-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, N/OCpQD9NtZ/wmk2kJl43JA+AKk1N3oiJfwC9EdzyyIGXls1iKTM+/IQV9QL/c/v kjykWMMmr78zbnDpXwz/Bg== 0000950129-99-001831.txt : 19990430 0000950129-99-001831.hdr.sgml : 19990430 ACCESSION NUMBER: 0000950129-99-001831 CONFORMED SUBMISSION TYPE: 8-K PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19990429 ITEM INFORMATION: ITEM INFORMATION: FILED AS OF DATE: 19990429 FILER: COMPANY DATA: COMPANY CONFORMED NAME: INTEGRATED ELECTRICAL SERVICES INC CENTRAL INDEX KEY: 0001048268 STANDARD INDUSTRIAL CLASSIFICATION: ELECTRICAL WORK [1731] IRS NUMBER: 760542208 STATE OF INCORPORATION: DE FISCAL YEAR END: 0930 FILING VALUES: FORM TYPE: 8-K SEC ACT: SEC FILE NUMBER: 001-13783 FILM NUMBER: 99604111 BUSINESS ADDRESS: STREET 1: 515 POST OAK BLVD STREET 2: SUITE 450 CITY: HOUSTON STATE: TX ZIP: 77027 BUSINESS PHONE: 7138601500 MAIL ADDRESS: STREET 1: 515 POST AOK BLVD STREET 2: SUITE 450 CITY: HOUSTON STATE: TX ZIP: 77027-9408 8-K 1 INTEGRATED ELECTRICAL SERVICES, INC. - 4/29/99 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: April 29, 1999 Commission File No. 001-13783 INTEGRATED ELECTRICAL SERVICES, INC. (Exact name of registrant as specified in its charter) DELAWARE 76-0542208 (State or other jurisdiction of (I.R.S. Employer Identification No.) incorporation or organization) 515 Post Oak Boulevard Suite 450 Houston, Texas 77027-9408 (Address of principal executive offices) (zip code) Registrant's telephone number, including area code: (713) 860-1500 2 ITEM 5. OTHER EVENTS Integrated Electrical Services, Inc., a Delaware corporation (the "Company") is a leading national provider and consolidator of electrical contracting and maintenance services, focusing primarily on the commercial, industrial, residential, powerline and data communication markets. In connection with its business acquisitions, the Company plans to offer shares of the Company's Common Stock, $.01 par value per share (the "Common Stock") pursuant to its Registration Statement on Form S-1 (Registration No. 333-45479). 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 unaudited pro forma financial statements and audited financial statements of a business acquired. (a) Pro Forma Financial Information See Pages 1 through 6 (b) Financial Statements of Business Acquired See Pages 7 through 18 3 INTEGRATED ELECTRICAL SERVICES, INC. AND SUBSIDIARIES UNAUDITED PRO FORMA FINANCIAL STATEMENTS BASIS OF PRESENTATION The unaudited pro forma balance sheet reflects the acquisition by Integrated Electrical Services, Inc. ("IES"), of Tesla Power and Automation, Inc. ("Tesla") which was acquired subsequent to December 31, 1998 as if it had occurred on December 31, 1998. The unaudited pro forma statements of operations give effect to the Tesla acquisition and the related pro forma adjustments as if it had occurred on October 1, 1997. IES has analyzed the savings that it expects to realize from reductions in salaries, bonuses and certain benefits to the owners. To the extent the owners of Tesla have contractually agreed to changes in salary, bonuses, benefits and lease payments, these changes have been reflected in the unaudited pro forma 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 transaction 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 entity was not under common control or management prior to its acquisition by IES, historical combined results may not be comparable to, or indicative of, future performance. The unaudited pro forma financial statements should be read in conjunction with the historical consolidated financial statements and notes thereto included in the company's Annual Report for the year ended September 30, 1998 filed on Form 10-K. See also "Risk Factors" included elsewhere therein. 1 4 INTEGRATED ELECTRICAL SERVICES, INC. AND SUBSIDIARIES UNAUDITED PRO FORMA BALANCE SHEET DECEMBER 31, 1998 (IN THOUSANDS)
IES AND TESLA PRO FORMA PRO FORMA SUBSIDIARIES ACQUISITION ADJUSTMENTS AS ADJUSTED ------------- ------------- ------------- ------------ ASSETS CURRENT ASSETS: Cash............................................. $ 4,044 $ 16 $ (1,960) $ 2,100 Receivables, net................................. 153,380 2,257 -- 155,637 Inventories, net................................. 7,756 -- -- 7,756 Marketable securities............................ -- 1,373 (1,373) -- Cost and estimated earnings in excess of billings on uncompleted contracts............ 14,445 344 -- 14,789 Prepaid expenses and other current assets....... 3,380 17 -- 3,397 ------------- ------------- ------------- ------------ Total current assets.......................... 183,005 4,007 (3,333) 183,679 GOODWILL, NET....................................... 305,972 -- 4,986 310,958 PROPERTY AND EQUIPMENT, NET......................... 25,872 1,379 -- 27,251 OTHER NONCURRENT ASSETS............................. 3,157 2 -- 3,159 ------------- ------------- ------------- ------------ Total assets.................................. $ 518,006 $ 5,388 $ 1,653 $ 525,047 ============= ============= ============= ============ LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Short-term debt and current maturities of long-term debt................. $ 3,637 $ 414 $ (414) $ 3,637 Accounts payable and accrued expense............. 71,017 988 -- 72,005 Billings in excess of costs and estimated earnings on uncompleted contracts............ 27,175 293 -- 27,468 Income taxes payable............................. 2,809 55 -- 2,864 Other current liabilities........................ 436 -- -- 436 ------------- ------------- ------------- ------------ Total current liabilities..................... 105,074 1,750 (414) 106,410 ------------- ------------- -------------- ------------ LONG-TERM BANK DEBT................................. 89,000 -- -- 89,000 OTHER LONG-TERM DEBT, NET........................... 880 39 (39) 880 OTHER NON-CURRENT LIABILITIES....................... 1,514 -- -- 1,514 ------------- ------------- ------------- ------------ Total liabilities............................. 196,468 1,789 (453) 197,804 STOCKHOLDERS' EQUITY: Preferred stock.................................. -- -- -- -- Common stock..................................... 289 50 (46) 293 Restricted common stock.......................... 27 -- -- 27 Additional paid-in capital....................... 301,384 54 5,647 307,085 Retained earnings................................ 19,838 3,495 (3,495) 19,838 ------------- ------------- -------------- ------------ Total stockholders' equity.................... 321,538 3,599 2,106 327,243 ------------- ------------- ------------- ------------ Total liabilities and stockholders' equity..... $ 518,006 $ 5,388 $ 1,653 $ 525,047 ============= ============= ============= ============
The accompanying notes are an integral part of these pro forma financial statements. 2 5 INTEGRATED ELECTRICAL SERVICES, INC. AND SUBSIDIARIES UNAUDITED PRO FORMA STATEMENT OF OPERATIONS FOR THE YEAR ENDED SEPTEMBER 30, 1998 (IN THOUSANDS)
IES AND TESLA PRO FORMA PRO FORMA SUBSIDIARIES ACQUISITION ADJUSTMENTS TOTAL ------------ ------------ ------------- -------------- REVENUES.................................. $ 386,721 $ 10,330 $ -- $ 397,051 COST OF SERVICES.......................... 306,052 8,151 -- 314,203 ------------ ------------ ------------- -------------- GROSS PROFIT........................... 80,669 2,179 -- 82,848 SELLING, GENERAL, AND ADMINISTRATIVE EXPENSES............... 47,390 1,322 (149) 48,563 NON-CASH, NON-RECURRING COMPENSATION CHARGE.................. 17,036 -- -- 17,036 GOODWILL AMORTIZATION..................... 3,212 -- 125 3,337 ------------ ------------ ------------- -------------- INCOME FROM OPERATIONS................. 13,031 857 24 13,912 OTHER INCOME (EXPENSE): Interest expense....................... (1,161) (78) 78 (1,161) Interest income........................ 433 101 (101) 433 Other, net............................. 335 95 (30) 400 ------------ ------------ -------------- -------------- OTHER INCOME (EXPENSE), NET............... (393) 118 (53) (328) INCOME BEFORE INCOME TAXES................ 12,638 975 (29) 13,584 PROVISION FOR INCOME TAXES................ 12,690 51 361 13,102 ------------ ------------ ------------- -------------- NET INCOME (LOSS)......................... $ (52) $ 924 $ (390) $ 482 ============= ============= ============== ============== EARNING (LOSS) PER SHARE - BASIC - $ 0.00 $ 0.02 ============ ============== DILUTED - $ 0.00 $ 0.02 ============ ============== SHARES USED IN THE COMPUTATION OF EARNINGS (LOSS) PER SHARE BASIC - 19,753,060 20,113,060 ============ ============== DILUTED - 19,753,060 20,512,893 ============ ==============
The accompanying notes are an integral part of these pro forma financial statements. 3 6 INTEGRATED ELECTRICAL SERVICES, INC. AND SUBSIDIARIES UNAUDITED PRO FORMA STATEMENT OF OPERATIONS FOR THE QUARTER ENDED DECEMBER 31, 1998 (IN THOUSANDS)
IES AND TESLA PRO FORMA PRO FORMA SUBSIDIARIES ACQUISITION ADJUSTMENTS TOTAL ------------ ------------ ------------- -------------- REVENUES.................................. $ 197,712 $ 2,132 $ -- $ 199,844 COST OF SERVICES.......................... 156,745 1,772 -- 158,517 ------------ ------------ ------------- -------------- GROSS PROFIT........................... 40,967 360 -- 41,327 SELLING, GENERAL, AND ADMINISTRATIVE EXPENSES............... 21,841 512 (193) 22,160 GOODWILL AMORTIZATION..................... 1,848 -- 31 1,879 ------------ ------------ ------------- -------------- INCOME FROM OPERATIONS................. 17,278 (152) 162 17,288 OTHER INCOME (EXPENSE): Interest expense....................... (1,695) (8) 8 (1,695) Interest income........................ 151 57 (57) 151 Other, net............................. 58 74 (18) 114 ------------ ------------ -------------- -------------- OTHER INCOME (EXPENSE), NET............... (1,486) 123 (67) (1,430) INCOME BEFORE INCOME TAXES................ 15,792 (29) 95 15,858 PROVISION FOR INCOME TAXES................ 6,700 -- 37 6,737 ------------ ------------ ------------- -------------- NET INCOME (LOSS)......................... $ 9,092 $ (29) $ 58 $ 9,121 ============ ============== ============= ============== EARNING (LOSS) PER SHARE - BASIC - $ 0.29 $ 0.29 ============ ============== DILUTED - $ 0.29 $ 0.28 ============ ============== SHARES USED IN THE COMPUTATION OF EARNINGS (LOSS) PER SHARE BASIC - 31,134,718 31,494,718 ============ ============== DILUTED - 31,668,316 32,028,316 ============ ==============
The accompanying notes are an integral part of these pro forma financial statements. 4 7 INTEGRATED ELECTRICAL SERVICES, INC. AND SUBSIDIARIES NOTES TO UNAUDITED PRO FORMA FINANCIAL STATEMENTS 1. UNAUDITED PRO FORMA BALANCE SHEET: The Pro Forma Adjustments reflect the acquisition of Tesla which was acquired subsequent to December 31, 1998. 2. UNAUDITED PRO FORMA STATEMENT OF OPERATIONS: The Tesla Acquisition columns reflect the historical results of Tesla as if it 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..... $ (149) $ -- $ -- $ -- $ (149) Goodwill amortization............................ -- 125 -- -- 125 ------------ ----------- ----------- ----------- ------------ Income (loss) from operations................. 149 (125) -- -- 24 Other income (expense): Interest expense.............................. -- -- 78 -- 78 Interest income............................... -- -- (101) -- (101) Other, net.................................... -- -- (30) -- (30) ------------ ----------- ------------ ----------- ------------- Other income (expense), net................... -- -- (53) -- (53) ------------ ----------- ------------ ----------- ------------- Income (loss) before income taxes............. 149 (125) (53) -- (29) Provision for income taxes....................... -- -- -- 361 361 ------------ ----------- ----------- ----------- ------------ Net income (loss)................................ $ 149 $ (125) $ (53) $ (361) $ (390) ============ ============ ============ =========== =============
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 ------------ ----------- ----------- ----------- ------------ Selling, general and administrative expenses..... $ (193) $ -- $ -- $ -- $ (193) Goodwill amortization............................ -- 31 -- -- 31 ------------ ----------- ----------- ----------- ------------ Income (loss) from operations................. 193 (31) -- -- 162 Other income (expense): Interest expense.............................. -- -- 8 -- 8 Interest income............................... -- -- (57) -- (57) Other, net.................................... -- -- (18) -- (18) ------------ ----------- ------------ ----------- ------------- Other income (expense), net................... -- -- (67) -- (67) ------------ ----------- ------------ ----------- ------------- Income (loss) before income taxes............. 193 (31) (67) -- 95 Provision for income taxes....................... -- -- -- 37 37 ------------ ----------- ----------- ----------- ------------ Net income (loss)................................ $ 193 $ (31) $ (67) $ (37) $ 58 ============ ============ ============ ============ ============
5 8 INTEGRATED ELECTRICAL SERVICES, INC. AND SUBSIDIARIES NOTES TO UNAUDITED PRO FORMA FINANCIAL STATEMENTS (a) Reflects the reduction in salaries, bonuses and benefits to the owners of Tesla. These reductions in salaries, bonuses and benefits have been agreed to in accordance with the terms of employment agreements executed as part of the acquisition. Such employment agreements are for five years, contain restrictions related to competition and provide severance for termination of employment in certain circumstances. (b) Reflects the amortization of goodwill recorded as a result of these acquisitions over a 40-year estimated life. (c) Reflects the reduction of additional interest expense and income on borrowings which will be repaid and collected, respectively, subsequent to the acquisition and the reduction of certain non-recurring other income. (d) Reflects the incremental provision for federal and state income taxes at a 38.5% overall tax rate, before non-deductible goodwill and other permanent items related to the other statements of operations adjustments and for income taxes on the pretax income of acquired companies that have historically elected S Corporation tax status. 6 9 INDEPENDENT AUDITOR'S REPORT To the Board of Directors Tesla Power and Automation, Inc. Houston, Texas We have audited the accompanying balance sheet of Tesla Power and Automation, Inc. (a Texas corporation) as of December 31, 1998, and the related statements of operations and comprehensive income, stockholders' equity and cash flows for the year then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Tesla Power and Automation, Inc. as of December 31, 1998, and the results of its operations and its cash flows for the year then ended in conformity with generally accepted accounting principles. BROCKMANN, ARMOUR & CO. LLC Denver, Colorado April 23, 1999 7 10 TESLA POWER AND AUTOMATION, INC. BALANCE SHEET DECEMBER 31, 1998 ASSETS Current assets: Cash and cash equivalents $ 16,171 Accounts receivable: Uncompleted contracts 1,055,864 Completed contracts, net of allowance for 50,000 1,196,431 Other 5,310 Marketable securities 1,373,206 Cost and estimated earnings in excess of billings on uncompleted contracts 343,830 Prepaid expenses and other current assets 16,628 ----------- Total current assets 4,007,440 Property and equipment, at cost, net of accumulated depreciation and amortization 1,378,935 Other assets 1,420 ----------- Total assets $ 5,387,795 =========== LIABILITIES Current liabilities: Line of credit and margin securities account $ 301,849 Accounts payable 892,935 Current portion of long-term debt 15,412 Current portion of notes payable to stockholders 96,674 Provision for product warranty 42,732 Billings in excess of costs and estimated earnings on uncompleted contracts 292,738 Income taxes payable 54,512 Accrued 401(k)/profit sharing and payroll related expenses 53,301 ----------- Total current liabilities 1,750,153 Long-term debt, net of current portion 30,534 Notes payable to stockholders 8,409 STOCKHOLDERS' EQUITY Common stock, $1 par value, 100,000 shares authorized, 50,000 shares issued and outstanding 50,000 Additional paid-in capital 53,900 Retained earnings 3,576,669 Unrealized loss on marketable securities (81,870) ----------- 3,598,699 ----------- $ 5,387,795 ===========
See independent auditor's report and accompanying notes to financial statements. 8 11 TESLA POWER AND AUTOMATION, INC. STATEMENT OF OPERATIONS AND COMPREHENSIVE INCOME FOR THE YEAR ENDED DECEMBER 31, 1998 Contract revenue $ 10,330,238 Cost of contract revenue 8,150,867 ------------ Gross profit 2,179,371 General and administrative expenses 1,322,085 ------------ Income from operations 857,286 Other income (expense): Interest expense (77,678) Interest income 101,331 Realized gain on sale of marketable securities 28,708 Gain on sale of property and equipment 1,626 Rental income 63,841 ------------ 117,828 ------------ Income before state income taxes 975,114 Provision for state income taxes 50,825 ------------ Net income 924,289 Other comprehensive income: Unrealized holding losses recognized during the period (121,498) Previously recognized unrealized gain on marketable securities 39,628 ------------ Comprehensive income $ 842,419 ============
See independent auditor's report and accompanying notes to financial statements. 9 12 TESLA POWER AND AUTOMATION, INC. STATEMENT OF STOCKHOLDERS' EQUITY FOR THE YEAR ENDED DECEMBER 31, 1998
ADDITIONAL UNREALIZED PAID-IN GAIN (LOSSES) COMMON STOCK CAPITAL RETAINED ON MARKETABLE SHARES AMOUNT STOCK EARNINGS SECURITIES TOTAL ------ -------- -------- ----------- ---------- ----------- Balance, December 31, 1997 50,000 $ 50,000 $ 53,900 $ 2,977,380 $ 39,628 $ 3,120,908 Distributions to stockholders -- -- -- (325,000) -- (325,000) Accumulated other comprehensive income -- -- -- -- (121,498) (121,498) Net income -- -- -- 924,289 -- 924,289 ------ -------- -------- ----------- ---------- ----------- Balance, December 31, 1998 50,000 $ 50,000 $ 53,900 $ 3,576,669 $ (81,870) $ 3,598,699 ====== ======== ======== =========== ========== ===========
See independent auditor's report and accompanying notes to financial statements. 10 13 TESLA POWER AND AUTOMATION, INC. STATEMENT OF CASH FLOWS FOR THE YEAR ENDED DECEMBER 31, 1998 Cash flows from operating activities: Net income $ 924,289 Adjustments to reconcile net income to net cash provided by operating activities-- Depreciation and amortization 142,224 Realized gain on sale of marketable securities (1,626) Gain on sale of property and equipment 28,708 (Increase) decrease in-- Accounts receivable (132,905) Costs and estimated earnings in excess of billings on uncompleted contracts 516,317 Other current assets 13,003 Increase (decrease) in-- Accounts payable 181,396 Billings in excess of costs and estimated earnings on uncompleted contracts 262,118 Accrued expenses (23,514) Other current liabilities 38,790 ----------- Net cash provided by operating activities 1,948,800 Cash flows from investing activities: Purchase of property and equipment (260,684) Purchase of marketable securities (157,759) Proceeds from sale of property and equipment 17,500 ----------- Net cash used by investing activities (400,943) Cash flows from financing activities: Payments of margin securities account (604,690) Distributions to stockholders (325,000) Borrowings on line of credit 3,755,730 Payments on line of credit (3,734,922) Net payment on long-term debt (642,350) ----------- Net cash used by financing activities (1,551,232) ----------- Net increase in cash and cash equivalents (3,375) Cash and cash equivalents, beginning of year 19,546 ----------- Cash and cash equivalents, end of year $ 16,171 ===========
See independent auditor's report and accompanying notes to financial statements. 11 14 TESLA POWER AND AUTOMATION, INC. NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 1998 1. Organization and description of business: Tesla Power and Automation, Inc. (the Company) is an engineering and manufacturing company specializing in the construction of electrical power control units. The Company was incorporated on January 18, 1988, in the state of Texas. The Company's long-term construction contracts are primarily comprised of fixed-price contracts. 2. Summary of significant accounting policies: Use of estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Accounting for construction contracts Revenues from long-term construction contracts are recognized on the percentage-of-completion method, measured by the percentage of total costs incurred to date to estimated total costs for each contract. Contract costs include all direct job costs and those indirect costs related to contract performance, such as indirect labor, supplies, insurance, equipment repairs, and depreciation costs. General and administrative costs are charged to expense as incurred. The asset, "Costs and estimated earnings in excess of billings on uncompleted contracts", represents revenue recognized in excess of billings. The liability, "Billings in excess of costs and estimated earnings on uncompleted contracts", represents billings in excess of revenues recognized. Provisions for estimated losses on uncompleted contracts are made in the period in which such losses are determined. Cash and cash equivalents The Company records as cash and cash equivalents all cash and short-term investments with original maturities of three months or less. 12 15 Concentrations of risk Financial instruments that potentially subject the Company to credit risk consist principally of cash and cash equivalents and contract receivables. The Company maintains cash balances at a single financial institution. Accounts at this institution are insured by the Federal Deposit Insurance Corporation up to $100,000. At times, the balances in the Company's accounts may exceed this limit. The Company's contract revenues are highly concentrated with two individual customers. These customers accounted for approximately $3,003,000 or 29% of contract revenues for the year ended December 31, 1998. The associated accounts receivable from these customers total approximately $375,000 or 17% of total accounts receivable at December 31, 1998. The loss of a significant customer could have a material impact on the Company's future earnings results. These sales are primarily derived from sales of electrical power control units concentrated with customers in the petroleum industry. The Company has recorded an allowance for doubtful accounts of approximately $50,000 as of December 31, 1998. Management believes that this allowance is adequate. The Company purchases materials, parts and supplies from four unrelated third party vendors and one vendor under common control as more further discussed in Note 10. These vendors accounted for approximately $4,299,000 or 68% of material, part and supply purchases during the year ended December 31, 1998. Management believes there are alternative sources of supply should a loss of one of these vendors occur, however, the loss may result in a short-term impact to the Company. Advertising Advertising expenses are charged to expense as incurred and are included in general and administrative expenses. Advertising expense totaled $22,234 for the year ended December 31, 1998. Property, plant and equipment Property, plant and equipment is stated at cost. Depreciation and amortization is provided on a straight-line basis over the estimated useful life of the asset. Machinery and equipment, vehicles and furniture and fixtures are depreciated between 5 and 7 years. Building and improvements are depreciated and amortized between 31 and 39 years. Repairs and maintenance of a routine nature are charged to expense as incurred, while those that improve or extend the life of existing assets are capitalized. 13 16 At December 31, 1998, property, plant and equipment consist of the following: Furniture and fixtures $ 22,056 Machinery and equipment 564,428 Vehicles 197,682 Building and improvements 716,204 Land 445,349 ----------- 1,945,719 Less--accumulated depreciation and amortization (566,784) ----------- Property, plant and equipment, net $ 1,378,935
Depreciation expense of $38,988 has been included in selling, general and administrative expenses and $103,236 has been included in cost of sales for the year ended December 31, 1998. Accrued Product Warranty The Company provides limited warranties through its original equipment manufacturers (OEM) for the products it sells. Generally, warranty costs during the basic warranty period, which varies based on the OEM, are reimbursed by the OEM. The accrued product warranty in the accompanying financial statements is based on management's estimate of future warranty costs for warranties provided by the Company outside of the OEM warranty period. Income taxes The Company, with the consent of its stockholders, elected under the Internal Revenue Code to be taxed as an S Corporation. In lieu of corporate income taxes, the stockholders of an S Corporation are taxed individually on the Company's taxable income. As a result of the Company being a non-taxpaying entity, no provision for income taxes has been provided for Federal income tax reporting purposes. The Company reports income for both financial and tax reporting using the percentage-of-completion method on its long-term contracts. The provision for income taxes relates to State of Texas franchise taxes owed by the Company. Upon completion of the acquisition of the Company's outstanding stock as discussed in Note 12, the Company's S Corporation tax status will be terminated. Fair value of financial instruments The following methods and assumptions were used to estimate the fair value of each class of financial instruments for which it is practicable to estimate that value: 14 17 Cash and cash equivalents The carrying amount approximates fair value because of the short maturity of those instruments. Marketable securities The fair values of marketable securities are estimated based on quoted market prices for those or similar investments. The carrying amount approximates fair value. Long-term debt The fair value of the Company's long-term debt is estimated based on the quoted market prices for the same or similar issues or on the current rates offered to the Corporation for debt of the same remaining maturities. The carrying amount approximates fair value. 3. Change in accounting principle The Company has adopted the provisions of Statement of Financial Accounting Standards No. 130, Reporting Comprehensive Income. This statement requires the disclosure of comprehensive income as well as net income. The only element of comprehensive income that the Company has that is not part of net income is unrealized gains on marketable securities. The Company has reclassified its 1997 financial statements in conjunction with the adoption of this statement. Other comprehensive income is shown of net realized gains on the sale of marketable securities. 4. Marketable securities The Company records its investment in marketable securities in accordance with Statement of Financial Accounting Standards (SFAS) No. 115, "Accounting for Certain Investments in Debt and Equity Securities." The Company's marketable securities consist of mutual funds and are classified as "available-for-sale." Accordingly, unrealized gains and losses are excluded from earnings and reported as a separate component of stockholders' equity. Realized gains or losses are computed based on specific identification of the securities sold. The following is an analysis of marketable securities available for sale at December 31, 1998: Balance at cost $1,455,076 Gross unrealized losses (81,870) ---------- $1,373,206 ==========
On April 13, 1999, the marketable securities were sold and the net proceeds were distributed to the stockholders. 15 18 5. Contracts in progress Contracts in progress at December 31, 1998 are as follows: Total contracts $ 5,528,445 Estimated costs Costs to date 944,576 Costs to complete 3,288,872 ----------- Total estimated costs 4,233,448 ----------- Estimated gross profit $ 1,294,997 =========== Amount billed to date $ 1,214,594 Costs and estimated earnings in excess of billings 343,830 Billings in excess of costs and estimated earnings (292,738) ----------- Contract revenue earned 1,265,686 Costs to date (944,576) ----------- Gross profit earned $ 321,110 ===========
6. Line of credit and margin securities account The Company has a $750,000 revolving line of credit with a financial services company. Advances on the LOC are limited to 80% of eligible accounts receivable. As of December 31, 1998, the maximum amount available under the LOC is approximately $448,000, with interest due monthly at 30-day commercial paper rate plus 2.9% per annum (totaling 8.0% at December 31, 1998). As of December 31, 1998, a total of $301,849 was outstanding. The line of credit is collateralized by the Company's accounts receivable, property, plant and equipment, and is guaranteed by the Company's stockholders and requires the Company to maintain a minimum tangible net worth of $1,500,000. Subsequent to December 31, 1998, the Company repaid the amounts on the line of credit prior to its expiration on January 31, 1999. The Company has a margin securities account with a financial services company to provide borrowings up to 50% of the marketable securities balance with interest at a 30-day commercial paper rate plus 2.9% payable monthly. Outstanding balances under the margin securities account are collaterialized by marketable securities. No balance was outstanding under the margin securities account at December 31, 1998. As a result of the acquisition of the Company's outstanding stock as discussed in Note 12, the line of credit agreement was not renewed and the margin securities account was cancelled. 16 19 7. Long-term debt and notes payable to stockholders Term note payable to a financial service company with monthly payments of $7,679, including interest at 30 day commercial paper rate plus 2.9% (totaling 8.0% at December 31, 1998) through January 31, 2003 when any outstanding principal and interest is due. Cross-collateralized with line of credit and secured by accounts receivable, fixtures and equipment. Guaranteed by the Company's stockholders. $ 8,410 Term note payable to financial institution with monthly payments of $767.71 including interest at 9.9% per annum through May 15, 2001, with a balloon payment of $18,507 due at maturity; collaterialized by a vehicle and guaranty by the Company's stockholders 37,536 -------- 45,946 Less current portion (15,412) -------- $ 30,534 ======== Unsecured notes payable to stockholders; monthly payments of $8,465 including interest at 8% per annum; due January 12, 2000. $105,083 Less current portion (96,674) -------- $ 8,409 ========
8. Operating leases The Company is obligated under several non-cancelable operating leases for office equipment and machinery that expire at various dates through the year 2002. The annual minimum lease payments under non-cancelable operating leases as of December 31, 1998 are as follows:
Year Ending December 31, ------------------------ 1999 $ 49,645 2000 48,645 2001 26,631 2002 68,371 --------- $ 193,292
Rent expense totaled $76,647 for the year ended December 31, 1998. 17 20 9. Benefit plans On January 1, 1994, the Company adopted a salary reduction/profit-sharing plan under the provision of Section 401(k) of the Internal Revenue Code which covers substantially all full-time employees who have completed one year of service. The plan provides for the Company to match voluntary employee contributions at a rate of 25%. Such matching rate can be changed at the Company's discretion. All contributions by the Company are funded annually and vest over six years. All employee contributions are immediately vested. Company matching contributions to the plan were $52,601 for the year ended December 31, 1998. 10. Related party transactions The Company purchases substantially all of its fabricated sheet metal products from Unlimited Controls, Inc. (UCI), a Texas corporation controlled by the stockholders of the Company. Total purchases from this entity during the year ended December 31, 1998 totaled $2,283,486. The Company also rents manufacturing space to UCI. Rent received from UCI totaled $63,841 for the year ended December 31, 1998. Interest expense related to notes payable to stockholders as discussed in Note 7 totaled $12,322 for the year ended December 31, 1998. 11. Cash flows During the year ended December 31, 1998, interest paid was $77,698. During the year ended December 31, 1998, the Company had non-cash investing activities related to unrealized holding losses on marketable securities of $121,498. 12. Subsequent events On January 13, 1999, the Company completed a corporate reorganization whereby the Company merged with Unlimited Controls, Inc into a newly formed entity, Tesla Power and Automation (Nevada), Inc. a Nevada corporation (TPAN). TPAN contributed its operating assets to Tesla Power and Automation, LLP (TPALLP) in exchange for a 99% limited partnership interest and contributed real estate to Tesla Properties, LLP (TPLLP) in exchange for a 99% limited partnership interest. The ownership of TPAN and the 1% general partnership interests in TPALLP and TPLLP are in direct proportion to the ownership of the Company. On April 23, 1999, the stockholders of TPAN and the general partners of TPALLP and TPLLP completed the sale of 100% of their ownership interests in TPAN, TPALLP and TPLLP to Integrated Electrical Services (IES). 18 21 ITEM 7. EXHIBITS (c) Exhibits. 23.1 Consent of Brockmann, Armour & Co. LLC 19 22 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this Current Report to be signed on its behalf by the undersigned, thereunto duly authorized. INTEGRATED ELECTRICAL SERVICES, INC. By: /s/ JOHN F. WOMBELL JOHN F. WOMBELL SENIOR VICE PRESIDENT AND GENERAL COUNSEL Dated: April 29, 1999 20 23 EXHIBIT INDEX
EXHIBIT DESCRIPTION - ------- ----------- 23.1 Consent of Brockmann, Armour & Co. LLC
EX-23.1 2 CONSENT OF BROCKMANN, ARMOUR & CO. LLC 1 EXHIBIT 23.1 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS We hereby consent to the use of our report, dated April 23, 1999, on the financial statements of Tesla Power and Automation, Inc. included in this Form 8-K and to its incorporation by reference 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 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/ BROCKMANN, ARMOUR & CO. LLC -------------------------------- BROCKMANN, ARMOUR & CO. LLC Denver, Colorado April 29, 1999 -----END PRIVACY-ENHANCED MESSAGE-----