ $ 413,404 $ 55,014 $ -- $ 468,418 $ 5,904
COST OF SERVICES ........................ 326,934 40,693 (402) 367,225 4,358
------------ ------------ ------------ ------------ -------------
GROSS PROFIT ............................ 86,470 14,321 402 101,193 1,546
SELLING, GENERAL AND
ADMINISTRATIVE EXPENSES ... 45,590 17,579 (6,120)(a) 57,049 1,219
GOODWILL AMORTIZATION ................... 3,943 -- 789 (c) 4,732 --
------------ ------------ ------------ ------------ -------------
INCOME FROM OPERATIONS .... 36,937 (3,258) 5,733 39,412 327
OTHER INCOME (EXPENSE):
Interest Expense .......... (4,923) (155) 155 (d) (4,923) (4)
Interest Income ........... 496 232 (232)(d) 496 38
Other, net ................ 283 189 -- 472 10
------------ ------------ ------------ ------------ -------------
OTHER INCOME (EXPENSE), NET ............. (4,144) 266 (77) (3,955) 44
INCOME BEFORE INCOME TAXES .............. 32,793 (2,992) 5,656 35,662 371
PROVISION FOR INCOME TAXES .............. 13,961 (1,151) 2481 (e) 15,291 143
------------ ------------ ------------ ------------ -------------
NET INCOME (LOSS) ....................... $ 18,832 $ ( 1,841) $ 3,175 $ 20,166 $ 228
============ ============ ============ ============ =============
EARNINGS PER SHARE
BASIC ..................... $ 0.59
============
DILUTED ................... $ 0.58
============
SHARES USED IN THE COMPUTATION
OF EARNINGS PER SHARE
BASIC ..................... $ 31,761,207
============
DILUTED ................... $ 32,254,651
============
PRO FORMA PRO FORMA PRO FORMA
ADJUSTMENTS SUBTOTAL PUTZEL ADJUSTMENTS TOTAL
------------ ------------ ------------ ----------- ------------
REVENUES ................................ $ -- $ 474,322 $ 9,266 $ -- $ 483,588
COST OF SERVICES ........................ -- 371,583 8,270 -- 379,853
------------ ------------ ------------ ----------- ------------
GROSS PROFIT ............................ -- 102,739 996 -- 103,735
SELLING, GENERAL AND
ADMINISTRATIVE EXPENSES ... 19 (a) 58,287 1,390 (450)(a) 59,227
GOODWILL AMORTIZATION ................... 126 (c) 4,858 -- 189 (c) 5,047
------------ ------------ ------------ ----------- ------------
INCOME FROM OPERATIONS .... (145) 39,594 (394) 261 39,461
OTHER INCOME (EXPENSE):
Interest Expense .......... 4 (d) (4,923) (36) 36 (d) (4,923)
Interest Income ........... (38)(d) 496 40 (40)(d) 496
Other, net ................ -- 482 18 -- 500
------------ ------------ ------------ ----------- ------------
OTHER INCOME (EXPENSE), NET ............. (34) (3,945) 22 (4) (3,927)
INCOME BEFORE INCOME TAXES .............. (179) 35,649 (372) 257 35,534
PROVISION FOR INCOME TAXES .............. (20)(e) 15,414 (143) 173 (e) 15,444
------------ ------------ ------------ ----------- ------------
NET INCOME (LOSS) ....................... $ ( 159) $ 20,235 $ (229) $ 84 $ 20,090
============ ============ ============ =========== ============
EARNINGS PER SHARE
BASIC ..................... $ 0.57
============
DILUTED ................... $ 0.56
============
SHARES USED IN THE COMPUTATION
OF EARNINGS PER SHARE
BASIC ..................... $ 35,103,949
============
DILUTED ................... $ 35,597,393
============
40
INTEGRATED ELECTRICAL SERVICES, INC.
NOTES TO UNAUDITED PRO FORMA FINANCIAL STATEMENTS
1. UNAUDITED PRO FORMA BALANCE SHEET:
The Unaudited Pro Forma Balance Sheet gives effect to the June Quarter
Acquisitions which were acquired for total consideration of $41.2 million,
including $16.0 million in cash and 1.4 million shares of common stock, the
Individually Insignificant Acquisitions which were acquired for total
consideration of $15.0 million, including $5.1 million in cash and 0.6 million
shares of common stock and Putzel which was acquired for total consideration of
$20.7 million, including $10.5 million in cash and 0.6 million shares of common
stock.
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.
Pro Forma Adjustments consist of the following:
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.
(b) Includes the reversal of the $17.0 million non-cash, non-recurring
compensation charge in connection with the acquisition of the Founding
Companies.
(c) 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.
(d) 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.
(e) 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 28, 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/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. 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).
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/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. 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).
REZNICK FEDDER & SILVERMAN
Charlotte, North Carolina
May 28, 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/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. 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).
Davidson and Golden, P.C.
Nashville, Tennessee
May 28, 1999
